Listed real estate tops institutional investment returns in the UK, second in the Netherlands – CEM benchmarking research

Listed real estate produced the highest average institutional investment returns in the UK (2010 to 2016) and the second largest in the Netherlands (2005 to 2016) across eight major asset classes, an EPRA-sponsored study by researchers CEM Benchmarking of European institutional investors has concluded. The institutions had combined assets under management (AUM) of EUR 2.6 trillion, representing 36% of the top 1,000 funds in Europe.

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 the 12-year period.
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% each 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% each year for the Dutch funds over the research sample 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,” Ali Zaidi, EPRA Director of Research & Indices, said.
“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,” he added.
Other key findings of the CEM Benchmarking research included:

  • The average annual net investment return from listed real estate for other Euro area funds for the period 2008 to 2016 was 5.59%, compared with 11.55% for private equity.

  • 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. The UK and other Euro area funds allocate just over 5.0% to real estate on average.

  • For the longest sample period where listed and unlisted real estate appear (Dutch funds 2005 to 2016), listed and unlisted real estate have comparable annualised volatilities (22.85% and 23.55% respectively). In other region/time samples, unlisted real estate is more volatile than listed real estate, largely due to the asset class having a more idiosyncratic risk.

  • Gross of investment costs, private equity was the best performing asset class overall, but also the most expensive with investment costs of 452 basis points (Dutch funds), 382 basis points (Euro area funds), and 415 basis points (UK funds). Net of investment costs, private equity returns remained the highest of all asset classes, with the exception of listed real estate in the UK.

  • Direct comparisons between listed and unlisted real estate in each region group/sample period did not show evidence of a liquidity premium for unlisted real estate.

  • After standardising returns of unlisted asset classes for lagged reporting, listed and unlisted real estate are seen to be highly correlated to each other for Dutch funds (correlation of 88%) but less so for other Euro area funds and UK funds.

Asset allocation and standardized return

About the CEM data used in this study

Of the more than 20 countries that provide data to CEM Benchmarking, only the subset of European funds is relevant towards understanding how European funds have invested in real estate. And while an even sampling across all of Europe would be ideal for this study, differences in culture and regulation of pension systems across countries motivate participation with CEM by some more than others.
Traditionally, funds from the Netherlands have seen the greatest participation with CEM, with funds from the UK seeing increasing participation. Other European countries that benchmark with CEM and are included in this study are funds from Denmark, Finland, the Republic of Ireland, Norway, Sweden, Switzerland and France. And while not all funds included in this study are traditional defined benefit (DB) pension funds, nearly all manage DB pension assets related to a DB pension liability; for the funds included for 2016, 92% are DB pension funds, 4% are buffer funds for DB pension systems, 3% are asset managers for DB pensions, and 1% are sovereign wealth funds.