GLOBAL - High fees are dampening the demand for opportunistic real estate investment, Towers Watson warned.
The consultant said it had turned positive about the strategic case for such value-added funds as part of a long-term real estate strategy but was concerned the associated fees for many investment vehicles were too high.
Towers Watson senior investment consultant Douglas Crawshaw said: "Some private equity-style real estate funds appear well placed to take advantage of continued dislocations in property markets.
"However, we believe it is important to negotiate fees on a fund-by-fund basis to challenge the status quo."
Crawshaw said - while the issues are specific to value-added and opportunistic strategies - changes in fees and terms would produce a fairer deal for investors in all real estate.
Towers Watson said it was particularly concerned about fees based on commitments rather than invested capital; fees based on gross asset value rather than net asset value; high management fees; carried interest of 20% and "catch-up", where the manager takes a proportion of the fund returns over and above the preferred return) until it receives its target profit share.
It said additional fees and charges - such as transaction, development or financing fees and fund expenses - along with deal by deal payment of performance fees were also of concern.
Towers Watson said changes to these features would redress "imbalances" around terms and fees, which it believed were currently tipped in favour of the investment managers.
Crawshaw added: "Naturally, individual funds structure their fees in different ways and may not include all of the above. But to reiterate we have reservations about a number of these features."
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