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Performance measurement, benchmarking and diversification in global real estate
© IPD 2011 ipd.com
Davide Manstretta, Group Director - Performance and Risk Analytics
Agenda
1. Why we need benchmarks and portfolio analysis
2. Institutional real estate allocation and global trends
3. Benefits of diversification theory and real numbers
© IPD 2011 ipd.com
4. The European market
5. An example of European Benchmarks: the IPD Pan European Property Funds Index
1. Why we need benchmarks and portfolio analysis
© IPD 2011 ipd.com
Why investors and fund managers are keen on benchmarking and portfolio analysis?
1. Property portfolio measurement and analysis aids the efficient allocation of capital within property and across asset classes
2. It can provide a framework within which to align investor and managers interests against relevant objectives ...
© IPD 2011 ipd.com 4
Why investors and fund managers are keen on benchmarking and portfolio analysis?
1. Property portfolio measurement and analysis aids the efficient allocation of capital within property and across asset classes
2. It can provide a framework within which to align investor and managers interests against relevant objectives ...... and monitor progress against those
Portfolio total returns v tailored benchmark
© IPD 2011 ipd.com 5
-25
-20
-15
-10
-5
0
5
10
15
20
25
%
Relative Portfolio Benchmark
Why investors and fund managers are keen on benchmarking and portfolio analysis?
1. Property portfolio measurement and analysis aids the efficient allocation of capital within property and across asset classes
2. It can provide a framework within which to align investor and managers interests against relevant objectives ...... and monitor progress against those
3. It helps understand the past ... and predict the future
© IPD 2011 ipd.com 6
Why investors and fund managers are keen on benchmarking and portfolio analysis?
1. Property portfolio measurement and analysis aids the efficient allocation of capital within property and across asset classes
2. It can provide a framework within which to align investor and managers interests against relevant objectives ...... and monitor progress against those
3. It helps understand the past ... and predict the future4. It also helps manage risks
© IPD 2011 ipd.com 7
Why investors and fund managers are keen on benchmarking and portfolio analysis?
1. Property portfolio measurement and analysis aids the efficient allocation of capital within property and across asset classes
2. It can provide a framework within which to align investor and managers interests against relevant objectives ...... and monitor progress against those
3. It helps understand the past ... and predict the future4. It also helps manage risks
© IPD 2011 ipd.com
5. Control costs6. And demonstrate added-value (or otherwise) to investors
8
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Bottom Quartile Funds
Top Quartile Funds
All Portfolios*
We
igh
ted
co
ntr
ibutio
n to
retu
rns
(vs A
ll P
rop
ert
y 8
.2%
)%
Re-gear
Letting
Development
Sales
Purchase
Other 'held' assets
Aiding managers, researchers, strategists, fund managers, property managers and sales
Management Team
CEO CIO CFO
Fund to Property Mgr
Fund / Portfolio
Mgr
Asset Mgr
Property Mgr
Research and Strategy
Research / Strategy
Risk Mgt
Relations to Investors
Investors Relations
Investors / Boards
Performance
Headline results
Segment analysis
Weighted contributions
By segmentation / sector
Best/worst asset contributions
Risk
Risk & return
Income & capital concentration
© IPD 2011 ipd.com
Ranking & range of returns
Historical analysis
Driver of capital growth
Market rents
Yields
Portfolio profile
Portfolio characteristics
Portfolio structure
Portfolio activity
Capital investment flow
Development exposure
Attribution
Asset allocation
Asset selection
Fund level
From portfolio to fund return
Income risk
Key tenancies
Asset performance
Asset factsheet
Individual assetsIncome & costs
Costs analysis
Vacancy analysis
Income analysis
Through each stage of the investment process
‘‘if you don’t measure it,
...you can’t manage it’’
© IPD 2011 ipd.com
This is why funds ask to be measured by IPD
• Established in 1985
• Coverage in 32 markets and 1,500 funds worldwide
• 126 indices and 570 benchmarks
Global leader in real estate performance analysis services
© IPD 2011 ipd.com
“ IPD's mission is to increase
real estate market transparency
through independent and
comparable performance
analysis with investors,
managers, consultants
and occupiers globally.”
