In the context of real estate funds , “discretionary” and “non-discretionary” refer to the level of decision-making power that the fund manager has in selecting and managing the properties. This distinction plays an important role as it determines how actively or passively a fund manager manages investments and the extent to which investors have influence on decisions.
1. Discretionary real estate funds
In the case of a discretionary real estate fund , the fund manager has extensive freedom to decide how to invest the investors’ capital. The fund manager makes decisions about how the capital is invested and independently determines which properties are bought, sold or renovated.
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Strategy and decision-making power: The fund manager determines the investment strategy and can adjust it according to market developments. In doing so, it usually pursues a specific goal, e.g. the acquisition of real estate in certain geographical regions or a certain market segmentation (e.g. commercial real estate, residential real estate, logistics real estate). These decisions are made on the basis of market analyses, trends and the manager’s assessment.
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Flexibility: A discretionary real estate fund can also react more quickly to market changes, as the fund manager does not have to wait for investor approval to make investments. This is especially beneficial when opportunities arise in the market that need to be seized quickly.
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For example, a real estate fund that invests in office buildings in major European cities might decide to invest in emerging markets such as the Baltics in the short term if it expects attractive returns there.
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Risk and reward: The fund manager bears the risk for the decisions. If the strategy is implemented well, higher returns can be achieved because the manager can use his expertise. On the other hand, bad decisions could lead to losses.
2. Non-discretionary real estate funds
In a non-discretionary real estate fund, the fund manager’s freedom of decision is severely restricted. Investors largely retain control over the decisions made. The fund manager usually acts only as an administrator who makes investments based on the instructions or approvals of the investors.
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Strategy and decision-making power: In a non-discretionary fund, the investors or a supervisory board give the fund manager clear instructions on how the capital should be invested. For example, investors can specify exactly what type of real estate to invest in, or even the geographical regions in which the fund should operate.
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Role of the fund manager: The fund manager has the task of implementing the instructions of the investors without making decisions independently. This means that the fund manager has no flexibility to react quickly to market opportunities or risks. Every investment or transaction must be approved by the investors.
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Example: A real estate fund in which investors stipulate that investments may only be made in new residential properties in Germany, and the fund manager must strictly comply with these requirements. The fund manager could also only act in response to specific requests or to approve real estate purchases and sales.
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Risk and reward: In a non-discretionary fund, investors have more control, but also more responsibility, as they directly influence strategies and decisions. The risk lies more with the investors, as they are responsible for the strategic decisions.
| Feature | Discretionary real estate funds | Non-discretionary real estate funds |
|---|---|---|
| Freedom of choice of the manager | High freedom of choice for the fund manager | Low freedom of choice for the fund manager |
| Strategy | Determined and adjusted | Determined and controlled by the investors |
| Flexibility | High flexibility to react | Low flexibility, investments must be approved |
| Risk diversification | The risk lies more with the fund manager | The risk lies more with the investors |
| Example | The fund manager decides which properties to invest in and when to buy or sell them. | Investors determine which properties are bought or sold, and the fund manager implements this. |
Result
The choice between a discretionary and a non-discretionary real estate fund depends on the preferences and goals of the investor. A discretionary fund offers more potential for active management and a flexible response to opportunities and risks, while a non-discretionary fund gives investors more control over investment decisions, but also means greater responsibility and possibly less flexibility.
