Performance measurement, benchmarking and diversification ... · Real Estate Asset Management Industry Real Estate Performance 1.Level & nature megatrends of supply & Key Implications

Performance measurement, benchmarking and diversification in global real estate

© IPD 2011 ipd.com

Davide Manstretta, Group Director - Performance and Risk Analytics

Agenda

1. Why we need benchmarks and portfolio analysis

2. Institutional real estate allocation and global trends

3. Benefits of diversification theory and real numbers

© IPD 2011 ipd.com

4. The European market

5. An example of European Benchmarks: the IPD Pan European Property Funds Index

1. Why we need benchmarks and portfolio analysis

© IPD 2011 ipd.com

Why investors and fund managers are keen on benchmarking and portfolio analysis?

1. Property portfolio measurement and analysis aids the efficient allocation of capital within property and across asset classes

2. It can provide a framework within which to align investor and managers interests against relevant objectives ...

© IPD 2011 ipd.com 4



2. It can provide a framework within which to align investor and managers interests against relevant objectives ...... and monitor progress against those

Portfolio total returns v tailored benchmark


-25

-20

-15

-10

-5

0

5

10

15

20

25

%

Relative Portfolio Benchmark




3. It helps understand the past ... and predict the future





3. It helps understand the past ... and predict the future4. It also helps manage risks





3. It helps understand the past ... and predict the future4. It also helps manage risks

© IPD 2011 ipd.com

5. Control costs6. And demonstrate added-value (or otherwise) to investors

8

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Bottom Quartile Funds

Top Quartile Funds

All Portfolios*

We

igh

ted

co

ntr

ibutio

n to

retu

rns

(vs A

ll P

rop

ert

y 8

.2%

)%

Re-gear

Letting

Development

Sales

Purchase

Other 'held' assets

Aiding managers, researchers, strategists, fund managers, property managers and sales

Management Team

CEO CIO CFO

Fund to Property Mgr

Fund / Portfolio

Mgr

Asset Mgr

Property Mgr

Research and Strategy

Research / Strategy

Risk Mgt

Relations to Investors

Investors Relations

Investors / Boards

Performance

Headline results

Segment analysis

Weighted contributions

By segmentation / sector

Best/worst asset contributions

Risk

Risk & return

Income & capital concentration

© IPD 2011 ipd.com

Ranking & range of returns

Historical analysis

Driver of capital growth

Market rents

Yields

Portfolio profile

Portfolio characteristics

Portfolio structure

Portfolio activity

Capital investment flow

Development exposure

Attribution

Asset allocation

Asset selection

Fund level

From portfolio to fund return

Income risk

Key tenancies

Asset performance

Asset factsheet

Individual assetsIncome & costs

Costs analysis

Vacancy analysis

Income analysis

Through each stage of the investment process

‘‘if you don’t measure it,

...you can’t manage it’’

© IPD 2011 ipd.com

This is why funds ask to be measured by IPD

• Established in 1985

• Coverage in 32 markets and 1,500 funds worldwide

• 126 indices and 570 benchmarks

Global leader in real estate performance analysis services

© IPD 2011 ipd.com

“ IPD's mission is to increase

real estate market transparency

through independent and

comparable performance

analysis with investors,

managers, consultants

and occupiers globally.”

• 126 indices and 570 benchmarks produced in 2011

• Workforce of over 300 analysts

• In 10 offices, over 5 continents

IPD’s market coverage as at end-2011

© IPD 2011 ipd.com

Is real estate still the preferred Alternative Asset Class?

