EUROPE - European institutional investors have little appetite for property derivatives, despite claims from investment banks suggesting they offer an effective hedge against real estate risk, suggests academic research.
A study published by French business school EDHEC has found although 90% of the 143 investors it polled had invested a median of €700m in real estate, 81% had no plans to invest in property derivatives.
Moreover, only around 5% had invested in index-based property vehicles, with a further 16% planning to invest before the end of the year.
Those with no plans to invest in derivatives cited inadequate products and regulatory constraints while pension funds said lack of familiarity topped the list of reasons not to invest.
Presenting the study, Frédéric Ducoulombier, director of EDHEC's asset management education, pointed out property derivatives could "theoretically" protect the financial conditions of real estate transactions and immunise a real estate portfolio against market-wide movements.
"Without property derivatives, it is difficult to hedge the risks of direct or unlisted real estate investments," he said.
Although the tracking error of the portfolio in relation to an index limits indices' hedging potential, he pointed out property derivatives also give investors exposure to ‘non-investable' indices and a wider range of arbitrage strategies, as well as reducing transaction costs and improving liquidity.
Among other trends identified in the report EDHEC said investment in real estate is primarily in pursuit of beta, although changes in market conditions would most likely make alpha shine brighter.
Increased overseas diversification, which research said is found to be correlated with allocations closer to an optimal 15-25%, will likely increase within pension fund real estate investments.
However, Ducoulombier pointed out "real estate markets are more integrated than many think because they're jointly dependent on economic conditions at the continental and world levels".
He further added "the continental factor" in European and US markets suggested additional gains can be had from intercontinental diversification.
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