• 126 indices and 570 benchmarks produced in 2011
• Workforce of over 300 analysts
• In 10 offices, over 5 continents
IPD’s market coverage as at end-2011
© IPD 2011 ipd.com
Is real estate still the preferred Alternative Asset Class?
40
50
60
57% 8% 16% 13% 6%2011
Real Estate Infrastructure Private Equity
Hedge Funds Commodities
Real Estate Compared with other Major Asset Classes, 2011
Allocations to Alternative Asset Classes for World’s Largest 100 Managers
$tn
© IPD 2011 ipd.com 13
0
10
20
30
Equity Markets
Govt Bonds
Corporate Bonds
Real Estate
Institutional Real Estate
Total Commercial Real Estate
Source: IPD; JLL; PrAmerica; Bank of International Settlements; World Federation of Exchanges
53% 9% 15% 16% 8%2010
Note: Total aum of $2.25tnSource: Towers Watson, July 2012
2. Institutional real estate allocation and global trends
© IPD 2011 ipd.com
A series of megatrends are driving the growth and development of the global real estate industry
Real Estate Asset
Management
Industry
Real Estate
Performance
1. Level & nature
of supply & megatrends
Key Implications for REAM1. Larger, more global and
complex markets2. Evolution of real estate into a
financial asset , leading to a demand for sophisticated analysis
3. Institutionalization and professionalism of the Real Estate Asset Class, and a
© IPD 2011 ipd.com 15
Industry
1. Institutional &
retail investors
2. Asset
management
organizations
of supply &
demand
2. Performance
across markets
and property
types
megatrends Estate Asset Class, and a demand for greater homogeneity in its use and its investment standards
4. Demand for greater speed and flexibility of analysis , driven by the pervasive impact of technology on investment and business processes
5. Increased pressure for governance, regulation and desire for transparency
Regulators recognize the range of real estate risks
AIFMD Solvency II
© IPD 2011 ipd.com
Dodd Frank
Basel 3
Stress Tests
And Risk Managers are taking a more profound role in business management
© IPD 2011 ipd.com
Source: Allianz Real Estate, February 2012
ScopeScope
Profound implications for the Scope and Execution Options for Real Estate
More conservative : focused on domestic priorities, and core products
Interest in debt investing, diversification , and counter-cyclical “opportunistic ” investing
BUT
© IPD 2011 ipd.com
ExecutionOptions
ExecutionOptions
Source: IPD
Stronger risk management: investment process , counterparty , liquidity , and alignment of interest
Restructuring and consolidation of fund management businesses, and increased regulatory
involvement
ALONGSIDE
3. Benefits of diversification theory and real numbers
© IPD 2011 ipd.com
1) ‘Stock specific’ risks: caused by factors only affecting individual assets e.g…
Leasing risks – unexpected vacancies / lettingsLocational risks – degeneration / gentrificationPhysical risks - fire / flooding
Two fundamental causes of risk or volatility of returns:
What do we want to diversify?
© IPD 2011 ipd.com
2) ‘Systematic risks’: caused by wider factors which are common to all assets e.g…
• Economic (in)stability• Changes in interest rates• Changes in government legislation
When we aim to diversify it’s the stock specific risk that we aim to reduce
otherwise known as “not putting all your eggs in one basket”
6
8
10
%
Asset 'A' £50mAsset 'B' £50mPortfolio ‘C’ £100m
Diversification in action:
3%
A very simple “academic” example
© IPD 2011 ipd.com
Standard deviation: -Expected return: 6% p.a.
Risk/return profile Portfolio C:
0
2
4
6
2005 2006 2007
%
*Standard deviation: dispersion of outcomes around the mean (or expected value)
2008 2009 2010
3%
The ‘magic’ number (for property depends on lot size variation) but somewhere between 30 and 50 assets tends to reduce most specific risk
Diversification in action:
What does it mean when you build a portfolio?
© IPD 2011 ipd.com
No. of assets within the portfolio
Ris
k (v
olat
ility
)
specific risk
Systematic risk
reduce most specific risk
What if we use some real numbers?
