When it comes to commercial real estate investment strategies for retail financial advisors, there’s water, water everywhere, but not a drop to drink — particularly if you’re a fiduciary. From a strict asset allocation perspective, publicly-traded REITs and REIT ETFs are often highly correlated to equities, especially over a short-term investment horizon. On the other hand, Non-Traded REITs have a much lower correlation to equities (at least on the surface), but they suffer from egregiously high fees, enormous conflicts of interest and a jaw-slackening lack of transparency. For most financial advisors and their clients, the only other alternative is smaller, illiquid direct investment programs which are generally not professionally managed, not widely distributed and often very expensive.
This Hobson’s Choice confronts advisors and investors every day, but Versus Capital has designed an innovative fund of funds vehicle, the Versus Global Multi-Manager Real Estate Income Fund, to address the dilemma. The fund aims to raise $750 million and operate as a publicly registered, closed-end investment fund. If the launch is successful, advisors will no longer have to choose between publicly traded REITs with a high correlation to equities, and Non-Traded REITs that have a high correlation to simply throwing your money away.
Versus Capital Advisors has teamed up with Callan Associates, one of the top institutional real estate investment advisors in the country; Callan will serve as Sub-Advisor to the fund, and together they have assembled a fund of funds portfolio that will include many of the top institutional real estate fund managers in the United States and abroad, including Heitman, Urdang, Morgan Stanley, Principal, Invesco and Security Capital.
The fund will be income-oriented, and while it will seek diversification by geography, it will primarily pursue a conservative U.S. core/core plus strategy, with an annual dividend yield target of approximately 5% after fees and expenses. A liquidity feature will allow investors to cash out periodically, although there is a 2% penalty for withdrawals in the first year.
The Versus Global Multi-Manager Real Estate Income Fund offers a distinct advantage to smaller investors seeking direct investment exposure to commercial real estate: the ability to circumvent the prohibitive minimum investments required by more efficient, institutionally-managed real estate funds — and get much better liquidity. Under the Versus closed-end fund structure, retail investors with as little as $10,000 can effectively buy shares in top institutional real estate funds that would otherwise require a $5 to $10 million minimum investment and a five to seven year capital commitment.
The Versus “fund of funds” strategy will also provide diversification by manager, asset class and market, but it is not cheap to administer or implement (it carries an approximate 3.45% annual expense ratio, all-in, including distribution fees, account servicing fees, underlying fund fees and expenses, and a 90 basis point asset management fee for Versus). Nevertheless, it delivers value by bringing top institutional fund managers to smaller investors, much broader diversification than direct investment programs involving only one or two distinct assets, and last but not least, the potential for higher risk-adjusted returns.
In my opinion, there’s absolutely no question that the commercial real estate market has bottomed. For retail investors interested in making some money on the recovery, the Versus fund of fund’s combination of transparency, liquidity, diversity, and potential for higher risk-adjusted returns generated by top managers should result in high-quality, non-correlated direct exposure to commercial real estate at a fraction of the usual cost (read the Versus registration statement here).
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It’s funny how this blog gets so infatuated with “institutional” money managers. This versus concept is not bad, but other parts of the blog lambast investment structures like non-traded REITs for their fees and then bows down to the superiority of a fund of funds structure? fund of funds = fee on fees. In analyzing the non-traded REITs, Mr. Reitwreck goes to great lengths to explain that only 83% of the funds invested go “into the ground” or are available for investment, but here, the analysis stops at the expense ratio. Are we to believe that this fund invests directly into institutional funds that charge absolutely no fees? So, apparently, the institutions of the world like to work for free. I’m sure they don’t pay real estate commissions when they buy real estate either, because they are “institutional”, so they must get institutional pricing, right. What a joker this guy is. Do some homework, a quick read of the prospectus shows that the “expenses” are way higher than 3.4%. What about the 3% sales load? What about the fees charged by the underlying funds for servicing, account maintenance etc. Excluded form the expense ratio are also the following:
“Other Expenses of the Fund”
The Fund will bear all expenses incurred in the business of the Fund, other than those specifically required to
be borne by the Adviser and other service providers pursuant to their agreements with the Fund. Expenses to be
borne by the Fund include:
• all costs and expenses related to portfolio transactions and positions for the Fund’s account, including,
but not limited to, brokerage commissions, research fees, interest and commitment fees on loans and
debit balances, custodial fees, shareholder servicing fees, margin fees, transfer taxes and premiums and
taxes withheld on foreign dividends, and expenses from investments in Investment Funds;
• all costs and expenses associated with the organization of the Fund, and all costs and expenses associated
with operation and registration of the Fund, offering costs and the costs of compliance with any
applicable Federal or state laws;
• the costs and expenses of holding any meetings of the Board that are regularly scheduled, permitted or
required to be held under the terms of the LLC Agreement, the Investment Company Act or other
applicable law;
Strategic Plans
Investment Policy/Guidelines
Manager Structure
Investment Plans
Callan Investments Institute
– Conferences
– White Papers
– Market Trends
– Surveys
“Callan College”
Manager Search
Fund Due Diligence
Annual Portfolio Plans
Fee Analysis & Negotiations
Performance Measurement
Style Groups
Portfolio Characteristics
Manager & Portfolio Reviews
Transaction & Fund
Compliance
Pacing Studies
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• fees and disbursements of any attorneys, accountants, auditors and other consultants and professionals
engaged on behalf of the Fund;
• the costs of a fidelity bond and any liability or other insurance, including director’s and officer’s
insurance, obtained on behalf of the Fund, the Adviser, BNY Mellon or the Board;
• all costs and expenses associated with the selection of Investment Managers and investment in Investment
Funds, including due diligence and travel-related expenses;
• all costs and expenses of preparing, setting in type, printing and distributing reports and other
communications to shareholders;
• all expenses of computing the Fund’s NAV, including any equipment or services obtained for the purpose
of valuing the Fund’s investment portfolio, including appraisal and valuation services provided by third
parties;
• all charges for equipment or services used for communications between the Fund and any custodian, or
other agent engaged by the Fund;
• the fees of BNY Mellon and of custodians and other persons providing administrative services to the
Fund; and
• such other types of expenses as may be approved from time to time by the Board.
The Fund will reimburse the Adviser for any of the above expenses that it pays on behalf of the Fund. Such
expenses may be accrued by the Adviser prior to the Fund issuing shares and during the Limitation Period when
the Adviser reimburses the Fund for any expenses exceeding the Expense Cap. Such accrued expenses shall be
amortized and reimbursed by the Fund over a three year term.
Nice article. “There’s absolutely no question that the commercial real estate market has bottomed.” agreed. I would say the real estate market is a good place to invest right now.