European investors could be paying twice as much for unlisted real estate funds than UK investors due to technical differences between how firms calculate acquisition fees.
Research by Willis Towers Watson, an investment consultancy, shows investors who invest in unlisted real estate funds using ‘amortisation’ – paying off their obligations over time in regular instalments – could be paying more than those who invest via the ‘offer-spread’ method.
The amortisation method is not new, but is growing increasingly prevalent in continental Europe. Conversely, UK-based funds favour the offer-spread method.
Willis Towers Watson research found long-term investors would pay close to 15% in aggregate acquisition fees to funds which use the amortisation method, compared to around 6% in aggregate fees to offer-spread funds.
According to the firm, the fundamental difference between the two approaches is that investors who use the offer-spread approach pay for the investment of their own unit of capital. Those investing via amortisation pay for the investment of their own unit of capital – and also a share of everyone else’s in the future.
While some investment managers claim industry guidance around net asset value calculations effectively promotes the amortisation method, Willis Towers Watson says this is not the intention of the guidance.
The firm says some managers are finding it harder to market offer-spread priced products to investors, because amortisation is perceived to be lower cost.
The findings are particularly relevant as real estate investment has increased over the past couple of years.
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