Some of the world's largest investors are sacking-off fund managers and going it alone. Funds like Harvard University's endowment, Canada Pension Plan and Abu Dhabi Investment Authority are bringing real estate investment in-house to avoid the high fees and mediocre returns of so-called pooled funds.
"When we can control what we buy, and how we manage it, our results tend to be better," said Jane Mendillo, head of the company that manages Harvard's $32 billion endowment, which is the largest college endowment in the U.S.
Investors are also put off by the management of the pooled funds during the downturn, many of which continued to seek capital even when they were not making any investments, because they were using excessive debt during the boom.
"Commingled funds have more risk than investors are being paid for," said Tom Arnold, head of Americas real estate for Abu Dhabi Investment Authority, at a recent Pension Real Estate Association conference.
In a poll of 472 investors world-wide with $10 billion or more in assets, 80% said they were either investing in real estate directly or considering it, according to Preqin, which tracks alternative investments.
In order to buy directly the funds need to build sizeable and experienced teams. Canada Pension Plan has gone from a team of just 5 operating through pooled funds, to 45 now it is acquiring real estate direct. This rules out smaller organisations from being able to go it alone says Edward Schwartz, a principal at ORG Portfolio Management, an investment adviser. "You'll need a staff as capable as a professional fund manager," he said.
"It also creates new conflicts to manage," Mr Schwartz added, since an operating partner in a joint venture may also own a construction, leasing or property-management business that the investor may be forced to use.
- Monday 28 May 2012