GLOBAL - Aberdeen Property Investors has defended the indirect real estate investment approach and predicts the recent popularity of joint ventures among large institutional investors will be a short-term phenomenon.
In a white paper entitled Reassessing the case of indirect property investment, Aberdeen said the indirect model was "not broken", but rather was suffering from a change in perception from investors driven by the negative effects of leverage.
The report admitted lessons needed to be learned and applied in the future, through closer attention paid to investment risks and structures that enable better alignment of interests.
Commenting on the paper, Andrew Smith, chief investment officer and head of fund management at Aberdeen, said: "The credit crisis and market downturn, synchronised across asset classes, have affected property investors' risk appetite and altered perceptions of different forms of property investment.
"In this context we find that most of the arguments for indirect property investment remain intact," he said.
Leverage problems and a lack of control over commingled fund investments have prompted many large institutional investors to look for alternative investment models, such as direct investments or joint ventures (JV).
Aberdeen said this had raised the question of whether this would prove to be permanent trend or only a cyclical response to the market downturn.
"We believe that the direct property and JV solutions will prove to be the latter, although we foresee a more balanced approach to the use of different forms of property investment in the future," the paper said.
Aberdeen also argued the recent phenomenon of institutional investors focusing on their domestic markets was also going to be a short-term trend.
"We believe the recent retreat from indirect investment and cross-border investing will prove to be a more cyclical phenomenon, and that international activity will pick up strongly as liquidity improves," the paper said.
"In practice, the arguments for indirect investment remain as valid today as they were in the boom times. Investors with limited resources have access to portfolios of a size, quality and geographical spread that would be unavailable through other means."
Aberdeen admitted real estate prices had become "more integrated with the wider capital markets" and said correlations with other assets classes would be high in the future.
However, its white paper argued the circumstances, which triggered the synchronised global collapse in asset values across the investment spectrum, were highly unusual.
"It would be wrong to assume that the experience under the extreme conditions of the last two years will be a reliable guide, as markets normalise," said Aberdeen.
"Pricing will reconnect with local rental growth fundamentals, improving the scope for diversification."