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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The incisive guide of how to effectively invest in real estate and REITs
In Real Estate Rules: The Investor's Guide to Picking Winners, Avoiding Losers in Listed Property, celebrated real estate investor Harm Meijer delivers a startlingly insightful and eye-opening roadmap to successful property investment. This book explains the golden rules of investing in European real estate companies, including Real Estate Investment Trusts (REITs). It's full of real-world examples and anecdotes drawn from the author's long and storied career in the industry.
Real Estate Rules contains:
- Robust tools for making informed investment decisions and staying clear of the "vicious downward spiral of doom"
- Understanding market cycles and mastering the art of acting contrarian during downturns to maximize your investment
- How macro drivers, central bank moves and government stimuli can be game changers for real estate markets
- Techniques for assessing the management's value creation and its alignment with shareholders
- Insights to ensure a solid capital structure and avoid leverage traps in downturns
- Advice on how to navigate the European stock markets with its unique challenges for Real Estate Investment Trusts
- Real-world case studies illustrating these principles in action, highlighting key lessons for investors
You'll also learn why acting on conviction, thorough research, strong relationships, and most importantly, trust are key to achieving lasting success.
Perfect for Real Estate Investment Trust investors, people interested in investing directly in individual properties, and other market participants, Real Estate Rules is also a must-read for anyone involved in the real estate industry looking for an insightful investor perspective on the sector.
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Seitenzahl: 319
Veröffentlichungsjahr: 2025
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Foreword
Preface
Introduction – A Sector Not To Be Ignored
Part I: Real Estate
Chapter 1: High Yield for a Reason
How Is the Yield Exactly Calculated? Is It ‘Dressed Up’?
Is It a Good Asset?
Chapter 2: Look for a Rent Compounding Machine with Minimum Capex
Real Estate with Strong Supply/Demand Dynamics
Ability to Capture Rental Growth Potential
Minimum Capital Expenditure and Incentives
Chapter 3: Scan for Value Add Potential
Refurbishment, Extension and Alternative Use
Cluster or Platform Creation
Development
Acquisitions and Disposals
Services
Chapter 4: Real Estate Is Cyclical
Warning Signs
Taking the Contrarian Side
Note
Chapter 5: Expected Returns Should Beat Cost of Capital
Yield and Price per Square Metre
Expected Return
Beat the Cost of Capital
Conservative Underwriting
Act!
Chapter 6: Central Bank and Government Stimuli (or Lack of ) Can Be Game Changers
Central Banks Tend to Get Their Way
Engineered Volatility, but …
Bail Out if ‘Majority Is in Trouble’
Stimulus or Restrictive Policy Will End One Day
Arbitrage Opportunities Opening Up
Part II: Capital Structure
Chapter 7: Prudent Use of Financial Leverage: Don't Get Caught Out by Downturns
Capital Markets Do Not Reward High Leverage, the Opposite!
Loose or No Covenants
Can Absorb a Value Decline of at Least 40%
No Endless Leverage on Valuation Gains
Increasingly Difficult to Degear above 50% LTV
Note
Chapter 8: Don't Assume That Financing Will Always Be Available
Sufficient Cash Flow
Spread in Maturities and Lenders
Equity Should Be Raised When Conditions Are Favourable
Alternative Financing
Good Relationships with Debt Providers
Rights Issues Value Destructive in Downturns
Notes
Part III: Management
Chapter 9: Continuous Value Creation Is Key
Value Creation Leads to Superior Shareholder Value
Optimising Total Returns from the Real Estate (ROIC)
Optimising the Capital Structure (WACC)
Cœur Défense – An Example of Strong Value Creation
M&A Can Add Value, but Frequently It Has Not
Notes
Chapter 10: Radical Action Needed in Case of Shareholder Value Destruction
Change Management, Board and/or Governance
Return of Capital
Circle Property Trust: Liquidating Itself
Chapter 11: Overconfidence Leads to Downfall
Capital & Regional – The Remarkable Example of Overconfidence
Chapter 12: Corporate Governance Should Be Top Nudge
Risk Management
Transparency
Governance Dynamics
Remuneration
Compounding Goodwill
Part IV: Investing in Listed Real Estate
Chapter 13: Scrutinise Property Investment Vehicles
First Impressions Can Be Misleading
Focus on Cash Flow
Mosaic Theory
Notes
Chapter 14: Significant Upside Based on Multicriteria Valuations
Historical Performance Analysis
Six Basic Valuation Metrics
Modelling
Invest with Margin for Error
Chapter 15: Focus on (Upcoming) Value Creators, Be Careful with Destroyers
Introducing a Framework: Get on the Right Highway!
