Impact of real estate fund issues on various Finnish asset managers
Translation: Original published in Finnish on 3/6/2025 at 7:46 am EET.
Real estate has been one of the best performing asset classes in asset management over the past decade. This has been true for both investors and the companies that manage their investments. Investors have received handsome returns from the sector, while asset managers have received hefty fees for their real estate products.
Over the past two years, real estate has been a very difficult asset class to deal with, as rising interest rates have eroded the excess returns of previous years, and the real estate market has frozen badly. This has also been reflected in domestic asset managers, and real estate-focused asset managers have been properly beaten up on the stock market. In this article, we discuss the impact of the problems in the real estate sector on asset managers on the Helsinki Stock Exchange, first in general and then at the company level.
Overall, the problems in the real estate sector have had a negative impact on the asset management industry as a whole. However, there are significant differences between companies, depending on the proportion of real estate funds in their business and the focus of their clientele. Future growth prospects for real estate have also weakened significantly across the sector, and it is difficult to see real estate funds as a driver of earnings growth in the coming years.
Short- and long-term impacts on the sector
In the short term, the key impact for asset managers will come from new sales. New real estate sales have virtually stopped for all players, and most have also suffered significant redemptions. In fact, several operators have been forced to close their funds to redemptions because the current dry transaction market has not allowed for the realization of assets at the pace required for redemptions. We estimate that funds focused on retail investors are under the most redemption pressure. Another important short-term direct effect has been the disappearance of performance fees, as real estate funds have consistently generated high fees during the zero-rate period. A third indirect effect is the potential lost customer satisfaction. The average value of real estate funds has declined significantly, and this, combined with the postponement of redemptions, may be reflected in client dissatisfaction.
In the long term, the key challenge is, of course, new sales. Although new sales will eventually return to positive territory after the redemption wave, new sales in the coming years will certainly remain far from the peak years of zero interest rates. For retail investors in particular, we believe it is very possible that the current problems and widespread publicity surrounding real estate funds will tarnish the reputation of the entire asset class and negatively impact new sales for a long time to come. Institutions should see a faster start to new sales as falling valuations and foreclosures create attractive buying opportunities. However, institutional selling will also be much slower than in the zero-rate years, as allocations are unlikely to increase and some may even reduce their allocations. The outlook for performance fees is also modest in the longer term, especially for open-end funds, where average performance fees will need to exceed previous highs. For the funds being launched now, the long-term prospects for returns are potentially very good, but those returns will be a long time coming at best. It is therefore fair to say that the outlook for performance fees is also modest.
Impacts on companies vary significantly
Titanium is the most real estate-dependent asset manager on the Helsinki Exchanges, with almost all of its revenue coming from real estate funds. The company's new sales have slowed significantly over the past 18 months, and redemption pressure has also increased. At the turn of the year, the company was forced to close the Care Real Estate and Housing funds (Housing has virtually no impact on the Group figures) due to increased redemption pressure. We believe that the company has also been affected by the heightened debate around the turn of the year on real estate funds, as the company's client base is primarily retail. As a result, there is significant uncertainty as to the company's ultimate redemption amounts and, given the dominance of real estate funds, this will also affect the performance of the Group as a whole. In addition, Titanium's performance fees have been effectively zeroed out as returns have weakened, and we do not see a sudden return to performance fees. Titanium is in desperate need of new growth drivers as we believe a significant recovery in new real estate sales is highly uncertain.
eQ's tremendous success over the past decade has been driven by making the right strategic choices, one of which has been a strong focus on the real estate sector. Real estate funds remain the company's largest product line, accounting for around 45% of management fees in 2024, and naturally eQ has also been hit hard by the problems in the real estate market. The capital of the company's real estate funds has declined sharply due to redemptions and write-downs. Like many other managers, eQ was forced to close its real estate fund for redemptions in 2024. The size of the redemptions is still unclear, but it is clear that the redemptions put a significant dent in the management fees of the company's real estate funds. For eQ, performance fees on real estate funds have also been pushed into the distant future, with the best-case scenario being that performance fees will not be introduced until the end of the decade. eQ believes that there is a real risk that customer satisfaction will be significantly impacted by the poor performance of real estate funds. A clear example of this is the recent SFR survey of institutional asset managers, where eQ fell off the podium to 7th place for the first time in living memory. eQ desperately needs new performance drivers, as real estate funds can no longer be expected to drive growth as they have in previous years.
