Real estate investors face a series of choices when allocating capital in the near future, delegates at MSCI’s IPD/IPF Property Investment Conference heard.
The choice between p assive and active investing was one of the issues discussed at this year’s event, held in Brighton. One-third of the gathering’s audience said they expected between 10% and 25% of their capital to be passively invested in 10 years’ time.
Peter Hobbs, managing director and head of real estate research at MSCI, said long-life, large funds may be the best way of providing a passive way for investors.
“Large, core, open-ended ‘mega’ funds could emerge in Europe and Asia Pacific in a similar way to their growth in the US,” he said.
Goh Kok Huat, president and chief operating officer of GIC Real Estate, said that, over the past 15 to 20 years, “most managers have done very well”.
Managers who actively target specific asset classes and regions achieve the best results, Hobbs told delegates.
“Actively-managed investments outperform ‘benchmark huggers’,” Hobbs said, speaking in a session entitled, ‘Do real estate fund managers add value? Do they have a future?’.
“More active funds have better sector calls,” he said, adding that managers who have been overweight to the southeast UK’s retail sector and London offices have made some “effective sector calls”.
“They’ve also been better at market timing than low-active funds,” Hobbs said. “The reality is that real estate is a very management intensive, active asset class.”
With real estate in the UK being one of the most risky real estate markets in the world, Hobbs pointed out the risk benefits from geographical diversification.
In a presentation on GIC strategy, Goh said: “Geographical diversification allows you to have more value, but it’s only half the truth that going global brings resilience to a portfolio”.
“When we invest in more than four to five countries, the additional diversification benefits are not tremendous, although a large part of our portfolio is in five to 10 countries,” Goh said. ”We think globally and geographically, rather than by sector.”
European markets offer more opportunity for ‘beta’ than the US, he added.
Delegates were asked what the most important potential benefit of foreign investment was – most voted for diversification or risk reduction (65%), followed by higher returns (21%).
Russell Chaplin, chief investment officer at Aberdeen Asset Management, said the “power of having the right assets is high”.
”If you knew that central London offices will next year be the best performing, would you go and buy it now?” he asked. “So it’s not about sectors, but more about individual assets.”
Hobbs pointed out that, “in the downturn, it was the benchmark huggers who were more sellers”.
Chaplin said “you need to be different to the index to be able to beat it”.
“To some level, indexes may be a distraction – you can’t invest in them, unless you’re going into futures,” he said.
Just over one-third of delegates voted for a benchmark as their main concern when selecting a manager, with as many citing reputation as a deciding factor.
Benchmarks are, Hobbs said, “a governance tool… rather a performance target”.
Roger Urwin, global head of investment content Towers Watson, said that while real estate is “doing pretty well”, the sector is “dripping with issues”.
He said: “It is different to other asset classes and multi-asset managers like myself don’t always factor in those issues.”
Co-panellist, Sebastien Lieblich, global head of index management, said the real estate sector has become very important and is emerging as a distinct asset class.
Highlighting the importance of six key factors for investors – value, size, momentum, quality, high yield and low volatility – Lieblich said that, between 1975 and end of 2014, all six factors have performed.
“The solution is to combine those factors,” he said.
A survey of the 300 delegates asked whether or not effective management can lead to outperformance, with which 73% of the audience agreed.
Urwin said real estate managers can add value, albeit at a certain cost, however.
“I can’t see any scenario where real estate does not have a place in a overall portfolio,” he said. But does it have a bright future? It’s shoulder to shoulder with other asset classes.”
Methods of research, Urwin said, need to be more common if real estate is to become mainstream.
Keynote speaker Nick Butler, visiting professor at King’s College London, told delegates that a decline in oil price will see sovereign wealth funds repatriate capital currently invested in UK property.
Butler, a former BP vice president for strategy and policy development, said “multiple step changes in the energy sector” will impact OPEC countries.
“Other than oil, these countries have few alternative sources of wealth creation,” Butler said, pointing to the introduction of austerity measures in Saudi Arabia.
For real estate investors, the flow of sovereign wealth capital has taken assets in major European cities out of the market. However, Butler said the capital is “not sticky at all and is already returning”.
Goh said GIC is still attracted by UK real estate.
“We are not pulling back from the UK, we are still open for business,” he said.