40

50

60

57% 8% 16% 13% 6%2011

Real Estate Infrastructure Private Equity

Hedge Funds Commodities

Real Estate Compared with other Major Asset Classes, 2011

Allocations to Alternative Asset Classes for World’s Largest 100 Managers

$tn


0

10

20

30

Equity Markets

Govt Bonds

Corporate Bonds

Real Estate

Institutional Real Estate

Total Commercial Real Estate

Source: IPD; JLL; PrAmerica; Bank of International Settlements; World Federation of Exchanges

53% 9% 15% 16% 8%2010

Note: Total aum of $2.25tnSource: Towers Watson, July 2012

2. Institutional real estate allocation and global trends

© IPD 2011 ipd.com

A series of megatrends are driving the growth and development of the global real estate industry

Real Estate Asset

Management

Industry

Real Estate

Performance

1. Level & nature

of supply & megatrends

Key Implications for REAM1. Larger, more global and

complex markets2. Evolution of real estate into a

financial asset , leading to a demand for sophisticated analysis

3. Institutionalization and professionalism of the Real Estate Asset Class, and a


Industry

1. Institutional &

retail investors

2. Asset

management

organizations

of supply &

demand

2. Performance

across markets

and property

types

megatrends Estate Asset Class, and a demand for greater homogeneity in its use and its investment standards

4. Demand for greater speed and flexibility of analysis , driven by the pervasive impact of technology on investment and business processes

5. Increased pressure for governance, regulation and desire for transparency

Regulators recognize the range of real estate risks

AIFMD Solvency II

© IPD 2011 ipd.com

Dodd Frank

Basel 3

Stress Tests

And Risk Managers are taking a more profound role in business management

© IPD 2011 ipd.com

Source: Allianz Real Estate, February 2012

ScopeScope

Profound implications for the Scope and Execution Options for Real Estate

More conservative : focused on domestic priorities, and core products

Interest in debt investing, diversification , and counter-cyclical “opportunistic ” investing

BUT

© IPD 2011 ipd.com

ExecutionOptions

ExecutionOptions

Source: IPD

Stronger risk management: investment process , counterparty , liquidity , and alignment of interest

Restructuring and consolidation of fund management businesses, and increased regulatory

involvement

ALONGSIDE

3. Benefits of diversification theory and real numbers

© IPD 2011 ipd.com

1) ‘Stock specific’ risks: caused by factors only affecting individual assets e.g…

Leasing risks – unexpected vacancies / lettingsLocational risks – degeneration / gentrificationPhysical risks - fire / flooding

Two fundamental causes of risk or volatility of returns:

What do we want to diversify?

© IPD 2011 ipd.com

2) ‘Systematic risks’: caused by wider factors which are common to all assets e.g…

• Economic (in)stability• Changes in interest rates• Changes in government legislation

When we aim to diversify it’s the stock specific risk that we aim to reduce

otherwise known as “not putting all your eggs in one basket”

6

8

10

%

Asset 'A' £50mAsset 'B' £50mPortfolio ‘C’ £100m

Diversification in action:

3%

A very simple “academic” example

© IPD 2011 ipd.com

Standard deviation: -Expected return: 6% p.a.

Risk/return profile Portfolio C:

0

2

4

6

2005 2006 2007

%

*Standard deviation: dispersion of outcomes around the mean (or expected value)

2008 2009 2010

3%

The ‘magic’ number (for property depends on lot size variation) but somewhere between 30 and 50 assets tends to reduce most specific risk

Diversification in action:

What does it mean when you build a portfolio?

© IPD 2011 ipd.com

No. of assets within the portfolio

Ris

k (v

olat

ility

)

specific risk

Systematic risk

reduce most specific risk

What if we use some real numbers?