(a) Firing on All Cylinders
(b) Potentials
(c) Stuck
(d) Fighting for Survival
The Accelerator Effect
Note
Chapter 16: Look for Maximum Pessimism and Maximum Optimism
Chapter 17: Ensure Management, the Board and Other Shareholders Are Aligned with Investment Objectives
Management and Board Alignment
Investigate the Shareholder Base
Note
Chapter 18: Be Aware of Self‐Liquidating Companies
Unsustainable Dividends
Sustainable Dividend Policy
intu Properties Plc – In Denial
Chapter 19: When Trust Is Gone, There Is No Limit to Downside
Spotting Red Flags
The Downfall of SBB
Adler Group: Everything That Possibly Could Go Wrong Went Wrong
Note
Chapter 20: Understand the Stock Market (Rules)
Have a Conviction, Listen to the Models
Be Proactive
Analysts Not Good at Spotting ‘Turning’ Points
When Management Teams Are Upset …
Every Day Is a New Day
Have a Wish List
The World Wants to Move Forward
Can Management (and You!) Present a Convincing Business Case with Numbers in One Minute?
Kitchen Sinking and Conservative Guidance
The Market Is Lazy and Does Not Reward Complex Companies and Long‐Term Developments
Don't Be Too Eager Picking Up Stocks in a Downturn
Watch Out for the Wallstreet Crowd!
The Psychology of Numbers and Patterns
Activism or Company Repositioning Takes Time
Exploiting the Reversal Patterns for Similar Companies
Benefit from Benchmark Investors
Monitor Insider Trading and Shareholder Notifications
Acknowledgements
Appendix I: Some Terminology
Appendix II: Six Basic Valuation Metrics Explained
Appendix III: The Great Financial Crisis (GFC)
2004 – Cheap Credit
2005 – Securitisation
2006 – Strong Valuation Growth
2007 – Credit Crisis
2008 – Lehman Collapse
2009 – Balance Sheet Revival (Rights Issues)
2010 – Economic Uncertainty
2011 – Wait and See Attitude
2012 – Slow Recovery
About the Author
Index
End User License Agreement
List of Tables
Introduction – A Sector Not To Be Ignored
Table I.1 Investor considerations (score 1 to 3 with 3 being best)
Chapter 1
Table 1.1 Yield calculation
Chapter 2
Table 2.1 London city office model
Table 2.2 The zig‐zag effect
Chapter 4
Table 4.1 DCF check (1 loose to 10 stretched)
Table 4.2 Bubble check list
Chapter 7
Table 7.1 Example of leveraging up on valuation gains
Chapter 8
Table 8.1 UK REITs equity issues, 2009
Chapter 9
Table 9.1 Vonovia: Major acquisitions
Chapter 14
Table 14.1 Selecting an investment based on six valuation metrics – example...
Table 14.2 Company positioning – input example
Chapter 15
Table 15.1 Stock selection – an example
List of Illustrations
f06
Figure I.1 Total value of global real estate in 2022
Figure I.2 Commercial real estate holdings by investor type in 2023 – EU and...
Figure I.3 Annualised total return, Europe, 2001–2023
Notes:
Listed Real Es...
