Signs of improvement continue to build in the real estatemarkets, although slowly. Global deal activity and property valuesare still significantly below peak levels, and the recovery isexpected to take a gradual rather than a rapid course. But forinvestors and fund managers, this may actually be the idealenvironment in which to deploy capital.

The landscape in which real estate private equity funds operateis changing, however, and these changes are directly impactingtheir terms and operating models. The state of the market in theaftermath of the financial crisis, especially given the continuedchallenges in capital-raising , has empowered investors to makegreater demands of fund managers. Increasingly, investors areapplying pressure over terms and fees and demanding more frequentand transparent reporting.

As a result, the pre-crisis standards for deal terms and feeshave altered considerably, and fund managers are feeling pressurefrom investors to make modifications to fit new industry norms. Ourrecent survey indicates that this is especially true for new andsmall to medium-sized funds. Overall fund periods have shortened byan average of two years since 2007, while average investmentperiods have scaled back from four to three years. Preferredreturns have dipped slightly, but target levered returns havedropped to the high teens, compared with the 2007 norm of more than20%. In addition, funds increasingly are pooling returns instead ofoffering them on a deal-by-deal basis. While carried interest stillfollows the standard 80/20 structure, limited partners aredemanding more favorable distribution. They are also demanding moremeaningful cash commitments from general partners.