THE PERFORMANCE AND DIVERSIFICATION BENEFITS OF EUROPEAN NON-LISTED REAL ESTATE FUNDS PROFESSOR GRAEME NEWELL University of Western Sydney ([email protected])

THE PERFORMANCE AND DIVERSIFICATION BENEFITS OF EUROPEAN NON-LISTED

REAL ESTATE FUNDS

PROFESSOR GRAEME NEWELL

University of Western Sydney([email protected])

June 2015

• Significance of unlisted real estate funds

• Focus: Europe

• INREV : Europe : Q1 2010 – Q4 2014

• Risk-adjusted performance

• Portfolio diversification

• Real estate investment implications

PURPOSE OF PAPER

• Access to expert management

• Diversification benefits

• Easier implementation than direct real estate

• Access to new markets

• International diversification

• Access to specific sector

• Risk-return profile

• Stable income return

• Access to leveraged investments

REASONS FOR UNLISTED REAL ESTATE

• Availability of suitable product

• Alignment of interest with fund manager

• Costs

• Current market condition

• Transparency

• Resources required

CHALLENGES FOR UNLISTED REAL ESTATE

• Liquidity

• Alignment of interest with co-investors

• Regulatory issues

• Currency risk

• Availability of debt

CHALLENGES FOR UNLISTED REAL ESTATE

GLOBAL INVESTABLE UNIVERSE OF REAL ESTATE

Source: CBRE (2011)

PLAYERS IN THE GLOBAL REAL ESTATE INVESTMENT LANDSCAPE

Local International

REITs/PCs Unlisted RE funds

Private equity funds Pension funds

Sovereign wealth funds Insurance companies

High wealth individuals

• High transparency (5/9): UK (1), France (5), Netherlands (7), Ireland (8), Finland (9)

• Transparent (13/19): Switzerland (10), Sweden (11), Germany (12), Belgium (15), Denmark (16), Poland (17), Spain (18), Norway (19), Austria (21), Italy (22), Portugal (23), Czech Republic (24), Hungary (25)

• Semi-transparent (8/33): Romania (30), Israel (31), Slovakia (32), Greece (33), Turkey (34), Russia – Tier 1 (37), Croatia (46), Russia – Tier 2 (59)

• Low transparency (5/21): Slovenia (62), Serbia (65), Bulgaria (66), Russia – Tier 3 (70), Ukraine (74)

• Opaque (2/20): Kazakhstan (84), Belarus (94)

EUROPEAN REAL ESTATE MARKET TRANSPARENCY: 2014

Asia-Pacific: $774B; 17% market share

Americas: $1,977B; 46% market share

Europe/MEA: $1,588B; 37% market share

Global: $4,344B

SIGNIFICANCE OF EUROPEAN TRANSACTIONS: 2007-2014

Source: Real Capital Analytics (2015)

# 1 : US : $ 1.8 T @ 41%

# 2 : UK : $ 489 B @ 11%

# 3 : Germany : $ 317 B @ 7%

# 4 : Japan : $ 243 B @ 6%

# 5 : France : $ 190 B @ 4%

EUROPEAN TRANSACTIONS: 2007-2014


# 2 : Paris ; office ; $1.8 B

# 4 : London ; office ; $ 1.7 B



# 14 : London ; retail ; $ 1.1 B

MAJOR GLOBAL TRANSACTIONS : 2014

RANKING OF THE MAJOR GLOBAL COMMERCIAL REAL ESTATE MARKETS:

TRANSACTION VALUECity 2014 2013 2012 2011 2010

New York 1 1 1 1 3

London 2 2 2 2 2

Tokyo 3 3 3 3 1

Los Angeles 4 4 4 5 8

San Francisco 5 5 5 7 10

Paris 6 7 6 4 4

Washington 7 6 8 6 7

Chicago 8 11 9 10 16

Sydney 9 13 17 20 18

Dallas 10 12 12 16 22


RANKING OF THE MAJOR EUROPEAN REAL ESTATE MARKETS:

TRANSACTION VALUECity 2014 2013 2012 2011 2010

London 1 1 1 1 1Paris 2 2 2 2 2Rhine-Ruhr 3 5 7 5 5Frankfurt 4 6 6 7 8Stockholm 5 7 4 6 3Berlin 6 3 3 4 6Amsterdam 7 9 10 11 7Munich 8 8 8 9 11Madrid 9 17 31 16 10Dublin 10 15 33 52 59


