Ramón van Heusden has seen a lot of changes in real estate investing over the last 14 years he has worked in Luxembourg. Over that time, van Heusden has held three different roles, each one of which has involved working with international real estate and private equity funds.
“What I’ve seen over the last couple of years, in particular, is an exponential growth in clients moving to large single platforms with a lot of connectivity to other systems, moving away from holding and managing data in multiple systems and specific silos,” says van Heusden (pictured), now Head of Client Services at TMF Group in Luxembourg.
Technology is slowly taking over and shaping the way that investment activities are conducted. As alternative fund managers use more, high quality data, regardless of whether they are hedge fund managers or PERE fund managers, it allows them to improve their decision-making skills.
“I attended an ALFI event last year on PERE where some important trends were discussed. One of those was the role of digital technology, especially within real estate investments – for us as a service provider, it’s important we adapt to these trends and remain flexible to support all of our clients’ activities,” adds van Heusden.
The sophistication of cloud platforms and applications has been a real game changer for fund managers, even for those who invest in real assets. The Internet of Things, for example, has begun to revolutionise how RE investment managers monitor the efficiency of properties. Far from passive assets, technology systems are now being deployed within buildings to measure everything from CO2 emissions to the performance of HVAC systems.
Such is the precision of analytical tools that a real estate manager, or one of their operating partners, can detect, in advance, when a heating system might be about to fail and need replacing.
“I’ve heard that in Asia Pacific some buildings are now fully digital. Everything can be monitored and processed in a central database. For years the European RE industry has been of continued yield compression and growing transaction volumes which is expected to continue in 2018. At the same time the whole industry is looking at cost inefficiencies and a way to improve this,” says van Heusden.
Digital technology is giving both managers, and their end investors, a fascinating insight into building performance, just as one might examine the performance of an equities portfolio.
However, the upshot to all of this is an explosion in the volume of data.
Whether it is a private equity fund or a real estate fund, the bottom line is that investors want the ability to analyse their investments with as much precision as possible. This is not just to monitor investment performance. Investors also want transparency from their GPs on the amount of leverage being used in the fund, and how fees and expenses are being calculated.
“Mostly it is for portfolio management though, as very often LPs might have investment restrictions, which they need to monitor in their portfolios,” explains van Heusden. “Equally as important as performance measurement is risk management. In the real estate world, investors are exposed to all manner of risks and under AIFMD, GPs have to perform a minimum level of risk management.”
Van Heusden confirms that one of the objectives of TMF Group is to create a paperless office, adding that in some of its global offices, “we are preparing to use robotic process automation (RPA) for certain administration tasks. If you look at the multiple bank statements we handle each day, that could be a process that we very quickly automate.” Other tasks such as reconciliation, exceptions management and record keeping all have the potential to be automated.
In terms of where LPs are allocating to real estate, van Heusden confirms that from a performance perspective, German real estate has been doing the best over the past few years.
“When you look at the top 10 performing cities in various industry surveys and reports, the four largest German cities are often always listed; Munich, Frankfurt, Hamburg and Berlin.
Other cities like Copenhagen, Amsterdam and Luxembourg have also been doing very well,” notes van Heusden.
Indeed, since the Brexit vote 18 months ago, Germany has enjoyed a pick-up in interest with EUR13.6 billion of inflows into German real estate in Q3 2016 compared to EUR10 billion for the UK, according to Real Capital Analytics. Meanwhile, real estate investment trusts in Germany and Scandinavia have risen since the Brexit vote to trade at premiums to the value of their assets, a sign that investors feel their cash is safer there, found the Emerging Trends in Real Estate Europe 2017 report.
“Europe is still a highly favoured market by LPs and I believe capital growth will continue to accelerate in 2018. Investors are cautious about London, however, given the ongoing Brexit negotiations and the uncertainty that exists. There are plenty of core-plus and value-added investment opportunities; I would say they are the most attractive areas of real estate right now, from a yield perspective,” comments van Heusden.
He says that in Luxembourg, the most popular legal vehicle for real estate investing is the SCSp, which came into effect in 2013. The SCSp, or Special Limited Partnership, is based on the English Limited Partnership and incorporates many of its elements. This has proven attractive to international real estate managers who previously could only use the Simple Limited Partnership (SCS), which was based on the 1915 company law.
Both the SCS and SCSp can be used for regulated and unregulated partnerships. Since 2013, more than 1,400 limited partnerships have been established.
“That is where we expect to see the biggest increase in fund numbers this year following on from the success of 2017. The bulk of investors are still Europe-based investors. That definitely gives TMF Group an advantage as these funds typically invest in Eurozone countries and with our footprint in all western European countries, we are very well positioned to service that business,” suggests van Heusden.
He also points out that aside from using the SCSp to set up unregulated partnership outside of the scope of AIFMD, another product innovation that has proven to be successful, albeit it is still early days, is the Reserved AIF or ‘RAIF’. Currently, van Heusden estimates the RAIF to account for approximately 6 per cent of the total fund population here in Luxembourg “but people are expecting it to grow over the next 12 to 24 months, given the flexibility of the RAIF and the fact that sponsors do not need to go through a lengthy registration process with the CSSF; everything is overseen and monitored by an approved AIFM,” he explains.
Coming back to the transparency point, to conclude, this has inevitably led to more detailed ODD work being conducted by LPs at the pre-investment stage. It has become a key factor in how and where LPs allocate, especially as the search for yield, even within real estate markets, becomes more challenging.
“Transparency is a crucial element of the investor ODD process, as well as for the administrator, in terms of understanding the GPs one is looking to work with. We need to understand the manager’s requirements from a reporting point of view; what systems do they use? How are they connected?
“We will sometimes participate in ODD calls with investors without any involvement from the GP. Typically, they will ask us about the level of reporting we can provide but also what our relationship is like with the GP, operationally speaking. This is happening far more often now,” concludes van Heusden.
