In preparation, companies should focus on their data collection and analysis processes, and evaluate their existing board oversight and risk management regarding environmental, social, and governance (ESG) risks to determine whether changes are appropriate before reporting on these processes.Companies should also evaluate their existing board oversight and risk management regarding ESG risks to determine whether changes are appropriate before reporting on these processes.
Focus on investment advisor fees and expense practices
Real estate fund managers often use affiliated personnel and companies to provide a variety of services for the real estate investments they manage, which has heightened risk factors associated with affiliate fees and expenses. The SEC recognizes that real estate investments require specialized services (e.g., property management, leasing, asset management) for which a fund manager may have the relevant expertise in-house. In some cases, affiliates can provide certain services more effectively and economically compared to outside service providers. However, given the increased use of affiliates by real estate fund managers and the significant growth of real estate funds in recent years, the SEC continues to increase the number of its examinations of real estate investment advisers, focusing primarily on the fairness of affiliate pricing arrangements and the appropriate disclosure of conflicts of interest arising from affiliate agreements.
In response to the SEC's increased focus on transparency regarding affiliate fees and expense reimbursements, real estate investment managers should ensure they have appropriate policies and procedures in place to regularly review their affiliate fee structures, perform analyses (e.g., benchmarking) to verify fairness of pricing, and ensure that adequate controls are in place to identify and disclose new and renewed agreements.
Market prices for various real estate services across different real estate asset types can be difficult to obtain because survey results on pricing of real estate services are not publicly available. This information is often obtained through fee surveys. In fee surveys, current market prices (including both fee structures and allowable reimbursable expenses) are collected from third-party service providers. Surveys are typically conducted annually or bi-annually and typically take into account pricing differences by asset type and geography. Investment managers can leverage the results of fee surveys for both internal market intelligence and investor reporting purposes. Investors often seek to understand whether the nature of their related party arrangements is market-based before committing capital to an advisor. In addition, real estate fund documentation often requires that independent market surveys be conducted periodically to ensure that related party fees continue to be structured on market terms.
The election will affect real estate investments
With the US presidential election in the spotlight, 2024 will be a crucial election year with all 435 House of Representatives members and 34 Senate seats up for grabs. Many economic issues will be decided, including taxation, budgets and various government funds. In addition, policies regarding clean energy regulations will also be discussed before the election. Robust consumer spending throughout 2023 helped stabilize the economy, but time will tell whether cost fatigue and credit crunch will tighten wallets.
Other factors impacting the U.S. economy include the ongoing war in Ukraine and the conflict in the Middle East, where the current administration is sending aid to help keep those countries running and address humanitarian needs. There will likely be further tensions in global trade, including the problems facing container logistics in the Red Sea.
The economy remains one of the most important issues facing the country as the Federal Reserve continues to tighten monetary policy. At its last meeting in 2023, the Fed left the federal funds rate unchanged at 5.25%-5.50%, signaling a peak in interest rates. If progress is sustained, lower inflation will favor a policy recalibration in 2024. The labor market ended strong, with the unemployment rate dropping to 3.7%, which may signal a respite from the interest rate cuts in the first half of the year. However, according to a forecast by EY-Parthenon Chief Economist Gregory Daco, the unemployment rate is likely to rise later in the year. As a result, the Fed is expected to cut interest rates in the second half of 2024 for the first time since 2020.