Figure I.4 UK Listed Property Index, annual total return – 50‐year rolling...
Figure I.5 Sector split, EPRA Europe
Chapter 2
Figure 2.1 City and West End – prime office rents
Figure 2.2 Eurocommercial Properties: I Gigli, Florence – the largest shoppi...
Figure 2.3 I Gigli dominance analysis
Chapter 4
Figure 4.1 EPRA UK – total real return three‐year rolling (since 28 January ...
Figure 4.2 EPRA Europe versus NASDAQ – total return
Chapter 6
Figure 6.1 Vonovia share price
Chapter 7
Figure 7.1 URW underperforms when leverage exceeds closest rival
Figure 7.2 Required asset sales to reduce loan‐to‐value by 10 percentage poi...
Chapter 9
Figure 9.1 Strong relationship between EVA and discount to NAV
Figure 9.2 Unibail (now URW) versus EPRA Eurozone – total return
Figure 9.3 Vonovia – share price back at IPO price
Figure 9.4 URW share price
Chapter 10
Figure 10.1 Circle Property – total return, 2016–2023
Chapter 11
Figure 11.1 Capital & Regional – total shareholder return, 2000–2006
Figure 11.2 Capital & Regional's track record
Figure 11.3 Capital & Regional – total shareholder return, 2000–2023
Chapter 12
Figure 12.1 URW – jump in total remuneration paid or granted (CEO and CFO) a...
Chapter 13
Figure 13.1 IVG Immobilien AG – share price
Chapter 14
Figure 14.1 Author preferred company valuation: adjust NAV and add EVA
Chapter 15
Figure 15.1 Goal to fire on all cylinders
Examples of levers for value creation
Figure 15.2 VGP NV – share price
Figure 15.3 Vastned Retail – share price
Chapter 17
Figure 17.1 European insider‐owned REITs vs. EPRA Europe – total return
Chapter 18
Figure 18.1 Regional REIT – higher dividend yield, lower share price
Figure 18.2 intu – turbulent total return story
Figure 18.3 intu – the road of decline: lower rental growth, falling values...
Figure 18.4 CSC's (intu's) defence document
Figure 18.5 intu – a net investor
Figure 18.6 Leverage too high and mountain of debt breaks company
Figure 18.7 intu – paying out too much cash dividend almost every year
Chapter 19
Figure 19.1 SBB versus European Public Real Estate Association (EPRA) Sweden...
Figure 19.2 SBB daily share price volatility
Figure 19.3 Key slide from Adler's half‐year 2021 results presentation
Figure 19.4 Adler Group – everything went wrong
Figure 19.5 Adler Group – bond yields rising sharply
Figure 19.6 Adler Group's vicious downward spiral
Chapter 20
Figure 20.1 Required rebound to break even
Figure 20.2 Trading pattern – ECP versus Klépierre
4
Figure A.1 European Public Real Estate Association (EPRA) Europe – total ret...
Guide
Cover
Title Page
Table of Contents
Copyright
Foreword
Preface
Introduction – A Sector Not To Be Ignored
Begin Reading
Acknowledgements
Appendix I: Some Terminology
Appendix II: Six Basic Valuation Metrics Explained
Appendix III: The Great Financial Crisis (GFC)
About the Author
Index
End User License Agreement
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REAL ESTATE —RULES—
The INVESTOR'S GUIDE to PICKING WINNERS and AVOIDING LOSERS in LISTED PROPERTY
HARM MEIJER
This edition first published 2025.
© 2025 Harm Meijer
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by law. Advice on how to obtain permission to reuse material from this title is available at http://www.wiley.com/go/permissions.