• 2014: CAPITAL RAISED: CLOSED FUNDS- 182 funds @ $ 91 billion

- 18% Private Equity market share

• 2014: RAISING CAPITAL: “IN MARKET”

- 437 funds @ $174 billion

• Major players- Blackstone (#1) - Lone Star (#2) - Brookfield (#3)

- CBRE GI - Prudential REI - LaSalle

• 2007 – 2014 : CAPITAL RAISED- 1819 funds closed @ $669 billion

• Investor appetite : pension funds

SIGNIFICANCE OF UNLISTED REAL ESTATE

• 2014: CAPITAL RAISED: CLOSED FUNDS- $36 billion

- 40% market share

• 2014: RAISING CAPITAL: “IN MARKET”- $40 billion

- 23% market share

• 2007 – 2014 : CAPITAL RAISED

- 479 funds closed @ $142 billion

- 21% market share

• Blackstone REP Europe IV : € 6.6 B

• Lone Star Fund IX : $7.2B (50% Europe)

• Investor appetite

EUROPEAN UNLISTED REAL ESTATE

• International players- Blackstone - CBRE GI - Heitman

- Invesco - LaSalle - ProLogis

- TIAA Henderson - Tishman Speyer - UBS

• Local players- Aberdeen - AEW Europe - Aviva

- AXA - Credit Suisse- L&G

- M&G - Patrizia - Patron

- Standard Life - Schroders - Union


• Strategies- Core, value-added, opportunistic, distressed, debt

- Country specific, multi-country, regional, global

- Sector specific, diversified

- Closed-end, open-end

• Termination strategies


CORE AND NON-CORE REAL ESTATE STRATEGIES

Source: Russell (2014)

KEY RESEARCH: UNLISTED

• Commingled real estate funds

• Transparency

• Performance analysis

• Drivers

• Style

• Blended portfolios

• General portfolio issues

KEY REPORTS: INDUSTRY

• INREV

• ANREV

• PREA

• ULI

• Preqin

• Russell

• CBRE

European Association for Investors in Non-Listed Real Estate Vehicles

• European unlisted real estate funds

• Q1 : 2010 – Q4 : 2014

• 233 funds @ €148 billion GAV

• Inclusion criteria

• Sub-indices (22)- Style (2) - Country (7) - Region (6)

- Sector (5) - Structure (2)

• INREV annual index : 2001 - 2014

INREV UNLISTED REAL ESTATE FUNDS INDEX

INREV INDEX: STRUCTURE

CONTRIBUTORS: EXAMPLES

• Aberdeen

• Aviva

• CBRE Global Investors

• Credit Suisse

• Grosvenor

• AEW Europe

• Bouwinvest

• Cordea Savills

• Deutsche

• Hines

CONTRIBUTORS: EXAMPLES

• Legal & General

• Patrizia

• Schroders

• UBS

• Valad Europe

• M&G

• ProLogis

• Standard Life

• Union

• Warburg-Henderson

UNLISTED FUNDS: EXAMPLES

• Aberdeen European Balanced Property Fund

• Aviva Investors Central European Property Fund

• BlackRock UK Property Fund

• Bouwinvest Dutch Institutional Office Fund

• CBRE Strategic Partners Europe Fund II

• CBRE Nordic Property Fund

• Cornerstone German Retail Fund

• Grosvenor French Retail Investments

• Heitman Europe Property Partners II

• M&G European Property Fund

UNLISTED FUNDS: EXAMPLES

• Morgan Stanley Eurozone Office Fund

• ProLogis European Properties Fund II

• Schroder European Property Fund I

• Schroder UK Property Fund

• Standard Life UK Shopping Centre Trust

• Tishman Speyer European Core Fund

• UBS Central London Office Value Added Fund

• Nordic Aktiv Property Fund

• UniInstitutional European Real Estate

• Warburg - Henderson Pan-Europa Fonds III

Sector Number of funds Total GAV(€)

Total 223 € 148.1B

Style

Core 175 € 127.3 B

Value-added 58 € 20.8 B

INREV NON-LISTED REAL ESTATE FUNDS PROFILE Q4:2014

Country Number of funds Total GAV(€)

UK 44 €50.0B

Germany 17 €5.0B

France 12 €3.4B

Netherlands 27 €17.2B

Italy 5 €0.9B

Finland 4 €0.9B

Multi-country 107 €56.5B


Sector Number offunds Total GAV(€)