Total Return, %pa
Italy
© IPD 2011 ipd.com
11.5
7.4 6.87.8
10.2
14.1 14.0
10.99.4 9.8
6.7
10
15
20
% pa Capital growthIncome returnTotal return5-year annualised total return
Total Return, Income Return and Capital Return, %pa
Recovery in global performance in 2010-11
© IPD 2011 ipd.com 3
Note: Annual results based on local currency compositeSource: IPD, KTI (Finland)
6.8
-4.8
-8.1
3.3 3.1
6.7
10
5
0
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
3 Y
ears
5 Y
ears
10 Y
ears
Global unlevered real estate returns, 2011 % pa
Variations persist across global markets…
22.3
18.016.415.915.214.5
12.010.410.210.210.1 9.8 9.2 8.4 8.4 8.2 7.8 7.8 7.4 7.4 6.6 6.3 6.3 6.0 5.5 5.2 4.8 4.7 4.3 3.8 3.5 2.9
0.5
5
10
15
20
25
% paCapital growthIncome returnTotal returnIPD Global Index
© IPD 2011 ipd.com
Note: Results for China, Hong Kong, Indonesia, Malaysia, Taiwan, Thailand and Singapore are not included in IPD Global IndexSource: IPD, KTI (Finland)
0.5
-2.4
15
10
5
0
Hon
g K
ong*
Chi
na*
Tai
wan
*C
anad
aIn
done
sia*
Uni
ted
Sta
tes
Mal
aysi
a*S
outh
Afr
ica
Sw
eden
Pol
and
Aus
tral
ia
IPD
Glo
bal I
ndex
Sin
gapo
re*
Kor
eaF
ranc
eC
zech
Rep
ublic UK
Sw
itzer
land
Tha
iland
*N
orw
ay
Pan
-Eur
opea
n
Tha
iland
*A
ustr
iaF
inla
ndG
erm
any
Hun
gary
Bel
gium
Den
mar
kIta
lyN
ethe
rland
sJa
pan
Spa
inP
ortu
gal
Irel
and
Indexed capital values in this cycle, 2007=100
… with marked differences in behaviour through the cycle…
Resilient markets Recovering markets Lagging markets
120
130
140
150
2007 = 100
Hong Kong
China 120
130
140
150
2007 = 100
Finland
Denmark
Germany
Belgium120
130
140
150
2007 = 100
Sweden
France
© IPD 2011 ipd.com
30
40
50
60
70
80
90
100
110
120
2007 2008 2009 2010 2011
Taiwan
South Africa
Switzerland
Canada
Korea
Singapore
Austria
Thailand
IPD Global
30
40
50
60
70
80
90
100
110
2007 2008 2009 2010 2011
Belgium
Italy
Netherlands
Portugal
IPD Global IndexJapan
Spain
Hungary
Ireland
30
40
50
60
70
80
90
100
110
2007 2008 2009 2010 2011
Norway
Australia
Poland
IPD Global
Czech
UK
United States
All property return rankings for 7 global cities 2006-11
… and, almost, from year to year…
Perth 1Brisbane 2Dublin 3London 4Paris 5Stockholm 6Edinburgh 7Budapest 8Copenhagen 9Prague 10Manchester 11Birmingham 12Barcelona 13Warsaw 14Madrid 15Calgary 16Wellington 17Porto 18Oslo 19Antwerp 20Sydney 21Seoul 22Amsterdam 23Rotterdam 24Auckland 25
1 San Diego2 Calgary3 Portland4 Seattle5 Philadelphia6 Denver7 Boston8 New York9 Los Angeles
10 Dallas11 Washington DC12 San Francisco13 Miami14 Perth15 Chicago16 Vancouver17 Montreal18 Houston19 Toronto20 Melbourne21 Minneapolis22 London23 Atlanta24 Brisbane25 Sydney26 Tokyo
2011 Rank2011 Rank2006 Rank
© IPD 2011 ipd.com
Lisbon 26Melbourne 27New York 28Vancouver 29Vienna 30Rome 31Brussels 32Montreal 33Milan 34San Diego 35Seattle 36Los Angeles 37San Francisco 38Portland 39Geneva 40Philadelphia 41Munich 42Hamburg 43Atlanta 44Miami 45Zurich 46Washington DC 47Denver 48Dusseldorf 49Toronto 50Johannesburg 51Boston 52Cape Town 53Tokyo 54Chicago 55Houston 56Dallas 57Berlin 58Minneapolis 59Frankfurt 60
26 Tokyo27 Zurich28 Stockholm29 Auckland30 Warsaw31 Manchester32 Geneva33 Seoul34 Wellington35 Oslo36 Birmingham37 Munich38 Paris39 Prague40 Edinburgh41 Antwerp42 Vienna43 Hamburg44 Copenhagen45 Budapest46 Berlin47 Rotterdam48 Amsterdam49 Dusseldorf50 Brussels51 Rome52 Milan53 Barcelona54 Frankfurt55 Madrid56 Lisbon57 Porto58 Dublin59 Cape Town60 Johannesburg