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While the publisher and authors have used their best efforts in preparing this work, they make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives, written sales materials or promotional statements for this work. This work is sold with the understanding that the publisher is not engaged in rendering professional services. The advice and strategies contained herein may not be suitable for your situation. You should consult with a specialist where appropriate. The fact that an organization, website, or product is referred to in this work as a citation and/or potential source of further information does not mean that the publisher and authors endorse the information or services the organization, website, or product may provide or recommendations it may make. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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ISBN 9781394324866 (ePub)
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Life is about learning and overcoming hurdles with a positive mind. The day you stop learning, you have become old.
Foreword
Real estate is the world's largest investment asset class. Yet, unlike stocks and bonds, broad‐based, public ownership of real estate is a relatively recent phenomenon. Real estate investment trusts (REITs) were created in the US in 1960 to give individuals the opportunity to invest in diversified, income‐producing real estate businesses. The ‘Big Bang’ moment for REITs came in 1986, when legislative changes in the US enabled REITs to actively manage and operate real estate, and not just own it passively. In 1993, new legislation also made it easier for pension funds to invest in real estate. The effect of these changes meant that, by 1994, the market capitalisation of US REITs had climbed to US$44 billion, from just US$9 billion in 1990.
It was around the same time – in the early 1990s – that investment firms, including the firm where I have spent the majority of my career, Blackstone (which today is the world's largest owner of commercial real estate), started programmatically investing in the sector. Firms such as ours responded to appetite from institutional investors for alternative and higher‐yielding assets, thus helping to attract new sources of capital to the fledgling sector from pension funds, insurance companies, endowments, foundations and sovereign wealth funds.
This inflow of capital into the sector, coupled with increasingly professional management of real estate assets and companies, started to yield attractive returns for investors, which, in turn, helped build trust and confidence in the asset class. Continued positive investment outcomes encouraged investors to deploy increasing amounts of capital to real estate, in search of the sector's uncorrelated and outsized returns at the time. This is exemplified across our business, e.g. by the growing size of many of our real estate funds, which are now in their tenth iteration and with our most recent global fund raising US$30 billion. Today, Blackstone's real estate business manages over US$336 billion of investor capital, with a portfolio valued at more than US$600 billion.
The rise of US REITs and private capital investment into real estate gave rise to public ownership of real estate. However, to ensure that the industry would continue to become a core part of institutional and individual investors' portfolios required more. For an industry which had relied primarily on relationships, increasing transparency and professionalisation was required, including a focus on research, analysis, operational excellence and active asset management, as well as an understanding of capital markets and both cyclical and secular market trends.
Most importantly, the industry had to continue innovating. Occupier demand for real estate reflects the ways people live their lives: how and where they work, shop, sleep, travel and spend their disposable income. Successful real estate investors of the past 30 years have learned to pay attention to the demographic, societal and technological changes that impact occupier demand for real estate, and how that continuously evolves over time – changes that we see currently accelerating in fact, given rapid advances in technology.
Blackstone's approach and portfolio mix over time reflects this dynamic and thematic approach to investing. For example, the US office sector represented over 50% of our global equity portfolio in 2007, now it is less than 2%. Logistics, a sector that has benefited meaningfully from the e‐commerce revolution, as well as – more recently – near‐shoring trends, accounted for 2% of our portfolio in 2010. It now represents over 40%. Similarly, the explosive growth of content creation and storage, coupled with the rapid emergence of artificial intelligence (AI), are currently supporting data centres' ascendence to their new position as a mainstream real estate sector.
Far from being static, the sector is always in flux and requires real estate investors to continuously challenge the status quo and seek new ways to marry conviction with opportunity.
When considering these requirements, no one is better placed than Harm Meijer to equip today's investors with the tools required to understand and navigate real estate markets. I have followed, respected and known Harm for essentially all of my career as a real estate investor. He was the most highly rated and most respected European real estate analyst for many years, and then co‐founded ICAMAP, a leading European investment fund manager. These positions have given him a front row seat to observe the trends and cycles that have shaped real estate investing over the past two decades. Partly as a result, his ability to take complex subjects and translate them into relevant and meaningful insights for end investors is second to none.
