Fears of loan breaches by funds

Issue highlights need for investors, bankers to be transparent

(LONDON) Almost nine out of 10 investors in non-listed real estate funds fear a breach of loan covenants by those funds as Europe's credit crisis lingers, a study by trade body INREV showed yesterday.

The study showed that 88 per cent of investors and 85 per cent of fund of funds managers were worried about potential breaches in funds which have suffered hefty falls in asset values following a deep global property slump.

'The results clearly show high levels of concerns among investors, but fund managers have identified problems and are tackling them,' said Lisette van Doorn, chief executive of the European Association for Investors in Non-listed Real Estate Vehicles (INREV).

Ms van Doorn said that the issue highlighted the importance of transparent relationships between investors and bankers, and the need for greater vigilance and dialogue on possible solutions before problems arise.

The study also uncovered investor reluctance to commit fresh equity to existing non-listed real estate funds against a backdrop of uncertain credit market conditions.

A third of investors and half of fund of funds managers who had been asked to commit fresh equity to soothe under-pressure loan covenants had rejected requests, INREV said.

'One of the main issues surrounding capital calls, such as those for additional commitments, is the high level of reporting requirements from investors,' said Ms van Doorn.

'Investors want to ensure they have a good understanding of what the money will be used for; and in these market conditions, such a decision cannot be made lightly,' she said.

INREV said that investors are most concerned about debt problems for non-listed real estate funds launched in 2006 and 2007, the phase immediately before the crest of the European property boom when capital flows into the sector were at their peak.

In 2006 and 2007, 14.5 billion euros (S$30 billion) was invested in European non-listed real estate according to the INREV Capital Raising Survey, raising pressure on funds to invest capital at top-of-the-market prices. -- Reuters

Source: Business Times, 3 Sep 2009