The story of how real estate has emerged from being a so-called alternative investment to become a staple of many investors’ asset allocations, along with fixed income and equities, is one that has been told many times to clients over the past decade. With the asset class promoted as a diversification play as well as a way of generating inflation-linked income over the long term, in the past 10 years investors have increased their allocation to real estate from nothing to 5% and in some cases up to 10%.
| Ranking by real estate assets |
| Fund management company |
Real estate AUM ($bln) |
| JPMorgan Asset Management |
58.4 |
| Aviva Investors |
57.574 |
| UBS Global Asset Management - Global Real Estate |
50.7 |
| Aberdeen Asset Management |
49.026 |
| Standard Life Investments |
24.9 |
| DekaBank Deutsche Girozentrale |
24.292 |
| Henderson Global Investors |
19.3 |
| Schroders Investment Management |
16.9 |
| F&C Management |
10.295 |
| Scottish Widows Investment Management |
10 |
| GE Asset Management Incorporated |
8 |
| MFC Global Investment Management |
7 |
| Fortis Investments |
6.2 |
| Franklin Templeton Investments |
5.1 |
| Axa Investment Managers |
2.669 |
| Generali Investments |
2.2 |
| BNP Paribas Asset Management |
0.785 |
| Barclays Global Investors (31/07/08) |
0.602 |
| OppenheimerFunds (31/10/08) |
0.413.6 |
| First State Investments |
0.118 |
| All figures as at end June 2008 except where stated |
| Source: Euromoney/Liquid Real Estate |
Most asset managers now have sizeable real estate units, demonstrating the asset class’s importance as part of their overall businesses. The top 20 respondents to Liquid Real Estate’s survey of the largest asset managers have a total of $366 billion invested in the asset class. Respondents were ranked by real estate assets under management. Real estate investing constitutes 7.8% of these managers’ total AUM and most of them are planning to keep their allocations as they are or increase them over the next year. Only 8% of managers responding to Liquid’s survey plan to reduce their real estate exposure in 2009.
Even though 2008 has not been one to shout about from a returns perspective, managers are confident that real estate is here to stay as a mainstream asset class. Compared with equities, real estate looks relatively strong, but apart from that relative outperformance to recommend it, the asset class simply has become entrenched in asset allocations, especially as more ways of measuring its performance have become available.
"We’re not getting the sense that institutional investors are pulling back from property," says Andrew Smith, chief investment officer at Aberdeen Property Investors, part of Aberdeen Asset Management, which manages $49 billion in real estate. "They intend to maintain property exposure, but they’re not looking to invest more money in the short term."
The investment thesis for property remains intact, argues Anne Breen, head of property research at Standard Life Investments in Edinburgh, which manages $24.9 billion in real estate assets. Investors like property because it is a stable, long-term income generator.
"There may be some changes in attitude, not on real estate allocations but about the method of investing in the underlying market," says Breen. "An example could be open-ended real estate funds. There may be a change in attitude on these funds and their ability to provide liquidity in what is a relatively illiquid asset class."
Investors will likely demand a higher premium for less liquid and opaque investment opportunities as they move into the next investment cycle. They will seek to spread their investments in different types of vehicles.
"It will be important not to have all your allocation in an open-ended vehicle or listed stocks, for example. A mix of investments could be more appropriate to diversify market risk and vehicle risk," says Breen.
Real estate investors, such as pension funds and insurance companies, are not running for the exits; nor though are they moving to boost allocations. A wait-and-see approach is the order of the day. Investors are keeping cash positions at the ready to deploy when the markets show signs of recovery.
"Allocations to real estate of up to 10% are here for the long run because investors have realized that diversification is important," says George Ochs, managing director in real assets at JPMorgan Asset Management, which manages $58.4 billion-worth of real estate. "Real estate has performed on a risk/return basis and is not correlated to stocks and bonds. There may be a pause in terms of allocations changing for the next few years, because all bets are off. If we get back to more normal times, you will see allocation to real estate rise again and to other real assets."
The explosion of measurement tools such as indices has contributed to real estate’s coming of age. It used to be difficult to measure performance outside such markets as the US, the UK and the Netherlands where there is a history of performance benchmarking and indices.
"There’s a change now in that there are enough indices available with sufficient histories, which can give investors some comfort through one or two cycles of real estate performance," says Russell Chaplin, global real estate strategist at UBS Asset Management, which manages $50.7 billion in property. "Investors are able to make some assumptions when they include real estate in their asset allocation models."
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A better picture |
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Expected change in real estate investments over the next year |
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Source: Euromoney/Liquid Real Estate survey |
Today, there are more analysts dedicated to real estate than 15 years ago when research on the asset class was a backroom discipline, which typically didn’t have much influence on what people did, according to Chaplin. More research has brought transparency to real estate, which in turn has bolstered interest in it and cemented its place in the investment orthodoxy.
"I don’t see any reason real estate would go back to the status it had 10 or 15 years ago, when it was considered more of an alternative investment," says Chaplin. "Real estate is an asset class that is firmly established and it’s an asset class that’s come of age over the last five years with more Reit structures, which allows greater transparency and public pricing on a daily basis."
