It is exactly 20 years ago that Prologis stormed into Europe and transformed the landscape of property funds, announcing it had raised $1.07bn of equity for its first European fund. This was a game-changer for the European markets, and not just in terms of size.

The real differentiators were the fund’s characteristics: a 12% internal rate of return, a maximum 50% leverage ratio and a performance fee that saw the fund manager share in some of the profits once a certain return hurdle was reached. Today, we’d call that value add. Back then it acted like catnip for investors. 

Funds had already been emerging as the panacea to bring more capital into the property market; the age-old problem of the illiquidity of property was solved by the fact that stakes in funds were much more tradeable than property itself. Not only did that feed into the industry’s own desire to be a more liquid commodity, but it also made property more appealing for investors and rival fund managers.

What Prologis had just done was make that prospect much juicier. Property fund managers had been existing on the annual management fees of core funds. Now, fund managers saw they could get rewarded for their performance – enhancing their usual status with clients – and drive those higher returns through increased debt.  

But stop right there if you think this ends happily. The legacy of that exciting time in the market, is not – as it should be – a vibrant and rich value-add part of the fund universe. Instead, it is the rather more sedate collection of funds that have been captured by a new index, the INREV European Open End Diversified Core Equity (ODCE) Fund Index.

These are funds that do everything they can to be the opposite of that first Prologis fund. They invest across multiple countries and multiple sectors and keep leverage below 40%. This is their appeal. By attracting capital from small to medium-sized pension funds, they have grown from around €5bn to €24bn in the last seven years.