Impact of diversification on portfolio risk/return profile
8.0
10.0
12.0
Improved risk and return profile
© IPD 2011 ipd.com 28
-
2.0
4.0
6.0
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
Ret
urn
Risk
Italy only
7 cities allocation
6 countries allocation
New YorkLondonParisMadridFrankfurtRomeMilan
USUKFranceSpainGermanyItaly
Diversifying across Europe
Germany18%
France16%
Switzer-land 9%
Sweden7%
EUROZONE
OTHER
23%UK
Total investable market size: Euro 1.5 trillions
© IPD 2011 ipd.com
Source: IPD, KTI (Finland)
Nether-lands
8%Italy5%
EUROZONE
58%UK
19%
4. The European market
© IPD 2011 ipd.com
Range of European real estate returns since 2000
0
5
10
15
20
25
30
35
Total Return (%) Pan-European SpreadIPD Pan-European IndexItaly
© IPD 2011 ipd.com
Note: Annual results based on local currency compositeSource: IPD, KTI (Finland)
Correlation = 0.7
-35
-30
-25
-20
-15
-10
-5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Correlation = 0.663
Total returns by country 2011
© IPD 2011 ipd.com
Note: Annual results based on local currency compositeSource: IPD, KTI (Finland)
Total returns by sector 2011
5
10
15
20 Office
Retail
Industrial
Residential
All Property
% pa
© IPD 2011 ipd.com
Note: Annual results based on local currency compositeSource: IPD, KTI (Finland)
-10
-5
0
Sw
eden
Pol
and
Fra
nce
Cze
ch R
epub
lic UK
Sw
itzer
land
Nor
way
Aus
tria
Fin
land
Ger
man
y
Hun
gary
Bel
gium
Den
mar
k
Italy
Net
herla
nds
Spa
in
Por
tuga
l
Irel
and
Pan
-Eur
opea
n
Historic range of capital value performance
-15
-10
-5
0
5
10
15
20
25 Historic peak year (since 2000)
Historic trough year (since 2000)
2011
% pa
© IPD 2011 ipd.com
Note: Annual results based on local currency composite; the time series for some markets does not extend back to 2000. These include Spain (2001), Switzerland (2002), Italy (2003), Austria (2004), Belgium, Poland, and Czech Republic (2005), and Hungary (2006).Source: IPD, KTI (Finland)
-40
-35
-30
-25
-20
-15
Sw
itzer
land
Aus
tria
Den
mar
k
Fin
land
Bel
gium Ita
ly
Ger
man
y
Net
herla
nds
Por
tuga
l
Fra
nce
Sw
eden
Pan
Eur
opea
n
Nor
way
Pol
and
Cze
ch R
epub
lic
Spa
in
Hun
gary UK
Irel
and
Historic range of income return
6
7
8
9
10
11
Range of income returns since 2000* 2011 income return
% pa
© IPD 2011 ipd.com
3
4
5
Irel
and
Pol
and
Cze
ch R
epub
lic
Hun
gary
Fin
land UK
Italy
Nor
way
Bel
gium
Por
tuga
l
Spa
in
Fra
nce
Pan
-Eur
opea
n
Net
herla
nds
Ger
man
y
Sw
eden
Den
mar
k
Aus
tria
Sw
itzer
land
Note: The time series for some markets does not extend back to 1999. These include Switzerland (2001), Italy (2002), Austria (2003), Belgium, Czech Republic, Hungary and Poland (2004). (Annual results based on local currency composite)Source: IPD , KTI (Finland)
5. An example of European BenchmarksThe IPD Pan European Property Funds Index
© IPD 2011 ipd.com
Pan European Property Funds IndexThe significance of the index
1. Maturing of the European real estate market• Reflects the maturing of the market – greater number of managers
with pan-European platforms• The first investable European Index
2. Strong investor demand for the index
© IPD 2011 ipd.com
• Search for diversified ‘core’ exposure to European real estate• Improved transparency• Dramatic improvement in reporting; quarterly and earlier
3. Robust insights provided by the index• Relevant comparison of fund types• Apples to apples valuation regime• Insights to enable better management of the underlying funds
Pan European Property Funds IndexWhat is it?
