The annualised total returns of listed real estate companies within the FTSE EPRA Nareit Index have outperformed general equities and government bonds in most of the last 20 years. The Developed Europe Index provided an 11.9% total return over 10 years and a dividend yield of 4.3% over 2018 reinforcing the view that listed real estate provides strong performance to long-term investors.
Against a backdrop of low interest rates, that are expected to remain lower than historic norms for longer, and an ageing population, that will require income in retirement for longer, yields that are significantly higher than government bonds are particularly attractive to institutional investors such as pension funds. This is one of the reasons we have seen increased allocation to European listed real estate from institutional investors in recent years. Many are also seeking to diversify their portfolios by geography or sector with a greater focus on underlying liquidity.
Listed real estate investments enable access to high quality assets, together with geographic and sector diversification, enabling efficient capital allocation to traditional real estate sectors and also niche sectors such as healthcare, student housing, hotel and lodging. In this context, efficiency describes both the low cost of investment as well as the speed and flexibility of allocation.
Analysis from 'Listed and private real estate: putting the pieces together' by MSCI (2017) demonstrates that listed real estate is closely correlated to other forms of real estate. It takes about 18 months for an investment in listed real estate to shed the influence of the general equities market and to start mirroring the performance of the comapnies' underlying portfolio. The study shows that medium to long-term ownership of listed real estate provide investors with much higher liquidity and lower costs than direct property investments once the background price volatility caused by the general equities market fades. Intuitively it makes sense that listed real estate's long-term returns reflect direct real estate returns because the investments are in the same underlying bricks and mortar.
We are seeing large institutional investors increasingly benefit from listed real estate within their allocation. There is academic research demonstrating improved annualised returns of 1% over 15 years when incorporating a global listed real estate allocation of 30% to a UK unlisted real estate allocation. We believe the benefits of a diversified real estate strategy gained by large institutional investors are also available to mid-size and smaller investors, right through to individuals, and listed real estate is an efficient addition to the whole portfolio.
A recent CEM Benchmarking study of European pension scheme investors’ returns concluded that listed real estate produced the highest average net returns in the UK (2010-2016) and the second highest in the Netherlands (2005-2016) across eight major asset classes. The institutions had combined assets under management of EUR 2.6 trillion, representing 36% of the top 1,000 funds in Europe.
Going forward, we are very positive about the growth prospects for the European listed real estate sector. In the US, alternative real estate sectors already represent about 40% of the listed sector, compared with 10% in Europe. If the European alternative sector was to match the market share of their US peers, that alone would add 50% to the size of the European sector.
This topic will feature as a panel session with global investors from listed and non-listed side at the EPRA Conference in Madrid later this year.
This article was published in the Iberian Property magazine.