The Real Estate fund industry seems to have reached an inflection point in its evolution and that business models may need to change, research by Vistra reveals.
Vistra, a global fund administration, trusts and corporate services provider, released a research report on the global non-listed real estate (RE) industry.
Drawing on the insight of 150 senior executives of RE Asset Managers (AM) and Sovereign Wealth Funds (AWF) across America, Asia and Europe, the report examines the insourcing and outsourcing operational model and how the various operational functions are carried out.
Here are five key findings:
1. Regulation Has Biggest Impact on Businesses
Nearly three-quarters of respondents (74 percent) stated that regulatory change has the biggest impact on their businesses, followed by increased appetite for open-ended funds, separate accounts, investment selection options and/or more complex products (69 percent), and increased activity in alternative asset types (53 percent).
The focus is understandable as a result of the successive waves of regulation on RE funds such as the EU’s Alternative Investment Fund Managers Directive (AIFMD) in particular, and most recently the Markets in Financial Instruments Directive II (MiFID II), which have led to greater costs on staff and compliance, additional structural issues and potential restrictions on business.
2. Use of Outsourcing is a Changing Picture
In the majority of cases, AMs and SWFs retain over half of their functions internally with SPV administration (71 percent), SPV accounting (66 percent) and fund technology administration (64percent) topping the list.
The use of outsourcing appears to be subjective to individual businesses and is a changing picture. Functions retained today may be outsourced at a later date. Indeed, close to half of the respondents (47%) foresaw an increase in the functions outsourced and a 51% increase in the volume of activity outsourced.
3. The Outsourced Model: What is Driving Change
The research shows that AMs and SWFs refer to a wide variety of options to outsourcing, and their choice of outsourcing model is broadly based rather than being reliant on a few major criteria. Decisions are mostly based on a fund-by-fund selection (70 percent), preferred providers by functional selection (64 percent) and preferred providers for all operations (61percent).
Overall, only 42 percent of respondents said they are looking to change outsourcing model and 67 percent of respondents pointed out legislation and government policy change as a potentially significant driver.
4. Technology: Now and in the Future
In the context of increasingly complex data requirements, technology expenditure is important for both AMs and SWFs. Seventy-nine percent of respondents believe that their IT spend will remain the same or increase in the next five years.
Whilst they would prefer to have the technology provided internally rather than outsourced for key functions such as company secretarial work and performance analysis, they recognise that they are working in an industry that is evolving and remain agnostic as to whether or not to outsource their IT in the future.
5. Less Variation in RE oOperational Model Types
Looking ahead, with increased functional specialisation developing on both the RE fund and external provider sides together with the accelerated development of provider capacity due to consolidation, the report predicts that there will be less variation in RE operational model types adopted by manager and increased formality and planning in determining and implementing models.
Vistra advises some of the most successful and significant fund managers including RE firms in the market, with over $263 billion of alternative investment fund assets under administration.
