Extensive challenges for direct real estate investors

Direct real estate investments from pension funds and sovereign wealth funds are increasing since 2010. In fact, 2016 could be the fifth consecutive year in which direct acquisitions exceed $100 billion US-Dollar, says Ernst & Young (EY) in “Internal real estate platforms for limited partners”. While 94 percent of all institutional investors rely on external fund managers for at least some of their property investments, especially large institutional investors are pursuing investment activities in-house. Less than half of institutions with assets under management greater than five billion US-Dollar rely entirely on external real estate fund managers.

However, EY sees extensive challenges for institutional investors that want to take real estate investment functions in-house. While costs are not prohibitive to develop an internal real estate platform, intransparent reporting make estimating the costs of the unique platform a tough task. While for example, US real estate investment trust can provide some guidance, they tend to be singly-sector focused, and further diversification may add costs, explains EY.

However, EY advises investors that consider establishing their own real estate platform to address six central areas: Regarding functionality, they need to create efficient and effective processes in the right locations. They need to define their governance framework with effective risk and control processes. Third, they need to define and assess platform architectures on an ongoing basis. Fourth, they need to support clients by identifying key product and service concepts. Institutional investors need to define global data standards that support tax, regulatory and financial reporting and analysis. Finally, they need to assemble the right people with the right skills in the right locations. More about the implementation of an internal real estate platform on ey.com.