This book is both important and timely. For the new generation of real estate investors, many of whom may have only experienced the post Global Financial Crisis (GFC)‐investment cycle, the world of real estate over the past several years may have been unsettling. Harm's ‘20 Golden Rules of Real Estate’ hold key lessons in this regard, from understanding the inherent cyclicality of real estate, and the opportunities that present themselves at the turn of each cycle, to the importance of prudent use of leverage and understanding the impact that interest rates can have on financing and capital markets.
Yet perhaps one of the book's most important contributions is Harm's analysis of the importance of value creation in real estate. This, we believe, is the key to performance in today's European real estate markets and to a degree helps explain why the European listed investment market has unfortunately historically lacked the scale and the depth of the US real estate market.
Despite a number of European countries launching their own REIT regimes over the past 20 years in the hope of replicating the success of US REITs, the success of each region's listed real estate companies have diverged significantly. While the US REIT market has gone from strength to strength, and today has a market capitalisation of over US$1.3 trillion, the European market remains a fraction of that.
Moreover, the listed European real estate market represents only 5% of the overall European commercial real estate market – in North America this proportion is significantly higher at 12%. In addition, the average equity market cap of listed commercial real estate companies in Europe is less than €1 billion, that is considerably smaller, and results in meaningfully reduced liquidity for investors, than from the average US REIT which is closer to US$5 billion.
A deeper pool of capital and a broad and engaged investor base has allowed US real estate markets to create sector champions, while the European listed universe, with some exceptions of course, remains more fragmented and has at times been more concentrated in country‐focused generalists with mixed‐sector portfolios. That has made it harder for investors to deploy capital with confidence, given the often divergent performance within subsectors of real estate.
While the US may have some inherent advantages, there are some non‐structural disadvantages currently embedded in the structure of the European market, which Harm identifies and which can and should be addressed.
First, the focus on point‐in‐time performance metrics such as net asset value (NAV) in contrast to earnings and cash flow growth, which are more forward looking, can impair listed firms' ability to raise fresh capital to fund expansion or capitalise on investment opportunities. Second, an emphasis on dividends (versus total shareholder return) can create an inherent conflict between delivering short‐term performance and delivering long‐term value for shareholders. This deters those investors who believe companies should be focused on dynamic portfolio management for the benefit of long‐term value creation. Both these phenomena have impacted companies' abilities to attract new sources of investor capital.
As large private market investors, we welcome any efforts to improve investor participation in public real estate markets. Any perceived dichotomy between public and private markets is illusory, as the relationship between the two is symbiotic. Private markets stand to benefit from a well‐functioning public market, by providing both real‐time price discovery as well as a viable avenue for exiting investments – through either mergers with existing listed companies or initial public offerings. Private markets, on the other hand, can offer public companies a way of accessing new sources of capital, allowing management teams to focus on value creation or implement meaningful changes across their businesses, rather than focusing on short‐term performance or delivering a quarterly dividend. This can allow management teams to enact strategic initiatives away from the pressure of public markets.
Harm's work is an important step in bridging the gap between these seemingly contrasting approaches and broadening the investors' understanding of and access to the listed real estate markets. A deeper pool of capital, and a professionally managed sector, will create a flywheel effect, which will ultimately benefit public and private markets alike.
—James Seppala Head of European Real Estate, Blackstone
London, September 2024
Preface
The real estate sector is a colourful world, seldom dull and often full of twists. While many perceive it as boring, safe and predictable, it is, in fact, a cyclical industry with frequent booms and busts. Investors can make substantial profits or lose everything. Moreover, the sector is filled with fascinating ‘characters’, making it an intriguing and entertaining asset class.
