Global real estate fund sector facing widespread 'disruption' as demand, funding and administration all evolve

- Cross-border investment could be leading to US real estate asset bubble

- M&A stays hot

- Fund managers dealing with increased regulation

News provided by

Mar 05, 2015, 07:00 ET

NEW YORK, March 5, 2015 /PRNewswire/ -- The global real estate sector, riding a broad wave of growth and demand, is going through one of its most tumultuous periods in recent history, according to EY's Global market outlook 2015: trends in real estate private equity report. As changes in economic and social patterns fundamentally alter demand throughout the real estate markets, investors are clamoring for new deals and sending prices higher.

Businesses are looking for leaner, more streamlined operations, leading them to seek out smaller office spaces in an effort to minimize overhead costs. However, online and major retailers are increasingly building large distribution centers around the US as consumers have become accustomed to convenient access to products and shorter delivery times.

These two trends are joined by a wave of urban revitalization in which generations from millennials to baby boomers – seeking to "live, work and play" in the same environment – leave small towns and suburbs for growing cities.

Follow the money
Amid these changes, cross-border capital is pouring into US real estate as the country's economy recovers more rapidly than other markets. But the sharp rise in popularity of this asset class has raised concerns of a bubble similar to the one that messily exploded following major investments by Japanese investors in the 1980s. However, EY believes there are several fundamental differences between now and then.

Mark Grinis, EY's Global Real Estate Fund Services Leader, said:
"If we look at history, market collapses have always been preceded by deteriorating economic fundamentals and stress factors like overdevelopment and rising vacancy rates. So far, there is little evidence of these precursors. What's more, industry players have moved carefully along the risk spectrum, which is why we have not seen an excessive amount of development or movement in markets that lack significant economic drivers."

M&A trending higher
With demand for attractive investments growing, deal flow has remained strong, although at higher prices than since the financial downturn.

The recent surge of M&A activity appears reminiscent of 2007, after several consecutive years of improving confidence in the global economy. In general, M&A is stimulated by three factors:

A desire for incremental growth
Strategic merit of transactions
Availability of debt and equity on favorable terms

Grinis said: "All of the key elements that drive M&A are in place to support the development of a healthier climate for deal-making. Whether M&A will eventually top the 2007 peak is unknown, but a key difference is the discipline with which capital is expanding into new territories. Capital marked for the real estate markets may once again be abundant, but the way it is channeled continues to reflect lessons learned since the financial crisis."

New rules
The European Securities and Markets Authority (ESMA) and other regulatory bodies in the EU are pushing for stricter definitions on performance metrics and "fair value" reporting. There are concerns in the fund sector that this will put downward pressure on returns.

For example, the Organisation for Economic Co-operation and Development (OECD), with support from a majority of G20 finance ministers, is widening its focus on base erosion and profit sharing (BEPS), EY says in its report. The OECD is seeking to curb tax evasion and avoidance and force companies to adhere to the tax regimes of their home countries.

Grinis said: "For the most part, companies are dealing with the new regulations. Proactive companies realize that any concerns about the new regulations will be assuaged over time – especially if they choose to hire a chief compliance officer."

Momentum around outsourcing
In private equity, fund administration also is seeing significant change. Several fund managers are turning to outsourced administration platforms to support their back- and middle-office operations. Many of these platforms are still structured with similar models to hedge funds or mutual funds, but their growing popularity indicates they will become increasingly important to fund management.

Howard Roth, EY's Global Real Estate, Hospitality & Construction Leader, said: "The most successful players in this segment of outsourced management companies are those that can provide superior client service and expertise; best-in-class technology; a broad range of services; flexibility to customize their services; and the ability to accommodate complex investment structures."

Please visit www.ey.com/rhc to download the report.

Notes to Editors

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.

About the report
This report is based on interviews with more than 20 of EY's global fund partners based in the US, UK, Europe and Asia, to determine the trends and market forces that are affecting the fund sector.