A new study by a group of European researchers has revealed that listed real estate produced the highest average institutional investment returns in the UK (2010–2016) and the second largest in the Netherlands (2005–2016) across eight major asset classes.
The report from CEM benchmarking of European institutional investors, presented at the European Public Real Estate Association's (EPRA) annual conference in Berlin on Wednesday, said that the institutions had combined assets under management (AUM) of €2.6 tln, representing 36% of the top 1,000 funds in Europe.
Commissioned by EPRA, the research showed that the average annual net return for listed real estate over seven years for UK institutional investors was 10.93%, slightly above private equity at 10.86% and general equities at 10.76%. In the Netherlands, listed real estate’s net return was second highest at 9.32%, after private equity at 10.78%, over a 12-year period.
'The strong returns of listed real estate demonstrate the merits of long-term institutional investor allocation to the sector independent of the general equities allotment, particularly with the risk diversification qualities this contributes to the overall portfolio,' said Ali Zaid, EPRA director of research & indices.
'The performance of real estate stocks is driven by the optimisation of rental income streams and the ownership of high quality assets, while providing unmatched liquidity compared with other forms of property investment. The CEM research also shows that the costs of listed real estate investment are a fraction of investing through funds, or holding property directly.'
The UK and the Netherlands, respectively Europe’s two largest private pension markets, appear to differ, however, in their view of the future direction of the real estate sector as a whole. Dutch funds are de-risking, reducing allocations to equities and real estate while increasing allocations to fixed income. UK funds are doing the opposite, increasing allocations to equity and real estate while lowering allocation to fixed income. Other Euro area funds are comparatively stable.
In the UK, listed real estate averaged only 0.3% of funds’ total AUM, but this has been increasing by a staggering +25.9% a year over the research period. In contrast Dutch funds, which at 1.9% have the highest average institutional allocation from total AUM to listed real estate in Europe across CEM’s three sample groups (UK, NL, and other Euro area funds), show a widely diverging trend to the UK market. Listed real estate allocations have been decreasing by -7.9% a year for the Dutch funds over the research sample period.
The CEM Benchmarking research also concluded that real estate is the primary diversifier in European institutional investor portfolios, against the main fixed income and general equities asset classes.
Dutch funds allocate 8.0% to real estate on average, split 25/75 between listed and unlisted real estate. UK and other Euro area funds allocate just over 5.0% to real estate on average.