Total Return, %pa

Italy

© IPD 2011 ipd.com

11.5

7.4 6.87.8

10.2

14.1 14.0

10.99.4 9.8

6.7

10

15

20

% pa Capital growthIncome returnTotal return5-year annualised total return

Total Return, Income Return and Capital Return, %pa

Recovery in global performance in 2010-11


Note: Annual results based on local currency compositeSource: IPD, KTI (Finland)

6.8

-4.8

-8.1

3.3 3.1

6.7

10

5

0

5

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

3 Y

ears

5 Y

ears

10 Y

ears

Global unlevered real estate returns, 2011 % pa

Variations persist across global markets…

22.3

18.016.415.915.214.5

12.010.410.210.210.1 9.8 9.2 8.4 8.4 8.2 7.8 7.8 7.4 7.4 6.6 6.3 6.3 6.0 5.5 5.2 4.8 4.7 4.3 3.8 3.5 2.9

0.5

5

10

15

20

25

% paCapital growthIncome returnTotal returnIPD Global Index

© IPD 2011 ipd.com

Note: Results for China, Hong Kong, Indonesia, Malaysia, Taiwan, Thailand and Singapore are not included in IPD Global IndexSource: IPD, KTI (Finland)

0.5

-2.4

15

10

5

0

Hon

g K

ong*

Chi

na*

Tai

wan

*C

anad

aIn

done

sia*

Uni

ted

Sta

tes

Mal

aysi

a*S

outh

Afr

ica

Sw

eden

Pol

and

Aus

tral

ia

IPD

Glo

bal I

ndex

Sin

gapo

re*

Kor

eaF

ranc

eC

zech

Rep

ublic UK

Sw

itzer

land

Tha

iland

*N

orw

ay

Pan

-Eur

opea

n

Tha

iland

*A

ustr

iaF

inla

ndG

erm

any

Hun

gary

Bel

gium

Den

mar

kIta

lyN

ethe

rland

sJa

pan

Spa

inP

ortu

gal

Irel

and

Indexed capital values in this cycle, 2007=100

… with marked differences in behaviour through the cycle…

Resilient markets Recovering markets Lagging markets

120

130

140

150

2007 = 100

Hong Kong

China 120

130

140

150

2007 = 100

Finland

Denmark

Germany

Belgium120

130

140

150

2007 = 100

Sweden

France

© IPD 2011 ipd.com

30

40

50

60

70

80

90

100

110

120

2007 2008 2009 2010 2011

Taiwan

South Africa

Switzerland

Canada

Korea

Singapore

Austria

Thailand

IPD Global

30

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011

Belgium

Italy

Netherlands

Portugal

IPD Global IndexJapan

Spain

Hungary

Ireland

30

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011

Norway

Australia

Poland

IPD Global

Czech

UK

United States

All property return rankings for 7 global cities 2006-11

… and, almost, from year to year…

Perth 1Brisbane 2Dublin 3London 4Paris 5Stockholm 6Edinburgh 7Budapest 8Copenhagen 9Prague 10Manchester 11Birmingham 12Barcelona 13Warsaw 14Madrid 15Calgary 16Wellington 17Porto 18Oslo 19Antwerp 20Sydney 21Seoul 22Amsterdam 23Rotterdam 24Auckland 25

1 San Diego2 Calgary3 Portland4 Seattle5 Philadelphia6 Denver7 Boston8 New York9 Los Angeles

10 Dallas11 Washington DC12 San Francisco13 Miami14 Perth15 Chicago16 Vancouver17 Montreal18 Houston19 Toronto20 Melbourne21 Minneapolis22 London23 Atlanta24 Brisbane25 Sydney26 Tokyo

2011 Rank2011 Rank2006 Rank

© IPD 2011 ipd.com

Lisbon 26Melbourne 27New York 28Vancouver 29Vienna 30Rome 31Brussels 32Montreal 33Milan 34San Diego 35Seattle 36Los Angeles 37San Francisco 38Portland 39Geneva 40Philadelphia 41Munich 42Hamburg 43Atlanta 44Miami 45Zurich 46Washington DC 47Denver 48Dusseldorf 49Toronto 50Johannesburg 51Boston 52Cape Town 53Tokyo 54Chicago 55Houston 56Dallas 57Berlin 58Minneapolis 59Frankfurt 60