The role of real estate has grown over the years at CapMan, accounting for about 50% of the company's AUM in 2024 (probably a bit less for fees). In addition, performance fees on real estate funds were an important source of performance fees. So far, CapMan has weathered the real estate market's problems quite well and has been able to raise new capital for real estate funds. CapMan's funds are largely closed-end, with an almost exclusively institutional client base and a high proportion of international investors. As a result, the company is significantly less exposed than many of its peers to the volatility of the real estate market and the domestic debate on real estate funds. While CapMan has outperformed its peers in the current market, we believe its real estate sales outlook is also significantly weaker than in a zero-rate environment. The launch of the new flagship real estate fund in 2025 will be a major litmus test for the company. The outlook for performance fees on real estate funds is more uncertain, although the company itself is very confident about them. This is also a clear litmus test for the company's real estate strategies, as the company's core strategies are based on real estate development, where it should be possible to create value even in a more difficult market. In any case, CapMan's broad product range will allow the company to continue to grow even if real estate sales do not recover at the same pace. However, the growth rate is inevitably slower as real estate plays a major role in the company's growth strategy.
United Bankers' growth in recent years has been driven by real estate and forest, and we estimate that its real estate funds account for just over 15% of current management fees. So far, UB has avoided major redemption waves and has been able to keep its funds open for the time being. The company has also been able to raise capital for its new housing fund. UB has weathered the turmoil in the real estate market quite well, but it is clear that the growth prospects for real estate in the coming years are bleak for UB as well. However, this is not a major problem for UB, as the company is able to compensate for lower real estate sales with its broad product range.
We estimate that Alexandria's real estate fund is the company's largest single product, but its share of total group revenue is around 10%. The real estate fund experienced moderate redemptions but managed to stay open. In our view, the company has survived with surprisingly few redemptions given its retail-oriented customer base. Overall, the problems in the real estate sector have a very limited impact on Alexandria.
At Evli, the share of real estate products is already much lower, and we estimate that they account for about 5% of the Group's total revenue. Although the role of real estate has clearly increased at Evli in recent years, with its strategy focusing on alternative products and the EAB merger increasing the share of real estate, its role is still relatively small. For Evli, the weakening demand for real estate is not a major problem, as the company can shift its sales focus to other products thanks to its broad product offering. In our opinion, one could even argue that Evli benefits at least relatively from the problems in the real estate market, as it is an underrepresented asset class for the company and cash flows are now flowing into other asset classes that are stronger for Evli.
At Taaleri, the role of real estate has remained very small, accounting for less than 5% of revenue, according to our estimates. The weakness of the real estate market has hampered the ramp-up of real estate funds, but in the bigger picture, this has not had a material impact on Taaleri, given its focus on renewable energy.
The role of real estate is non-existent at Aktia, as the company focuses on traditional wealth management and alternative investments (including real estate) are managed through partners. For Aktia, the weakening of the real estate sector is more likely to be positive as the attractiveness of fixed income products increases.
We estimate that well under 10% of Mandatum's client AUM are in real estate. Therefore, while the decline in popularity of real estate investments is not without significance for the company, the potential impact is very limited. In addition, we believe that the vast majority of real estate assets come from more moderate institutional investors in terms of allocation, so we do not expect the challenges of real estate funds to materially harm the company. Mandatum is best known for its fixed income products, so as with Aktia, their growing popularity at the expense of real estate investments is a positive driver for Mandatum.