A new quarterly index for Pan European real estate as defined by an index design group in 2011
Open ended funds only
RICS valuations on a quarterly basis by a third party appraiser
© IPD 2011 ipd.com
Pan European mandate to invest in at least 3 regions of Europe
Leverage – funds must carry no more than 60% of GAV
The funds asset level data must be measured by IPD to enable reconciliation between asset and fund returns
Composition of the index: summary statisticsValues reported in Euros as at December 2011
Pan European Property Funds All Balanced
Net Asset Value (NAV) € m 6,988 4,146
Gross Asset Value (GAV) € m 11,694 6,172Number of funds 16 12Number of properties 490 206Loan to Value (D/GAV%) 40.2 32.8
© IPD 2011 ipd.com
Pan-European Property Fund Index exposureCountry split by % CV of direct property
France, 29%
Belgium (inc. Lux), 6%
Spain, 4%
Sweden, 3%
Italy, 2%
Finland, 1%
Switzerland, 1% Austria, 1%
Portugal, 1%
Norway, 0%
Other, 0%
© IPD 2011 ipd.com
Germany, 19%
CEE, 12%
UK, 12%
Netherlands, 9%
All direct property 6.7%
Fund Level Total Return: 4.1%
Pan-European Property Fund IndexHeadline figures (in EUR)
© IPD 2011 ipd.com
All direct property 6.7%Year end: 490 assetsvalued at €11.2 billion
Income return+6.4%
Capital growth+0.3%
6.7
4.14%
6%
8%
10%
12%
Tot
al R
etur
n
Range of fund returns – 1yr to Dec 2011Portfolios ranked between 5th and 95th percentiles
© IPD 2011 ipd.com
4.1
-4%
-2%
0%
2%
4%
0255075100
Tot
al R
etur
n
Fund (NAV) Returns Portfolio (Direct) Returns
Annual country returns based on direct property data in EUR
5
10
15
Income Return Capital Growth Total Return
Returns are diverse across countries in 2011
2011 Return (%)
© IPD 2011 ipd.com
-10
-5
0
Note: Direct Property Standing investments only - DPSI
0
5
10
% per qtr
Pan European Property Funds Indexless volatile during and after the 2007-09 crisisQuarterly total returns December 2003 – December 2011
© IPD 2011 ipd.com
-20
-15
-10
-5
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
Pan European Property Funds Index UK Open End Funds PPFI US ODCE
Source: IPD; NCREIF
Conclusions
• Benchmarking, market and portfolio analysis are important• efficient allocation of capital within property and across asset classes• align investor and managers interests against relevant objectives• It helps understand the past , predict the future, manage risks, control costs and
demonstrate added-value to investors
• IPD provide almost 700 national and cross market indices and benchmarks across global real estate
• GFC represented a profound shock to the global real estate industry
© IPD 2011 ipd.com
• GFC represented a profound shock to the global real estate industry• Increased Regulatory involvement• Back to basics of real estate investing – core, low gearing, diversified
• Significant variations in real estate performance: by market, portfolio and asset• Understanding these variations is central to:• Diversify risk (improved risk management)• Enhance performance
• PEPFI is IPD most recent example of how we can support investors and fund managers in the respective investments decisions
© IPD 2011 ipd.com
Thanks for your timeDavide ManstrettaDirect: +44 20 7336 9263Email: [email protected]