Since Chicago-based LaSalle Investment Management issued a white paper released earlier this month about the merits of combing non-listed and listed real estate in one allocation, the topic has provoked increasing numbers of private real estate investment managers and their investors to express their views.
Among the investors is Stephen Tross, head of international investments at Bouwinvest, the investment management arm of Dutch construction workers’ pension fund bfpBouw. Tross regards the white paper as further validation of a strategy adopted by the investor in 2010. On the side-lines of the annual PERE Global Investors Forum in Amsterdam he discussed blended real estate portfolios with PERE.
Bouwinvest manages around €7 billion of assets and is the Netherland’s third largest real estate investor. At present, Bouwinvest has a 60 percent allocation to the Netherlands and 40 percent overseas. Of the overseas quota, a quarter is allocated to listed and three-quarters to unlisted. “With a 50 percent plus allocation to the listed side, you are really exposed to short term volatility,” said Tross. “With only 25 percent, we are comfortable with the level we are exposed to.”
As the brainchild of his firm’s 2010 blended strategy, Tross agreed that a blended portfolio brought numerous advantages.
“We started the program after the crisis – prior to that, we had a few listed shares that were really just used as an index,” Tross said. “But we started to introduce listed as a means of diversification and optimization of the real estate portfolio. And as we implemented the strategy, our portfolio became much more balanced over the three regions and over various sectors and risk profiles.”
Three blended benefits
Tross added that as a pension fund investor with a long-term view, Bouwinvest felt the benefits of a blended portfolio are threefold.
“Firstly, the combination of listed and unlisted real estate in your portfolio actually reduces volatility rather than increase it because the two cycles are not aligned, with listed reacting much more to what is happening in the public markets and macro-economic themes,” said Tross.
“Secondly, the risk-adjusted returns are enhanced by putting the two together because of the reduced volatility – listed property securities generally tend to have a higher and more constant dividend ratio than direct real estate investments,” Tross added. “Thirdly, in the longer term say three to five years, listed real estate securities do eventually behave like the underlying real estate.”
Other benefits from a blended portfolio can also come into play, suggested Tross, such as access to specialist managers and management teams or specific niche sectors like regional malls, which are harder to own privately in certain parts of the world.
“We have specialists for each, but the way we combine it is a really integrated approach, so we look at the underlying real estate exposure that we want to get and determine how we are going to get there – this can be listed, unlisted, joint ventures, club deals and so on,” he said.
Bouwinvest determines its particular strategy but uses managers, on the execution and operational side, which deal in both private and public real estate because they are more aligned with their own approach.
“We feel that they share more of the same philosophy as us in that they combine both listed and unlisted and are not solely focused on listed real estate securities using charts and all kinds of technical analyses but actually have a view and an understanding of the underlying real estate,” said Tross.
The relative performance of the two strategies is more difficult to quantify overall, but Tross said clues can be found if one looks at little closer at particular sectors, geographies or risk strategies.
“It really depends on what variables you are looking at in the listed space, more so than in the unlisted space,” Tross said. “If you look at listed real estate in the US this year, what you see is malls in general and retail are down. Simon Property Group, for example, have had a tough time this year and they have negative performance. But if you look at logistics, it is up – though previously these two have been reversed.”
On a global level, in terms of size, there is little distinction between the listed and unlisted spheres, according to Tross, but at a regional level the difference is stark.
“The LaSalle white paper showed that China, where a lot of big listed developers are state-owned, held 92 percent of its institutional real estate in listed vehicles, whereas in the US it was 61 percent. But on the other side was the UK where only 24 percent of institutional assets were held indirectly, while in Germany it was around 27 percent,” said Tross.
In short, by combining both types of real estate within the same portfolio, investors can achieve many of the benefits of both listed and unlisted while reducing exposure to either approaches’ downside such as public volatility and private illiquidity.