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Real estate asset manager AUM stable despite market turmoil

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Assets under management of real estate asset managers remained remarkably stable in 2008, but profit margins are down by 14 per cent and further pressure is expected, according to a report by McKinsey.

AUM rose by five per cent in 2008, despite the property bubble burst.

Equity inflows of four per cent and increased leverage of eight per cent more than offset the seven per cent drop in valuations across Europe. Companies with a large exposure to the UK were hit harder, with revaluations of –22 per cent compared to minus two per cent for continental Europe.

According to the report, profit margins dropped from 37 to 32 bps mainly due to lower revenue margins. In particular, management fees declined by seven per cent while cost margins remained largely stable despite AUM growth, indicating that only few players have begun to tackle their cost bases so far. Nevertheless, players with comprehensive cost programmes were able to increase their profits by up to 20 per cent.

Large players have higher profit margins than their smaller peers, reinforcing the benefits of scale during the crisis. Furthermore, captive players (owned by a bank or insurer) were more profitable than independent players, mainly due to their lower cost margins, but also because they outsource certain functions within their group.

The data suggest that it pays to be "close to the asset": integrated players who operate along the entire value chain – particularly in asset, property and facility management – have also outperformed.

The research shows that a successful international sourcing strategy can help stabilise inflows in turbulent times, generating inflows of nine per cent versus two per cent for largely domestic sourcing approaches. However, sourcing models with a strong domestic focus still dominate the industry.

Most players are still more or less replicating their domestic market by investing largely in their home countries (50 per cent) with a strong emphasis on office (43 per cent) and retail (28 per cent) properties. Conservative investment strategies in core assets dominate, while investment styles with a higher risk/return profile are expected to come under pressure going forward.

"Profits have come under pressure, and a fundamental relief does not seem likely in the near future. Real estate asset managers should think about approaches to tackling inefficiencies within their organisation in a capability-preserving way,” says Philipp Koch, partner in the Munich office.

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