26 Tokyo27 Zurich28 Stockholm29 Auckland30 Warsaw31 Manchester32 Geneva33 Seoul34 Wellington35 Oslo36 Birmingham37 Munich38 Paris39 Prague40 Edinburgh41 Antwerp42 Vienna43 Hamburg44 Copenhagen45 Budapest46 Berlin47 Rotterdam48 Amsterdam49 Dusseldorf50 Brussels51 Rome52 Milan53 Barcelona54 Frankfurt55 Madrid56 Lisbon57 Porto58 Dublin59 Cape Town60 Johannesburg

Impact of diversification on portfolio risk/return profile

8.0

10.0

12.0

Improved risk and return profile


-

2.0

4.0

6.0

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Ret

urn

Risk

Italy only

7 cities allocation

6 countries allocation

New YorkLondonParisMadridFrankfurtRomeMilan

USUKFranceSpainGermanyItaly

Diversifying across Europe

Germany18%

France16%

Switzer-land 9%

Sweden7%

EUROZONE

OTHER

23%UK

Total investable market size: Euro 1.5 trillions

© IPD 2011 ipd.com

Source: IPD, KTI (Finland)

Nether-lands

8%Italy5%

EUROZONE

58%UK

19%

4. The European market

© IPD 2011 ipd.com

Range of European real estate returns since 2000

0

5

10

15

20

25

30

35

Total Return (%) Pan-European SpreadIPD Pan-European IndexItaly

© IPD 2011 ipd.com


Correlation = 0.7

-35

-30

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-15

-10

-5

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Correlation = 0.663

Total returns by country 2011

© IPD 2011 ipd.com


Total returns by sector 2011

5

10

15

20 Office

Retail

Industrial

Residential

All Property

% pa

© IPD 2011 ipd.com


-10

-5

0

Sw

eden

Pol

and

Fra

nce

Cze

ch R

epub

lic UK

Sw

itzer

land

Nor

way

Aus

tria

Fin

land

Ger

man

y

Hun

gary

Bel

gium

Den

mar

k

Italy

Net

herla

nds

Spa

in

Por

tuga

l

Irel

and

Pan

-Eur

opea

n

Historic range of capital value performance

-15

-10

-5

0

5

10

15

20

25 Historic peak year (since 2000)

Historic trough year (since 2000)

2011

% pa

© IPD 2011 ipd.com

Note: Annual results based on local currency composite; the time series for some markets does not extend back to 2000. These include Spain (2001), Switzerland (2002), Italy (2003), Austria (2004), Belgium, Poland, and Czech Republic (2005), and Hungary (2006).Source: IPD, KTI (Finland)

-40

-35

-30

-25

-20

-15

Sw

itzer

land

Aus

tria

Den

mar

k

Fin

land

Bel

gium Ita

ly

Ger

man

y

Net

herla

nds

Por

tuga

l

Fra

nce

Sw

eden

Pan

Eur

opea

n

Nor

way

Pol

and

Cze

ch R

epub

lic

Spa

in

Hun

gary UK

Irel

and

Historic range of income return

6

7

8

9

10

11

Range of income returns since 2000* 2011 income return

% pa

© IPD 2011 ipd.com

3

4

5

Irel

and

Pol

and

Cze

ch R

epub

lic

Hun

gary

Fin

land UK

Italy

Nor

way

Bel

gium

Por

tuga

l

Spa

in

Fra

nce

Pan

-Eur

opea

n

Net

herla

nds

Ger

man

y

Sw

eden

Den

mar

k

Aus

tria

Sw

itzer

land

Note: The time series for some markets does not extend back to 1999. These include Switzerland (2001), Italy (2002), Austria (2003), Belgium, Czech Republic, Hungary and Poland (2004). (Annual results based on local currency composite)Source: IPD , KTI (Finland)

5. An example of European BenchmarksThe IPD Pan European Property Funds Index

© IPD 2011 ipd.com

Pan European Property Funds IndexThe significance of the index

1. Maturing of the European real estate market• Reflects the maturing of the market – greater number of managers

with pan-European platforms• The first investable European Index

2. Strong investor demand for the index

© IPD 2011 ipd.com

• Search for diversified ‘core’ exposure to European real estate• Improved transparency• Dramatic improvement in reporting; quarterly and earlier

3. Robust insights provided by the index• Relevant comparison of fund types• Apples to apples valuation regime• Insights to enable better management of the underlying funds

Pan European Property Funds IndexWhat is it?