Recognising this from the outset 25 years ago, I began collecting boxes filled with materials, news articles, research notes, anecdotes, emails and diaries, all with the goal of writing a book – the very book that is now in front of you. As I have been fortunate to be active in this colourful sector in various roles, giving me a comprehensive 360‐degree perspective, these boxes contained a wealth of information. A lot has happened over these years. The sector has emerged from the shadows and become more mature, but it has been quite a journey full of remarkable and turbulent times.
These boxes were stored at my mum's house all this time until she asked me two years ago what I was planning to do with them. It was time to start writing the book. A challenging period began with many early and late hours, and weekends in front of my laptop. Additionally, I conducted numerous interviews to verify the stories, add details or include the wisdom of key industry players, who are frequently quoted in this book.
Going through these boxes was an interesting exercise. Things were often slightly different from how I remembered them, and certain actions of mine seemed silly in hindsight (I guess I was still young…). Above all, the boxes contained captivating slogans, lessons and entertaining anecdotes. What was truly striking was that success stories in real estate consistently had the same ingredients, while failures repeatedly resulted from the same mistakes, time and time again.
Over the years, I have read numerous real estate books. However, most of them are focused on the US market: none clearly explained the golden rules for investing in European real estate companies or real estate investment trusts (REITs) from an industry insider's perspective, combined with real‐life examples and anecdotes. That had to change. This is that book. Whilst the book is mainly focused on investing in listed property vehicles, the lessons drawn are also applicable for investing directly in real estate. After all, these companies hold real estate.
Doing your homework thoroughly, having great relationships, and acting on your convictions are some of the key takeaways in this book, but if I had to mention one key principle, it is ‘trust’. Trust is the key to success. You break it once, it is hard to restore, although you might be lucky with hard work over time. But you break it twice, it is gone. Gone forever. You are in the black box.
This is true for people you interact with, work with and deal with. It also applies to the equity market. Once trust is gone, companies find themselves in a very delicate sliding situation, which we will discuss further in this book and call the ‘vicious downward spiral of doom’, which is difficult to break, let alone reverse. Things can go very fast in this spiral, and one should expect the unexpected. The equity market does not like uncertainty and definitely not lost trust. There is this saying: ‘If in doubt, throw it out’. Meaning: if you doubt the intentions of a company or what is the truth, just sell the shares!
I do hope you enjoy reading this book, that sometimes it will make you smile or even amaze you. But above all, that it makes you think and makes you a better and more successful investor.
Introduction – A Sector Not To Be Ignored
Real Estate Is an Important Asset Class
$380 Trillion Market
Real estate is an important investment class as it provides for both living and economic activity. Besides, it is the largest investment class globally, surpassing publicly traded equities and debt securities, with values of $380 trillion, $99 trillion and $130 trillion, respectively. According to Savills (Figure I.1), residential real estate accounts for the majority of this global value at $288 trillion (76%), followed by commercial real estate at $51 trillion (13%) and agricultural land at $41 trillion (11%). Based on the global GDP in 2022 of $101 trillion, this total value equates to 3.8× GDP. Europe makes up about 20–25% of the global real estate market, with the largest markets being Germany ($17 trillion, 4% of global), the UK ($12 trillion, 3%) and France ($11 trillion, 3%).
Figure I.1 Total value of global real estate in 2022
Source: Adapted from Savills (2023) ‘Global real estate universe in comparison, 2022’. https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate-property-remains-the-worlds-biggest-store-of-wealth.html.
Wide Range of Investors
Approximately 26% of European commercial property is held as an investment (see Figure I.2), while 74% is in the hands of owner‐occupiers. The largest investors are non‐listed funds, holding 35% of the market, followed by other professional investors, such as high net worth individuals and alternative investment managers, with 30%, and listed property companies with 19%. Listed companies are real estate vehicles that are publicly traded on a stock exchange. Most of them have the real estate investment trust (REIT) status, which generally means they pay no tax on rental profit and capital gains but must distribute the majority of their recurring earnings as dividends, on which tax is due. Institutional investors account for approximately 8% of the investment in European real estate, though they also hold significant amounts in non‐listed and listed vehicles. This is similar for non‐EU institutions and sovereign wealth funds, estimated at 7%, but in reality, their share, including their stakes in vehicles, is much higher. Indeed, global investment has increasingly become an important source of capital in the European real estate market.
