GLOBAL - Investing in global real estate contributes over 115 basis points or 10% to a pension fund’s annual total return, according to evidence presented by Ibbotson Associates.
A study of global real estate past performance conducted by the asset allocation analysts for a 15-year period suggests pension funds which invest around 20% of their assets in global real estate – either directly or indirectly through global real estate investment trusts (REITs) – generate an average annual return of 10.98% compared with 9.8% for pension funds without exposure to real estate investments.
"The addition of that global real estate for a 10% level of risk is around 115-120 basis points," said Michael Grupe, senior vice president of research and investment affairs at the National Association of Reits (NAREIT)
Ibbotson plotted out the risks and returns for various asset classes between 1990-2005 to construct what it considers to be an optimized portfolios of moderate risk with a 10% standard deviation both for funds with and without global listed real estate exposure.
In order to make the calculations, Ibbotson used data delivered by the FTSE EPRA-NAREIT Global Real Estate Index, looking at the North American, European and Asian markets.
In order to qualify for eligibility on the FTSE NAREIT indices, the 312 listed companies must meet global investment criteria which include being liquid enough to handle large investments in and must have a market cap of at least $75m (€55m).
Grupe noted these findings are based solely on past performance and cannot therefore be considered as the potential returns to be expected in the future.
However, with the development of Reits markets in the UK and Germany and increased interest in Asian listed real estate markets, moderate risk to the real estate market is expected to generate strong returns for the future, particularly if funds increase their exposure to Europe and Asia.
"What we are seeing is from the conversations we have been having with large institutional investors is planned sponsors have become increasingly concerned over 12-18 months about real estate valuations in the US. They are looking to try and diversify their real estate allocations outside the US and what we have been seeing is mandates for global real estates.
"There is a growing interest in Germany as an investment and the introduction of Reits in the UK and Germany is raising awareness there are liquid alternatives to direct property investments," added Grupe.