Appetite for listed property exposure grows

Demand for real estate securities has surged since the global financial crisis as a property allocation gained through the listed sector plus the attractive income returns appeal to a broader range of investors.

That was one of the key conclusions of a presentation by Alex Moss, Managing Director of UK-based consultants Consilia Capital, and a member of the European Public Real Estate Association’s (EPRA) Research Committee during the PropertyEU Regulatory Investment Briefing at Realty in Brussels at end-May.

Moss said that assets under management of real estate securities funds grew 68% to $250 bn from 2007 to 2012, according to research by Consilia Capital and Property Funds Research for EPRA. The study estimates that the number of real estate securities funds increased 39% to 677 in the same period. The most recent figures show that total assets under management for Exchange Traded Funds (ETFs) pegged to FTSE EPRA/NAREIT real estate indices jumped 85% to $8.7 bn in the 12 months through to February this year.

The tax efficiencies of the real estate investment trust regime means that global REIT funds now account for seven of the 10 largest global real estate funds, with $22.2 bn of assets under management as of the end of 2012, Consilia’s report showed.

'Asset managers have digested academic research showing that over the longer term the listed real estate sector delivers returns comparable to those generated by directly owned buildings. Researchers have supplied evidence to convince more investors that having listed real estate in a portfolio can also improve returns and diversify risk,' Moss said.

The report highlights how diverse investment strategies using real estate securities have brought depth and increased liquidity to the market. Beyond the large group of income return-focused investors, the broader and growing uses of the listed sector can be categorized into the following investment strategies:

* Long/short strategies: Returning to favour among traditional long only specialist asset managers as well as new hedge fund entrants to the market. This approach first came to prominence in 2006/7 but foundered in the global financial crisis.
* Listed real estate securities as a proxy for real estate investment: Recent institutional investor mandate awards, including one from the National Council for Social Security Fund of China, target global REITs as a liquid, tax-efficient proxy for the global real estate market.
* Platform investing: this allocation to sector-specialist real estate asset managers was traditionally the preserve of the private market. Specialist management teams with unique assets mean this approach can also apply using listed real estate. Forum Partners has executed this strategy globally, with over 70 investments in 17 countries. Platform investing can be used to build blended listed and non-listed institutional portfolios, incorporating the most attractive assets from both sectors - an investment strategy developed by the largest Dutch pension funds.
* Listed real estate is potentially a key component of new Defined Contribution pension strategies in the UK. Auto-enrolment into Defined Contribution pension schemes in the UK is now underway and one of the biggest challenges facing the industry is how to provide a suitable real estate platform for DC schemes as has been successfully pioneered in the US. Legal & General has provided one UK solution, by combining their managed property funds with a Global REITs Index Tracker Fund.
* Demand is increasing for real asset (or inflation protection) funds, which include listed real estate. For example Cohen & Steers Real Asset Fund holds 25%-30% in global real estate, 25%-30% in commodities, 15%-25% in global natural resource equities and up to 20% in other assets such as gold.