The outsourcing of fund administration tasks in real estate is not a new idea. But, as KPMG says in a new paper, the marketplace has been slow to take the administrators up on their offerings. So it may still be the wave of the future even though it has a past.
For some real estate fund managers, outsourcing doesn’t work. It may simply be that a manager has unique requirements that do “not fit well into legacy fund administration operations and platforms.” Or it may be a bottom line issue: managers have judged the administrators’ pricing to be “out of line.”
But in the last three to five years, real estate administrators have made a concerted effort to address such problems -- to develop beyond their “legacy” platforms and to add enough value to make their pricing economically compelling. So …. Where is this going? As a service provider both to the managers and to the administrators, KPMG wanted to know.
The new paper results from a survey of 107 real estate investing professionals representing a wide range of entities: fund managers, sovereign funds, diversified firms. Its respondents make investments in every type of real estate, from offices and homes to hotels, infrastructure, and RE debt. They were asked: how much do you outsource administrative tasks? Which tasks? What are the drivers of your outsourcing?
The most pressing factor that gets managers to consider outsourcing, their survey reveals, is the desire to focus in-house activities on core real estate functions. Nearly as important are: the need to reduce costs/headcount; a perception that third-party costs are more palatable when passed on to their investors; and the desire to improve process performance/service delivery.
Lift Outs versus Organic Growth
Part of the paper focuses on the question of who gets into the business of offering administrative services to these managers, and the mechanics of how they do it.
As the paper observes there has been a “flurry” of deals in which firms have bought up an existing administrative platform in order to establish themselves in the industry. For example, in 2013 State Street integrated Morgan Stanley Real Estate Investing’s fund servicing operations. That integration involved 150 staff and a proprietary real estate servicing technology.
But other firms have built up their own operations in house rather than buying them. This is often described with a biological metaphor -- “organically growing” the outsourcing business. This forfeits the “benefit by association” of a lift-out, and the opportunity to pick up marquee clients on the target operation’s rolodex, but it may avoid corporate culture clash.
What Job Gets Outsourced?
But let’s turn back to the managerial side of the equation. If managers are outsourcing in order the better to focus on their core operations, what are the not-so-core operations that they are looking to offload?
The number one activity fully or partially outsourced is tax preparation and filing. Unsurprisingly accounting firms are usually the recipients of this hand-off.
Fifty five percent of real estate funds say that this is at present fully outsourced. Another 29% say it is partially outsourced. Another 1% say they plan to outsource it, leaving a stubborn 15% do-it-ourselfers in the tax realm.
Investor and performance reporting, on the other hand, is only seldom (3%) fully outsourced. Another 14% of the time it is partially outsourced. Another 9% of respondents say that they plan on outsourcing it, leaving 74% doing this themselves. A reasonable inference is that reporting to ones investors is more of a core activity than reporting to the IRS or analogous authorities.
What about reporting to regulators? Regulatory reporting falls in between the tax and the investors’ case on the spectrum of outsourceability. Fully outsourced at present: 11%. Partially outsourced, 22%. Plans to outsource, 4%. Determined do-it-ourselves? 63%.
What are Managers Looking for?
KPMG also asked managers what they’re looking for in a service provider when they outsource. What differentiates one potential provider from another?
The most common answer here is “real estate expertise.” The second most common is a strikingly similar answer, given to whom the question was directed: experience with funds and structures similar to that of the managers’ portfolio.
The report concludes with some words for those managers who may have looked at outsourcing at some earlier time and shied away. It is an option that is “worth another look.”