Listed real estate applications EPRA conference presentation 2103

EPRA conference Paris September 2013

Alex Moss

Does listed real estate form part of the real estate

allocation?

Uses and applications of listed real estate in asset

management

Does adding listed real estate enhance the returns

of a direct or unlisted real estate portfolio ?

1) Does listed real estate form part of the real estate

allocation? • Published by EPRA September 2013

• Plenty of work has been undertaken on the impact of adding REITs to a multi-

asset portfolio, the relationship between the listed and direct real estate markets, and the predictive qualities of listed. However, little work has been published regarding the behavioural or institutional aspects of incorporating listed real estate into an investment strategy

• To address this we conducted a survey of 56 market participants comprising 39 asset managers and 17 investors/investment consultants. Tailored questionnaires were prepared for each of the three groups.

• The main question posed was : Are listed real estate stocks managed as part of the real estate allocation?

• If the answer was Yes , we wanted to know how it was managed. If the answer was No then we wanted to know why not.

/02 EPRA Survey – Is listed real estate part of the real estate allocation

Summary of results

Listed real estate is part

of the real estate allocation

(54%)

Listed real estate is not part

of the real estate allocation

(46%)

Separate

internal/external

management

(40%)

Integrated

management

(14%) 86% of interviewees

have not developed an

integrated solution


Sample size 56


Summary of results – those who said yes

• Who manages the listed real estate allocation ?

22%

31% 25%

17%

6% Integrated RE team

Within RE group

Outside RE group

External manager

General equitiesteam

52%

33%

14%

Grow

Fluctuate

Shrink

• Do you expect the allocation to grow?

• The vast majority of respondents used active management rather than ETFs or Index tracking strategies

Questions for those who said ‘no’

• Why do you think listed real estate securities do not form part of the real

estate ?

• To what extent is this a product of history or of a conscious review?

• Is this decision driven by investors, the manager or by consultants?

• Do you believe that future mandates are more likely to include listed real estate securities, and if so why?


Answers for those who said no


• In a number of cases the reasons given for not holding listed real estate was the result of a long history rather than a recent strategic review, and, although the case for accessing liquidity is strong, the issue of volatility as well as the timing differences of equity and direct property valuations is seen as a problem limiting the appetite for change.

• The majority of respondents felt that future mandates may include listed real estate for a number of different reasons

• "Probably for indirect accounts but unlikely for direct separate accounts. Most

real estate investment management houses house would struggle to fulfil such a mixed mandate and would probably build relationships with specialist listed managers and ‘sub contract’ the listed part.“

• "Real estate investment funds will invest more in direct real estate to avoid share price volatility. Funds of funds and mutual funds will invest more in listed real estate securities, because the actual and the future compliance rules will be very strong concerning diversification."

Conclusions


• There is evidence to suggest that there is a greater willingness to use listed real estate in asset allocation, but operational challenges remain. For some European investors and managers, listed real estate is clearly part of the equity allocation. For others, there is some evidence that pension funds and consultants regard (or would like to regard) listed real estate as part of the real estate allocation.

• However, asset managers (with their greater experience of execution as well

as a propensity for business unit separation) may not have developed a satisfactory integrated investment process.

• As asset managers adjust and develop their product ranges to meet rising demand, they need to solve the investment process problems of integrating listed and private real estate within one business and one portfolio.

• They also need to be able to show that the listed portfolio is being managed with an eye on the strategic objectives of the real estate allocation, and not on a standard solution that suits the objectives of the listed real estate team.

2) Uses and applications of listed real estate in asset management

• Published by EPRA March 2013

• Overview of listed real estate strategies currently employed

Uses and applications of listed real estate in asset management

Universe of Listed Real Estate

Securities

Benchmark

Indexed/ETF

Income Funds Non benchmark

Long/Short

Hedge Fund 130/30 style

Long Only Strategies Long/short strategies

Uses and applications of listed real estate in asset

/08 Uses and applications of listed real estate in asset management

• Overview of applications

PAIF/APUT

Liquidity

DC real estate funds

Long/Short

Filling gaps Platform investing

Focus

Direct proxy

3) Does adding listed real estate enhance the returns of an unlisted or direct real estate portfolio ?

/09 Does adding listed real estate enhance the returns of an unlisted or direct

real estate protfolio ?

Published September 2013 Consilia Capital • The sample : 5 UK unlisted funds, and 4 actively managed global real estate

securities funds.

• Time period : 2003-2013. We also broke this period down into three clear stages of the cycle: • i) Rising property values – June 2003 to June 2007 • ii) The Global Financial Crisis – July 2007 to June 2009 • iii) The QE led recovery – July 2009 to June 2013

• We took three portfolio weightings : 100% unlisted , 70% unlisted / 30% listed

, and 50% unlisted / 50% listed • For returns we used average unweighted returns of the funds , rather than

indices

The results

• Over the 10 year period the returns were as follows:

• 100% unlisted portfolio : + 61% • 70% unlisted / 30% listed : + 91% • 100% listed portfolio : + 161%

• In other words, a simple buy and hold strategy of adding 30% listed to an

unlisted real estate portfolio would have enhanced the returns by 30% in absolute terms , and 50% in relative terms.

• Most importantly , the expected return drag during the market correction was minimal, with increased volatility a price worth paying for the enhanced returns and improved liquidity.


Return enhancement Return enhancement

Market type Period of adding 30% listed (%) of adding 50% listed ( %)

Rising property values June 03-June 07 22.00 36.67

Global Financial Crisis July 07 -June 09 -2.20 -3.87

QE Led recovery July 09 - June 13 12.98 20.61

Conclusions • Although a number of investors have integrated listed real estate into their

real estate allocation there remain a significant number who have not, for a variety of reasons. There is evidence to suggest, however, that use of listed real estate is likely to increase. In particular it is worth highlighting the following:

• The decision by NEST to include a 20% allocation to real estate in its DC fund, and for that 20% allocation to be executed via a hybrid vehicle . This comprises a 70% weighting to UK direct property via their unlisted fund, and a 30% weighting to listed real estate via a Global REIT tracker fund.

• The performance enhancement achieved by adding listed real to an unlisted real estate portfolio, allied to an increase in the emphasis placed by investors and consultants on liquidity post the GFC, and a critical focus on costs, which suits listed real estate at the expense of direct real estate.

• Significant growth in “real asset “allocations (i.e. real estate, commodities, and infrastructure). A number of commentators (Towers Watson, JP Morgan, Brookfield et al.) have suggested that this real asset allocation could increase to 20% of portfolio weightings.

/11 Conclusions

Consilia Capital

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Email: [email protected]

www.consiliacapital.com

Property Funds Research

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Berkshire

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Email: [email protected]

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accurate or may be based upon certain assumptions, forecasts, and analysis as at the date of publication.

Property Funds Research, Consilia Capital or connected parties do not accept responsibility to any person

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Economy & Finance

Listed real estate applications EPRA conference presentation 2103