Perspective is a funny thing. Speak to one investor and real estate equities sit within a wider equities strategy. Speak to another and they sit firmly within real estate. Jeremy Plummer, head of CBRE Investor’s global multi-manager business
Speak to Robert Bingen, Schroder Property Investment Management’s recently promoted co-head of property multi-manager, and he’ll tell you there’s merit to viewing real estate stocks as simply another form of indirect real estate investing.
“If you’re going to be a long-term investor, the whole concept of listed or unlisted is arbitrary,” he remarks. “Both have portfolios and management teams that can be good or bad. The only difference is one has daily pricing and the other doesn’t.”
Bingen brought this view with him when he joined Schroders in 2007 from the Dutch government pension fund, Stichting Pensioenfonds ABP. Having worked for Dutch pension funds (he also worked for PVF Pensioenen, now part of Foreign and Colonial) for more than 15 years, Bingen has had experience thinking in terms of a dual strategy. That experience, including a five-year stint managing a global real estate securities portfolio, has taught him the similarities between investing in real estate shares and real estate funds make doing both within a property portfolio or fund of funds vehicle more than palatable.
Since his arrival, and under his direction, Schroders has completed two sizeable investments in listed companies on behalf of its Continental European Fund series – two European funds of funds that, combined, have raised approximately €400 million from investors. Both were European Public Real Estate Association (EPRA) companies.
“In early 2009, a lot of the unlisted funds had a bad time,” Bingen says. “Just look at the INREV index – continental Europe was at -8.4 percent. Meanwhile, we saw opportunities in the listed sector that were hugely undervalued and the share price of the stocks we bought increased more than 70 percent, excluding dividends being paid out.”
In one case, Schroders bought a significant ownership — more than 2.5 percent of the stock. “The interesting thing is we used exactly the same discipline as we do with unlisted funds,” Bingen says. This, he notes, included similar due diligence on management, the companies’ assets and their lease covenants — all the areas a fund of funds manager would normally scrutinise when considering a commitment to an underlying fund. “We viewed the investments on a five-year hold,” he adds. 
There’s an alternative view, however, that to invest in a listed REIT over a five- to 10-year period is similar to investing in core funds.
Bingen acknowledges that funds charge a management fee, while listed companies have other operational costs to consider. “For us, that is not a key decision driver,” he says. “More important is the quality of the portfolio, management and strategy.”
Schroders’ fund of funds cannot commit more than 25 percent of its capital to listed companies, but Bingen says the option to take the public route further enhances the firm’s ability to continually invest in the best businesses at times when traditional private funds are underperforming. Its European funds of funds target a total return of between 8 percent and 10 percent through investing in core and value-added strategies.
An acquired taste
The concept of investing in both listed and unlisted real estate evokes differing reactions in the wider fund of funds community. Jeremy Plummer, head of CBRE Investor’s global multi-manager business, sees the logic in combining such investments but argues it’s ultimately up to the firm’s investors. “We are client driven, and they generally take the view they’ll approach listed separately as part of a broader equities strategy.”
“There’s an alternative view, however, that to invest in a listed REIT over a five- to 10-year period is similar to investing in core funds,” Plummer says. “Assuming both managed similar assets, the two should be interchangeable.”
Plummer notes that none of CBRE Investors’ pooled funds have invested in listed real estate, although there are allowances in a couple of the Los Angeles-based firm’s separate accounts to commit up to 30 percent of the capital to public share purchases. He adds that each has exercised this option to the tune of between 20 percent and 25 percent.
“For each, no index trading approach was taken. The individual stocks were invested on an absolute return basis,” Plummer says, adding it was a useful exercise for investing in asset classes not easily approachable via private funds – areas like prime shopping centres. “That’s one example. It’s very difficult to get to the sort of assets owned by companies like Unibail-Rodamco and Kléppiere in Europe and Simon Property Group in the US.”
Taxing issue
Of course, investing in both listed and unlisted brings with it structural and regulatory considerations too. Glenn Uren, managing director at Franklin Templeton Real Estate Advisors, points out that, before launching, you need to confirm that your private equity fund of funds vehicle can also be used to buy and hold listed securities. “Buying securities, for example, can’t be done from just any fund structure and jurisdiction. You need appropriate back office, governance and compliance capabilities set up to trade listed instruments,” he states. Glenn Uren, managing director, Franklin Templeton Real Estate Advisors
Uren, a former real estate securities analyst himself, has just come to market with Franklin Templeton’s latest offering, the Franklin Templeton Asian Real Estate Fund 2. While there is no provision for buying listed investments directly, he notes that it has been seriously evaluated. We’ve considered adding listed real estate securities to our mandates for almost 15 years, be it for tactical, strategic or liquidity reasons, but it must be appropriate for the mandates involved.
“We’ve considered adding listed real estate securities to our mandates for almost 15 years, be it for tactical, strategic or liquidity reasons, but it must be appropriate for the mandates involved,” Uren says. “Also, adding a listed component brings its own inherent risks and the interplay between the two adds a further layer of risks, especially when it comes to potential conflicts of interest.”
Uren also suggests that the scale of the opportunity and liquidity are vital considerations. “If you want to park a large amount, that’s going to be painful especially if it’s concentrated. Large outlays could be made during share placements, but buying directly from the market could be problematic.”
Bingen counters this by pointing out that the use of listed investments is for supplementary purposes anyway. Furthermore wide-scale listed investing as an option for funds of funds is a cyclical affair. “Listed and unlisted real estate aren’t in sync,” he says. “Typically, listed leads unlisted because it acts more on expectation. Recently, Europe’s listed sector rallied and, in many cases, is valued at a large premium to net asset values, so you must ask if that five-year value is still there.”
Bingen does believe there is still value to be found in the listed space, although it’s “stock specific”. “There are always opportunities around even if the sector as a whole looks fully valued. We continue to monitor the market – you just have to dig deeper as the opportunities aren’t as obvious as they were.”
Amsterdam- and Hong Kong-based firm Composition Capital Partners is another that doesn’t have dual listed and unlisted aspirations, but it also admits certain opportunities could present themselves. Managing director Erwin Stouthamer says: “There are two exceptions where we may temporarily accept listed investments in our portfolios: when we sponsor an investment in a listed entity that will be taken private in the short term, or where we allow one of our local partners to list a portfolio, provided there is no lock-up for us bringing in LPs and the liquidity is real.”
An opportunity for some and a headache for others, the notion of investing in listed real estate alongside private equity within funds of funds offers a diversity of views. However, from such spread opinions, there is one shared strand: most have considered it even if with varying degrees of seriousness and subsequent action.
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