Thursday 19 October 2017
After a brief introduction from AREF’s CEO, John Cartwright, Andrew Baum of Property Funds Research gave an overview of the global real estate market, with a particular focus on funds.
It is estimated that the institutional investable global universe for real estate is valued at around €23 trillion, versus a global stockmarket valued at around €50 trillion. The investable stock is roughly split one third in each of Europe, Asia and the Americas. Given the world’s population, Africa and Asia are the obvious growth markets.
Global investors tend to allocate between 10-15% to real estate and funds have driven the bulk of cross-border investment. Andrew observed that the constituents of the top global property fund managers change considerably over time and suggested that this appears to evidence a lack of commitment towards real estate investing from many of these houses.
The global funds universe stands at around €2 trillion, or 10% of the investable universe. Their popularity waned following the issues after the global financial crisis (GFC), with clubs and single property transactions more popular since. The EU referendum in the UK caused further reputational issues with retail open-ended funds. Andrew believes this dip in popularity of funds as an investment vehicle is temporary and there is some evidence of a slight rebound now, with a number of open-ended pan-European funds launched – 2016 saw the highest number of launches since 2011. An ongoing issue may be whether investors will be satisfied with returns from ‘core’ propositions – the funds in the UK and Germany tend to be core.
By investment style, the unlisted funds market is broadly split one third each by value in core, value-add and opportunistic approaches. By number, the most common remains value-add. Over the last two years, there has also been an increase in debt and residential funds launched.
Discussing structures, overall, limited partnerships continue to dominate, both globally and here in the UK – though property unit trusts remain high on the list of structures in the UK. ‘Open-ended’ appears to be a dirty word and Andrew suggested taking on the US terminology of ‘evergreen’ or ‘perpetual’ to repackage the same products.
In discussing technology in real estate, Andrew highlighted a report by University of Oxford Research, published May 2017. The technology focus in this part of the talk was on fintech in the property space and the raising of capital via such routes.
There was then a Q&A session with the distinguished panel Peter Hayes of PGIM Real Estate, Johan van der Ende of Cyclus Property and former chair of INREV and Paul Richards of Mercer, after which questions were invited from the floor. Matters discussed were as follows:
- The GFC and 2016 should be looked at as two separate issues for open-ended funds. 2016 was solely a retail fund issue, institutional funds were not affected at all. The retail funds did what they were supposed to do in such events and demonstrated that they do work.
- Post-GFC investors still seem wary, with a focus on income and wealth preservation. Institutional investors are seeking bond-like investments and/or inflation proofing, so there is little or no new money going into core funds.
- It was suggested that real estate fund managers need to stop offering what they cannot deliver – e.g. absolute levels of return and liquidity. On the latter, perhaps the alternative is to change the market to make it more liquid.
- Listed REITs are a good proxy for physical real estate in the long-term but exposed to the vagaries of the equity markets short-term. The choice of vehicle for an investor should be driven by what their needs and wants are. It was also noted that REITs can vary substantially and many new REITs are effectively funds, just listed as a REIT.
- Further discussion around technology made it clear there was insufficient understanding of the relevance of blockchain in real estate at this time. It was also suggested that the use of technology would more likely be accepted where it assists, rather than where it disrupts. Clearly, there are many technological developments that are affecting real estate, both directly and indirectly, but the industry can be slow to adapt as it is challenging to ascertain which trends are short-term and which are genuinely structural.
- Apportioning blame for the downturn in the GFC was difficult and probably shared. The panel agreed that there were few signs that the same sort of downturn was about to occur. ‘Lower for longer’ appears to be the outlook, with forecasts to the contrary being confounded for some time.
Click the link for the presentation slides from this event.
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