Report backs listed property as markets enter late stage of cycle

The liquidity offered by listed real estate over direct property investments highlights how investors are better served by blended real estate portfolios as global markets enter the late stages of the cycle, according to new research.

BNP Paribas Investment Partners conducted the research on behalf of the European Public Real Estate Association (EPRA).

Jan Willem Vis, CIO of global listed real estate at BNP Paribas IP in Amsterdam, said that the research showed that the time it takes to sell a large €1 bn global portfolio of good quality direct assets has slightly deteriorated compared with two years ago, even though the occupier markets are much better now.

'That surprised me and suggests that investors are getting cautious and coming to the same conclusion as us: the market is entering the latter stages of the cycle. There is still a lot to play for, given the attractive spread of real estate yields over government bonds, but investors should consider increasing liquidity while maintaining their real estate exposure through the listed route. They get the same level of returns from high quality assets, a great portfolio diversifier and the ability to adjust their exposure efficiently when required,' added Vis.

He continued: 'We’ve seen a lot of demand for real estate in the past few years leading up to record levels, but with the Fed [US Federal Reserve] kicking off the upward interest rate cycle the uncertainly surrounding the future direction of global real estate yields is increasing.

'The sought-after London market is a perfect example: current low yields continue to price in rental growth over the coming years -- and we concur with this view,-- but investors would be better advised to provide themselves with a degree of flexibility by taking a position in UK REITs focused on London so that they can effectively adjust as market conditions demand.'

The BNP Paribas IP research showed that listed property allows investors to substitute for the direct real estate in their portfolios because the returns closely mirror each other over long-term holding periods of five years and beyond.

EPRA's CEO Philip Charls said: 'This reinforces the findings of academic research conducted by EPRA over the past 10 years on the benefits of blending listed real estate with direct real estate in the overall real estate allocation.'

Real estate stocks also act as a good portfolio diversifier because in the long term they tend to show low correlations with other asset classes such as general equities, bonds and commodities. They can also improve investment returns for a multi-asset portfolio by on average 80 basis points, without increasing volatility, the research concluded.