Brave new world

This marks the strongest performance in four years, based on the IPD Global Quarterly Property Fund Index, and is significantly higher than for the other main asset classes which MSCI also covers. For example, bonds achieved a total return at net asset value (NAV) of 1.6%, followed by equities with a NAV of 2.6%. Property equities turned in a slightly better performance than the overall listed market with 3.7%, but this was still well below the figure for global non-listed real estate funds.

The North American property fund index generated the highest return, of 14%, followed by the pan-European index with 13.3% and Asia-Pacific with 12.7%.

The latest performance figures give fund managers additional fuel to drive new investors to the asset class which is already in a sweet spot thanks to the sustained low interest rate environment. Now for the bad news. The record levels of global capital flowing into real estate means product has become increasingly scarce and yields have compressed to historic lows.

No wonder Rainer Komenda, head of real estate funds at BVK, was more than a little ambivalent during an INREV seminar at MIPIM last month when asked whether the German pension fund giant was planning to commit more capital to real estate this year than in 2015. 'Unfortunately, yes,' he answered.

Markets are peaking
BVK is already heavily invested in alternatives and real estate is a big part of that, he explained. But, he added, the real estate markets are peaking. 'I'm not sure whether the performance this year will be as good as past years.'

In any case, the highly attractive returns offered by the early mezzanine debt funds in Europe are a thing of the past, according to Robert-Jan Foortse, head of European Property Investments at the asset management arm of Dutch pension fund giant APG. Speaking during the same INREV panel session, Foortse said APG committed €1 bn to mezz debt funds between 2010-13. 'We were spoiled by the returns we were getting for mezz funds of that vintage. The banks are back now and debt funds no longer offer an attractive risk-return versus equity.'

That said, there are still some attractive niches with double-digit returns in the real estate debt space such as development finance and the income component is prompting some asset managers like TH Real Estate and LaSalle Investment Management to beef up their real estate lending activities. TH Real Estate, for example, plans to start lending in Continental Europe this year after being active exclusively in the UK since launching its debt platform in 2014, Christoph Wagner, director of debt strategies at TH Real Estate, told PropertyEU. Real estate secured debt currently generates a premium over the yield on publicly traded fixed income portfolios, he noted.

Risk management tools
As the European real estate landscape continues to evolve, non-listed vehicles remain the preferred route to the market and the range of strategies available to investors continues to increase and mature. Not only are the vehicles and their managers becoming more sophisticated, the systems available to them have improved. Historically the tools to manage property beta have not existed but now they do, however it will take time for investors to understand and start using them, according to Charles Ostroumoff, director of Arca Property Risk Management and a pioneer in the use of IPD Futures as a property risk management tool.

Speaking during PropertyEU’s Risk & Asset Management roundtable at the LaSalle Investment Management yacht at MIPIM last month, Ostroumoff said, 'Traditionally property risk management was about executing an asset management plan at the asset specific level, from the bottom up,’ he explained. ‘Now you have the ability to manage risk both from the bottom up and from the top down, i.e. at the asset specific level and at market or portfolio level (beta). Specifically, I am talking about IPD Futures contracts listed on the Eurex Exchange. These contracts enable both buying or selling exposure to the property market in one-year annual chunks, so at different points in the cycle you can go risk on or risk off.'

These products, which at present are only available to UK investors, have guaranteed cash liquidity at settlement and daily transparent pricing which allows investors to know exactly where they stand the whole time. They also give flexibility in regards to managing the ‘unknowns’, said Ostroumoff, giving the example of a hedge fund that executed an event driven trade the week after the UK Election result was announced in May of 2015 buying the rest of the calendar year 2015 and the following calendar year 2016, but selling calendar years 2017, 2018 and 2019. This Fund was the first property fund back into the UK property market after the Election to maximize any short term fillip after the political risk of a Labour victory was removed but presumably protecting against a period of unwelcome uncertainty ensuing a couple of years in the future.'

The need to avoid slipping back into bad old habits is the reason why the Royal Institute of Chartered Surveyors (RICS) sees crisis prevention as a public interest mission and has instituted an international Risk Management Forum, according to Martin Bruhl, head of investment management international at Union Investment Real Estate and the first non-British citizen to have been elected president of RICS. '2016 at times feels like 2006, and we all know what happened then.'

But, he added, it will take time for investors to understand and start using the new tools that companies like Arca are providing. 'Elsewhere in Europe, including Germany, these new tools are part of a brave new world that we are not ready for yet.'

Judi Seebus
Editor in Chief