Neil Harris

Neil Harris has a broad perspective on real estate investment whether it’s direct or through funds, joint ventures or club deals. He has also played a key role in helping to shape the revised INREV Guidelines. IQ spoke to Harris about recent developments and on-going challenges within the nonlisted real estate investment industry.

Non-listed real estate investing is continually evolving and improving. These are important words for Neil Harris, Head of Asset Management, Europe at GIC Real Estate International. His close involvement with the revised INREV Guidelines and his position as a member of the INREV Management Board are demonstrable examples of his belief in, and commitment to, seeing the industry mature.

He starts with a reflection on the status of the funds industry: “When heated conversations were on-going within INREV postcrisis about investors demanding more control and moving away from funds, I always maintained that the pendulum would swing back at some point. It was a natural reaction from investors to want more control and seek direct investment, but I also know how difficult it is in practice to invest directly and through JVs. It’s harder to execute a direct investment strategy than some investors thought, and often they don’t have the resources in place to be effective. Ultimately they’ll realise that there are good managers who can do things they can’t readily do, and who can deploy capital into real estate investments on their behalf, which is what it’s all about.”

According to Harris, the dynamics for large and small investors vary greatly. Non-listed funds – especially core finds – present a fantastic opportunity for smaller investors to access real estate markets and to achieve a proxy for direct real estate returns. Hence his eagerness for INREV to champion the non-listed real estate funds sector. As he explains: “The Management Board had a good discussion about shifting the emphasis away from the challenges faced by the industry post-crisis, to a more positive stance on the attractiveness of the industry and the important role non-listed has to play in a portfolio.”

I always maintained that the pendulum would swing back [to funds] at some point

Over the last year, says Harris, INREV has been supporting this objective through its active research and events programme, and more is to be done in this area.

He makes the point that the situation is different for larger investors such as GIC with a history of direct investment. “Although we’re more able to invest directly and favour acquiring core or core-plus assets directly or in JVs, believe that there will always be a place in the portfolio for more opportunistic or specialist fund investments that offer genuine access to skills, sectors or markets which we don’t already have or in which we can’t easily build up a capability.”

However, the structure of a core closed end fund isn’t ideal for larger, long term investors: “We’re still dealing with a number of legacy closed end funds that have come to the end of their life but still own some good assets. Nobody can agree the way forward, and discussions between manager and investors, and between investors, have been going round in circles since the crisis hit! Some of these assets are ones that large investors typically like to own over a long period and are therefore better suited to direct investment for us.”

He suggests that conceptually, longterm investors should more naturally favour an evergreen fund structure for core assets, but that in Europe, there isn’t a huge choice of fund structures and for the larger investors, liquidity remains a real issue in most open end funds.

Harris mentions INREV’s 2014 Investment Intentions Survey that highlighted the lack of suitable product as one of the barriers to investment in non-listed funds. It’s a point that he believes was too quickly dismissed by some fund managers.

“I can understand why managers might want to gloss over this point, but I see it as important feedback and a challenge for the industry. Many investors are looking for good investment ideas supported by rigorous research and coherent thinking and we don’t see as much as we would like of that. Real estate fund managers with good ideas, track record and execution capability will always be able to raise equity, because there’s a big pool of capital looking for interesting propositions.”

He is quick to acknowledge that some good fund managers saved investors from themselves before the crisis. “Investors have to take responsibility for the investment vintage when they commit to funds. Yes, in some case, managers chased the market up, but other smart managers avoided investing at pre-crisis valuation points that would have proven unattractive. They were then able to invest post-crisis at very attractive valuations making us and them very good returns.”

He moves on to explain how the INREV Guidelines are helpful in promoting alignment between investors and between fund managers “because they align standards”. It’s an important point for the future, as it will enable everyone in the industry to share a common understanding of best practice reporting.

“The INREV reporting standards and in particular the Standard Data Delivery Sheet (SDDS) have transformed the access investors have to performance data and their ability to take information into their systems to monitor key performance and risk metrics in their portfolio. As soon as you’ve got something new like this, you wonder how you ever coped without it!” confirms Harris.

He contends that many investors will be using the SDDS for the delivery of information into their systems, and in many cases these will be new systems developed post crisis. It’s a good example of how fund managers are aligning the information they provide with what investors need. The more managers can provide this fund and investor-level information in a standardised form to the majority of investors, the more it will also save them time. The SDDS, says Harris, provides information and metrics to investors that fund managers should be monitoring in any case. “I would always be very concerned if a manager says he is unable or unwilling to provide the data. We have been writing provision of the SDDS as a requirement into fund documents or side letters for some time now.”

The recent revision of the INREV Guidelines has been a great opportunity to set the bar higher for the future. The huge amount of work that has been done over the past year or so has been very well received by investors and fund managers alike. This is clearly positive, but Harris is eager to reinforce the fact that the process of improvement is neverending. He concludes with a typically forward-looking perspective:

“Now we need to take the Guidelines from being something that’s simply issued by INREV, to something that’s embedded within the industry and becomes part of the way that things are done. And it’s not just about Europe. Investors in the US and Asia are also striving for consistent standards. INREV is ahead of the game and can be an important catalyst driving the whole industry toward a set of global standards.”