Alex Moss outlines the different ways that listed real estate securities can be used by investors

With investors placing increasing importance on liquidity, income and inflation-hedging qualities, the popularity of listed real estate securities has increased. This article provides a summary of the most important applications of listed real estate by looking at: dedicated real estate securities funds; the range of listed real estate strategies available; their different uses in asset management; and how listed real estate can be combined with other real estate asset classes.

From 2007 to 2012, assets under management of dedicated real estate securities funds grew 68% to $250bn (€192bn), and the number of real estate securities funds increased 39% to 677 in the same period. Reflecting the market growth in lower-cost passive funds, the most recent figures show that growth in real estate exchange-traded funds (ETFs) has been explosive, with total assets under management for ETFs pegged to FTSE EPRA/NAREIT real estate indices jumping 85% to $8.7bn in the 12 months to February this year.

Although the number of new funds being launched has slowed down, it is interesting to note that there have been some significant new entrants to the sector, such as Blackrock, which has announced the creation of a global real estate securities platform and the formation of regional teams.

Table 1 shows the relative size, as measured by assets under management and frequency in terms of number of funds.

Benchmarked funds: In Europe, we have identified close to 90 funds with listed real estate at their core. The majority of these, use a benchmark, and EPRA is by far the most popular provider. For global real estate funds, the FTSE/EPRA/NAREIT Developed index (in its various forms) was easily the most commonly used.

Non-benchmarked funds: Non-benchmark constrained funds seek to provide what is typically described as a mixture of income and capital growth. A good example of a non-benchmark constrained fund would be the M&G Global Real Estate Securities Fund, set up in 2008. As a result of the absence of a benchmark, the fund weightings can be expected to be quite different (typically more concentrated) from those in a benchmarked fund.

Income funds: There are two specific strategies that seek to deliver a specific income objective: first, using a portfolio of higher-yielding REITs such as the CBRE Clarion Global Real Estate Income Fund, and (on a regional basis) the B&I Pan-Asian Total Return Real Estate Securities Fund; second, through writing call options on the underlying portfolio and taking the premium received, distributing it as a dividend to unit holders. The Schroder Global Property Income Maximiser Fund is a good example of a fund using this strategy.

Long-short strategies: Many specialist real estate securities teams incorporate these long/short strategies alongside traditional long-only structures. As an example, the team at Thames River runs a hedge fund (the Longstone Fund), a UCITs III-compliant long-short fund, and is currently launching the F&C Real Estate Equity Long/Short Fund which aims to generate a return of 8-10% by investing in a portfolio of pan-European real estate securities. Cohen & Steers also runs a Global Real Estate Long/Short Fund alongside its numerous long-only funds.  

Using listed real estate as a proxy for direct real estate: The China National Council for Social Security Funds (NCSSF) recently awarded a listed real estate mandate to use listed real estate to deliver a real estate exposure as part of the multi-asset portfolio. In the US this strategy has been extremely popular with US state pension funds, which have awarded domestic and global REIT mandates to fulfil their requirement for a real estate exposure. In Europe, PGGM and APG have both (at times) been keen proponents of using the listed sector as a way of delivering direct real estate returns.

Using listed real estate for platform investing: The concept of platform investing (allocating money to specialist asset managers) is well known to real estate private equity managers, but it is increasingly being used in the listed sector. There are two specific reasons for this: first, a belief that specialist management teams and niche sectors deliver superior returns over the long term; and second, the current limited equity funding available for smaller listed companies means that platform investors can fill the gap, providing a critical lifeline of support and expansion in the same way that mezzanine debt funds are filling the gap left by the reduction in senior debt. As an example, Forum Partners has successfully executed this strategy globally, with over 70 investments in 17 countries in Europe and Asia.

Listed real estate plus direct real estate: The most well known example of combining listed and direct property in a fund format is the TR Property Investment Trust. The manager currently applies the following guidelines for asset allocation:
• UK listed equities 25-50%
• Other listed equities 0-5%
• European listed equities 45-75%
• Listed bonds 0-5%
• Direct UK property 5-20%.

It is important to note that, as the TR Property Investment trust is closed-ended, it is able to add debt to the balance sheet to part finance the direct property holdings.

In addition to the TR Property Investment Trust, the same manager also runs a smaller, open-ended vehicle that combines direct property and listed real estate and has a greater emphasis on income, called the Thames River Property Growth and Income Fund. It should be noted that this structure does not use debt.

Listed real estate fund plus external unlisted funds: A good example of a structure combining listed funds with unlisted funds is the HSBC Open Global Property Fund run by Guy Morrell. This combines a geographic allocation strategy with the ability to invest in funds that are exposed to both listed and unlisted property markets.

Internal Listed real estate fund plus internal unlisted funds: Legal & General Property (LGP) together with Legal & General Investment Management (LGIM) launched a new product, the Hybrid Property Fund, in 2011 which offers defined contribution (DC) pension schemes a new and innovative way to invest in property funds while managing volatility and liquidity. The fund invests in LGP’s UK balanced fund (the Managed Property Fund) and LGIM’s Global REITs Index Tracker Fund on a default position split of 70:30. The manager has the flexibility to alter the 70:30 default position of the fund within pre-set benchmark ranges.

Listed real estate plus other real assets: The growth in commodities and resources as an asset class, coupled with a need to provide protection against inflation, has led to increasing attention on ‘real asset’ funds. A good example is the Cohen & Steers Real Assets Fund, which invests primarily in core real asset categories, consisting of global real estate securities (25-35%), commodities (25-35%) and global natural resource equities (15-25%). It may invest up to 20% of the portfolio in diversifiers for added stability, including gold and fixed income in multiple currencies. It utilises a multi-manager approach for core real asset categories.

Listed real estate plus derivatives: Combining listed real estate and derivatives is the key strategy employed by the Iceberg funds managed by CBRE Reach Aim. The fund invests across the full spectrum of investment vehicles, but focuses on listed real estate and derivatives with a highly quantitative investment process.

Listed real estate fund providing liquidity in a direct property fund: In the UK, property authorised investment funds (PAIFs) are new tax-efficient collective vehicles for the retail and institutional market. They follow (and may replace) the authorised property unit trust, which is a direct property fund required to hold 15% of its assets in a liquid form. The increasing popularity of these vehicles is likely to lead to an increase in the use of listed real estate in direct property funds.

Academic research has shown how the returns of the listed sector are related to the returns of the underlying assets, and that inclusion of REITs in a multi-asset portfolio can improve both return and risk. The liquidity, efficient pricing and transparency offered by the listed property sector means it is now being used by a broader range of investors, and in a wide variety of applications, including defined contribution pension plans, platform investing, and long/short hedge fund strategies.

Alex Moss is managing director of Consilia Capital and a member of the EPRA Research Committee