In property recession post-mortem both pooled managers and investors have to learn from their mistakes in the boom years, delegates are told

Speaking in the session on the listed and unlisted fund sector following lunch on the first day of the IPD / IPE Real Estate Congress 2010, Aberdeen Property Investors’ head of investments Antonio Alvarez argued some funds were mismanaged while investors failed to understand the risks inherent in the vehicle they invested in.

He told delegates: “When things were going well, in my opinion, many funds were mismanaged. Sometimes fund managers were conflicted or not careful about the financial risks of their fund. So when values started going down, it opened ‘Pandora’s Box’ and a lot of problems came to light. When things are going well, people are not really looking, they become too relaxed.

“Investors were surprised about the downside effects of leverage. Many people forgot leverage has a dark side: it can help you get double-digit returns but can cause you to lose everything. Good property people don’t always understand the financial side or the risks within the underlying funds they are invested in In future, they have to understand better their risks.”

In the Q&A session which followed the four presentations, Alvarez added that “some investors will learn, some will not and when the market picks up again many will forget the lessons they learnt”. He concluded that, where it is not already common practice, now was “a fantastic opportunity” for managers to align their interests with investors.

Fund performance

Anne Breen, head of property at Standard Life Investments said performance of funds prior to the market collapse and subsequently has been closely linked to cash-flow management. “Large diversified liquid funds have broadly underperformed in this cycle due to the pressures to invest and need to subsequently sell quickly to meet redemptions. The funds that have outperformed are those that have managed their cashflows most effectively.”

The measurement of these funds going forwards can be benchmarked by an increasingly diverse range of national, multi-country and pan European Pooled Property Fund Indices (PPFI), said IPD’s head of fund services Cameron McVean. As well as a new IPD Pan-European Institutional PPFI, McVean told delegates plans were afoot at IPD to launch national PPFIs for France, Portugal and, possibly, the Nordic market.

There have of course been liquidity constraints in the direct market over the last two years, but, perhaps surprisingly, these restrictions have also manifested in unexpected corners of the property market. Breen said: “At certain points in the cycle, for some of our non-UK derivatives, there were no willing counterparts to take on those contracts – they were viewed as risky products by the market.”

Also in the session, Philip Koch principal McKinsey Consultancy commented on the direct property market “Whilst there has been, and remains, a lot of uncertainty in the market there has been some surprising excellent sector performance within Europe. Even in the middle of the crisis, two thirds of all European IPD sector posted positive returns throughout 2008 and 2009.” In 2008, Belgium and Denmark retail delivered 10.2% and 7.6%, respectively, while Finland’s residential sector returned 8.0%. Last year, Norwegian industrial returned 8.0%, while Finland’s residential delivered 7.5%

Eprop/IPD