Figure I.2 Commercial real estate holdings by investor type in 2023 – EU and UK
*HNW – high net worth individuals; AIM – Alternative Investment Managers.
Source: RHL Strategic Solutions estimates using data from Eurostat, ECB, EPRA, INREV, OECD, ONS and MSCI, 2023.
Attractive Long‐Term Returns
Investors in property benefit from rental income and changes in the building's value over time. The sector has provided superior returns. For example, over the period from 2001 to 2023 (the longest period for which INREV1 direct fund data are available), listed real estate companies performed best with an annual return of 5.8%, followed by direct real estate funds with 4.8%, equities with 4.6% and bonds with 3.3% (Figure I.3).
In the long term, real estate stocks, i.e. listed property companies, have delivered between 9% and 10% per annum, which is an excellent return for the asset class compared to alternatives. For instance, a real estate index for listed UK property stocks has generated an annualised return of 9.7% since 1965. Its 50‐year moving average has been between 8% and 12% (Figure I.4).
Figure I.3 Annualised total return, Europe, 2001–2023
Notes: Listed Real Estate represented by EPRA Europe Index; Direct Property represented by INREV Index; Stocks represented by STOXX Europe 600 Index; Bonds represented by the Bloomberg Europe Aggregate Index.
Source: Data from Factset, except for INREV data: https://www.inrev.org/market‐information/indices/inrev‐index#Latestpublications.
Real Estate Enhances the Risk/Return Profile of Investment Portfolios
There is no debate: the addition of real estate improves the risk/reward profile of investment portfolios compared to equities, bonds and other alternative investments. However, there is more discussion about the exact allocation. Whilst research continuously shows that the optimal portion of real estate in an investment portfolio is between circa 9% (e.g. Kallberg and Liu, 1996)2 and 15–20% (e.g. Amédée‐Manesme et al., 2019),3 in reality the allocation of institutional investors tends to be on the low side of this range at around 7–10%. For example, McKinsey found target allocations for institutional investors ranged 9–10% between 2011 and 2015.4 Based on my experience and the cyclical nature of the asset class, I believe an average allocation of circa 15% is ideal with a range of 10–20% depending on the stage of the cycle. Given real estate's illiquid and rather opaque features (see next section), I recommend allocating circa half of the real estate portion to listed real estate companies or REITs.
Figure I.4 UK Listed Property Index, annual total return – 50‐year rolling
Source: Author's estimates based on historical stock statistics and EPRA.
Two Undesirable Features of Real Estate
However, there are two undesirable features of investing in real estate: it is illiquid and opaque.
Illiquid
The biggest issue is that real estate itself is an illiquid investment. It takes time to buy or sell a property. Potential buyer pools can be significantly smaller for larger assets or during downturns when liquidity can dry up completely. Additionally, there is a risk of buying an asset that turns out to be a poor investment, e.g. due to changing tenant demand, in which case repositioning the property could be extremely costly. As Evert Jan van Garderen, CEO of Eurocommercial Properties, said to me: ‘It is not difficult to buy a property, but to sell it is’.
Opaque
Although sector transparency has increased over the years, real estate is an opaque asset class, e.g. in terms of pricing, valuation, ownership and actors in the space. Real estate markets frequently depend greatly on local knowledge and insider information.
Gladly, there are ways to invest in the space with increased liquidity and transparency.
Listed Real Estate Has Attractive Features
There are different ways to invest in real estate: directly, through a fund structure or via other methods such as a club‐deal or joint venture, but we will focus on the first two. The most common types of funds are closed‐ended non‐listed, closed‐ended listed and open‐ended non‐listed funds.