A new quarterly index for Pan European real estate as defined by an index design group in 2011

Open ended funds only

RICS valuations on a quarterly basis by a third party appraiser

© IPD 2011 ipd.com

Pan European mandate to invest in at least 3 regions of Europe

Leverage – funds must carry no more than 60% of GAV

The funds asset level data must be measured by IPD to enable reconciliation between asset and fund returns

Composition of the index: summary statisticsValues reported in Euros as at December 2011

Pan European Property Funds All Balanced

Net Asset Value (NAV) € m 6,988 4,146

Gross Asset Value (GAV) € m 11,694 6,172Number of funds 16 12Number of properties 490 206Loan to Value (D/GAV%) 40.2 32.8

© IPD 2011 ipd.com

Pan-European Property Fund Index exposureCountry split by % CV of direct property

France, 29%

Belgium (inc. Lux), 6%

Spain, 4%

Sweden, 3%

Italy, 2%

Finland, 1%

Switzerland, 1% Austria, 1%

Portugal, 1%

Norway, 0%

Other, 0%

© IPD 2011 ipd.com

Germany, 19%

CEE, 12%

UK, 12%

Netherlands, 9%

All direct property 6.7%

Fund Level Total Return: 4.1%

Pan-European Property Fund IndexHeadline figures (in EUR)

© IPD 2011 ipd.com

All direct property 6.7%Year end: 490 assetsvalued at €11.2 billion

Income return+6.4%

Capital growth+0.3%

6.7

4.14%

6%

8%

10%

12%

Tot

al R

etur

n

Range of fund returns – 1yr to Dec 2011Portfolios ranked between 5th and 95th percentiles

© IPD 2011 ipd.com

4.1

-4%

-2%

0%

2%

4%

0255075100

Tot

al R

etur

n

Fund (NAV) Returns Portfolio (Direct) Returns

Annual country returns based on direct property data in EUR

5

10

15

Income Return Capital Growth Total Return

Returns are diverse across countries in 2011

2011 Return (%)

© IPD 2011 ipd.com

-10

-5

0

Note: Direct Property Standing investments only - DPSI

0

5

10

% per qtr

Pan European Property Funds Indexless volatile during and after the 2007-09 crisisQuarterly total returns December 2003 – December 2011

© IPD 2011 ipd.com

-20

-15

-10

-5

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Pan European Property Funds Index UK Open End Funds PPFI US ODCE

Source: IPD; NCREIF

Conclusions

• Benchmarking, market and portfolio analysis are important• efficient allocation of capital within property and across asset classes• align investor and managers interests against relevant objectives• It helps understand the past , predict the future, manage risks, control costs and

demonstrate added-value to investors

• IPD provide almost 700 national and cross market indices and benchmarks across global real estate

• GFC represented a profound shock to the global real estate industry

© IPD 2011 ipd.com

• GFC represented a profound shock to the global real estate industry• Increased Regulatory involvement• Back to basics of real estate investing – core, low gearing, diversified

• Significant variations in real estate performance: by market, portfolio and asset• Understanding these variations is central to:• Diversify risk (improved risk management)• Enhance performance

• PEPFI is IPD most recent example of how we can support investors and fund managers in the respective investments decisions

© IPD 2011 ipd.com

Thanks for your timeDavide ManstrettaDirect: +44 20 7336 9263Email: [email protected]

Documents

Performance measurement, benchmarking and diversification ... · Real Estate Asset Management Industry Real Estate Performance 1.Level & nature megatrends of supply & Key Implications