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Fund structure, performance are lead RE pricing factors

Leverage ratios and secondary market volume have little effect on real estate pricing discounts, according to research from Consilia Capital.

Fund structure, past performance and a diversified investor base are important factors in terms of secondary pricing for UK unlisted real estate funds, according to research from London-based real estate advisory firm Consilia Capital.

The research considers a number of factors that affected the premium or discount to net asset value investors were willing to pay for unlisted real estate funds on the UK market between February 2007 and May 2013.

“There’s an increasing trend to secondary trading in unlisted real estate funds, so looking at what drives pricing is particularly important at the moment,” Alex Moss, a managing director at Consilia, told Secondaries Investor.

During the six-year period, higher past fund returns were one of the main factors that led to higher pricing with respect to NAV. Investors extrapolated past returns or used the returns as an indicator for fund quality, according to the research.

Meanwhile, higher leverage ratios didn’t lead to increased discounts to NAV, although over a long period of time with a deeper data set, leverage is expected to become more a more significant factor to pricing.

Historically there have not been a lot of transactions for unlisted real estate and therefore there are not a lot of data points, Moss explained. “As we move forward there are more transactions and the more we look at the drivers of pricing, the better and more realistic the model becomes.”

The research revealed secondary market volume isn’t associated with real estate fund pricing. As the secondary market becomes more liquid however, the relationship between volume and pricing could strengthen.

The diversification of a fund’s investor base meanwhile, did have an effect on pricing. Funds with a greater concentration of investors suffered less favourable pricing.