Non‐listed closed‐ended funds are not listed on a stock exchange and have a fixed maturity date, typically around 10 years. Although participations can sometimes be traded on the secondary market, this is usually at a significant valuation discount. Listed closed‐ended funds or REITs are traded on a stock exchange and have a perpetual structure, meaning the fund has no set end date. Non‐listed open‐ended funds are not listed on a stock exchange and aim to provide liquidity to investors by maintaining a cash reserve or disposing of assets for redemptions.
Table I.1 displays my assessment of investing in real estate directly or via one of these fund structures. Every structure has its pros and cons, but in my view, listed real estate has the most attractive characteristics, although it is not perfect. Careful analysis of assets, the balance sheet and management is essential for every investment vehicle.
Table I.1 Investor considerations (score 1 to 3 with 3 being best)
Investor Considerations (Score 1 to 3 with 3 Best)
Direct
Closed‐ended (non‐listed)
Closed‐ended (listed)
Open‐ended
Portfolio diversification
1
2
3
2
Liquidity
2
1
3
1.5
Return volatility
3
3
1
2
ESG
1
2
3
2
Financing
1
2
3
2
Management intensity
1
3
3
3
Alignment management – investor
3
2
1
1
Costs
1
1
3
1
Tax
1
3
3
3
Total
14
19
23
17.5
Source: Author.
Listed real estate scores well on several fronts:
Portfolio diversification
: With thousands of listed property companies worldwide investing in various sectors, investors can build a truly diversified portfolio. This type of diversification is not possible through investing in funds, let alone directly by yourself. Worse still, I have seen numerous private investors making large bets on individual assets, which turned out to be disastrous.
Liquidity
: Listed property stocks can be bought or sold with a mouse click. However, it takes time to sell or buy a property, while investors in non‐listed closed‐ended funds are locked in for a certain period. Whilst open‐ended funds promise liquidity, this is frequently false, particularly in downturns when investors want to withdraw their capital but assets cannot be sold, causing these funds to ‘close their gates’. As a result, listed stocks have instant pricing, whereas the other options depend on valuations that typically lag behind market reality.
ESG
: Listed companies are frequently leaders in ESG (environmental, social and governance) initiatives, as their actions are subject to public scrutiny.
Financing
: Listed vehicles typically have wider access to financing, such as from banks, private placements and public bond markets.
Management intensity
: Property investments require intense management. The three fund structures handle the management on behalf of the investor.
Costs
: Management costs are often relatively high for non‐listed funds, particularly those targeting private individuals. Listed real estate companies can usually generate platform value, a benefit that is more difficult for smaller funds and, especially, for individual investors to achieve. For example, the average management cost as a percentage of the portfolio value for listed REIT Unibail‐Rodamco‐Westfield (URW) is 0.45% per annum, while the cost for an individual in a non‐listed fund can be as high as 2–3% and in some cases even much higher.
Tax
: Funds generally have tax‐efficient structures available. For example, many listed companies have the option to become a REIT. This option is sometimes available for non‐listed funds as well, or they can benefit from other tax‐efficient schemes. A clear advantage of investing in a listed property company is that the company has already paid for transfer duties (the tax payable when a property is purchased, which can be as high as 5–10%, depending on the jurisdiction), whereas this still has to be paid if one invests directly in real estate or in a fund that has yet to buy the assets.
Whilst one can debate my assessment and call me biased, listed property does tackle the two main drawbacks of investing in real estate: the liquidity issue and the sector being opaque. In particular, the arrival of REITs in Europe has improved disclosure and provided better insight into the wheeling and dealing in the underlying property markets. Besides, it has made property more accessible for investors and provided liquidity to an otherwise illiquid asset class.
But Listed Real Estate Is Not Always Preferred (Although It Should Be!)
However, many investors still prefer direct investment or non‐listed funds over listed real estate, primarily for two reasons.
