IPE RE Awards: Applying factor investing to real estate markets
Real estate investors could use data to take an analytical, quantitative-based in a similar way to methods widely employed in the equity and bond markets, a conference in the Netherlands heard.
At the IPE Global Conference & Awards 2019 in Amsterdam, Maurizio Grilli, head of investment management strategy at BNP Paribas, proposed a systematic approach to real estate portfolio management, using factors — attributes of a certain type of investment which drove returns.
The six factors he said could be used were growth, yield, quality, liquidity, low volatility and value.
Grilli said the firm had decided to look at applying style investing — a methodology used to higher returns and reduce risk while getting better diversification — to real estate portfolio construction.
Discussing the proposition, Meagan Nichols, global head of real assets investment group at Cambridge Associates, said: “We’re a fund-level investor, not an asset-level investor, and one thing we have been digging more deeply into is understanding the underlying metrics of the underlying portfolio companies, in funds, and understanding how those different property types can generate returns in different ways.”
The digitalisation of the operating mechanisms was a tool that was first used in private equity investing in the 2000s, and that model was now coming to real estate, she said.
“Now what we’re seeing is that model really coming to real estate through real estate technology and venture funds, so there’s a blurring happening now in real estate that hasn’t really happened before in real estate and venture capital,” she said.
Karim Habra, head of Europe at Ivanhoé Cambridge, took issue with what he said was a common perception that the real estate asset class was outdated. While some saw real estate investors as less numbers-orientated than investors in financial asset classes, he said, “I think we’re much more disciplined than any investor in other investment asset class”.
He said: “When you look at our [due diligence] process, we look at the property itself, we look at the macro analysis, the cashflow analysis, the legal analysis, tax analysis,” citing other factors.
In real estate, investors were able to do anything they wanted, such as investing via mezzanine debt, senior debt, portfolios, at the corporate level and joint ventures, he said. “I think we’re the only industry that has a holistic approach to investment.”
Nichols said one thing the industry could do more with, was using the data it already had. “This is one of the most data-rich asset classes”, she said, but added that a lot of that information was just kept very private which made it harder to overlay asset management capabilities.”
She said: “There’s so much you could do with artificial intelligence if we could figure out how to unlock some of the underlying data.”
Will Robson, executive director and global head of real estate applied research at MSCI, said organisations were not leveraging the real estate data they had, and that potential benefits could arise from layering this and sharing it.
“I think that’s a big area,” he said. “There’s also a time dimension in terms of the investment process.”
He explained that, while real estate investors were very sophisticated in terms of going into an investment, there was more that could be done when it came to monitoring the portfolio over time.
Meanwhile, Stephen Ryan, former INREV and Mercer consultant and founder of S Ryan Invest, said there was a need for education so that real estate could play a wider range of roles in defined contribution pension schemes, which are becoming the dominant savings vehicles.
He said DC pensions typically allocate to growth assets in their early stages and more defensive assets at the latter stages. “Lazy allocators will lump it in with one without realising that it could play a role in both”, he said.
“Defined contribution now accounts for over half of all pension assets in the world, so we need to get on top of this agenda.”