Regions

CEE 11 €3.9B

Continental Europe 189 €98.1B

Nordic 21 €8.1B

Sth. Europe 12 €2.8B

West. Europe 116 €89.3B

Pan-Europe 73 €44.0B


Sector Number offunds Total GAV(€)

Office 29 €13.5B

Retail 37 €22.6B

Industrial 20 €14.9B

Residential 17 €13.9B

Multi-sector 117 €71.9B

Structure

Closed end 105 €47.3B

Open end 128 €100.8B


Sector Averageannual return Annual risk Reward-to-risk

ratio

Total 4.66% 1.91% 2.44

Style

Core 4.82% 1.68% 2.87

Value-added 4.00% 3.18% 1.26

RISK-ADJUSTED PERFORMANCE ANALYSIS: Q1:2010 – Q4:2014


ratio

Country

Finland 7.25% 3.32% 2.18

France 4.54% 3.62% 1.25

Germany 2.94% 1.83% 1.61

Italy 0.25% 2.16% 0.12

Netherlands 1.58% 1.08% 1.46

UK 9.10% 3.53% 2.58

Multi-country 1.64% 2.25% 0.73



ratio

Region

CEE 2.04% 4.66% 0.44

Continental Europe 2.24% 1.48% 1.51

Nordic 5.03% 3.54% 1.42

Southern Europe -3.84% 6.38% -0.60

Western Europe 6.18% 2.20% 2.81

Pan-Europe 1.94% 1.75% 1.11




ratio

Sector

Office 3.19% 2.53% 1.26

Retail 5.79% 2.60% 2.23

Industrial 5.47% 3.99% 1.37

Residential 1.20% 1.26% 0.95

Multi-sector 5.20% 1.83% 2.84



ratio

Structure

Closed end 4.93% 2.76% 1.78

Open end 4.52% 1.48% 3.05

DIVERSIFICATION BENEFITS: Q1:2010 – Q4:2014

Style

Core / Value-added: r = 0.94

Country

Fin. Fra. Ger. Ita. Neth. UK Multi.

Fin.1.00

Fra.-0.23 1.00

Ger.0.03 0.12 1.00

Ita.-0.03 0.19 0.17 1.00

Neth.0.09 0.16 0.40 0.42 1.00

UK-0.31 0.24 -0.07 0.24 0.30 1.00

Multi.-0.07 0.51 0.40 0.69 0.50 0.44 1.00


Region

CEE Cont. Nord. Sth. West. Pan-E.

CEE 1.00

Cont. 0.57 1.00

Nord. 0.51 0.82 1.00

Sth. 0.33 0.79 0.54 1.00

West. 0.04 0.53 0.31 0.64 1.00

Pan-E. 0.53 0.98 0.79 0.75 0.51 1.00


Sector

Off. Ret. Ind. Res. Multi.

Off.1.00

Ret.0.75 1.00

Ind.0.73 0.55 1.00

Res.0.56 0.19 0.63 1.00

Multi.0.84 0.79 0.82 0.48 1.00


Average annual

return Annual risk Reward-to-risk ratio

Europe 4.66% 1.91% 2.44

Asia-Pacific 9.14% 1.38% 6.61

US 13.30% 2.26% 5.87

EUROPE Vs ASIA-PACIFIC Vs USQ1:2010 – Q4:2014

• European unlisted real estate

- Performance -Diversification

• Investor landscape

• Real estate strategy

• Challenges: going forward

• Fund vs Separate account vs Club deal?

• Europe vs Asia-Pacific vs US?

REAL ESTATE INVESTMENT IMPLICATIONS

FUTURE OPPORTUNITIES FOR THE EUROPEAN REAL ESTATE MARKETS• Increased levels of European real estate in institutional

investor portfolios

• Enhanced quality of real estate assets available to investors

• Increased stature for European real estate assets in global portfolios

• Further development of REIT markets in Europe

• Further development of unlisted real estate products

• Increased opportunities for skilled real estate professionals

• Increased levels of real estate market information and added-value real estate services

• Role of unlisted versus listed RE in European real estate portfolio; “blended” portfolio

• Role of unlisted real estate in European mixed-asset portfolio

• Asia-Pacific unlisted RE analysis: ANREV

• Global unlisted RE analysis-Europe, Asia-Pacific, US

FUTURE RESEARCH

ACKNOWLEDGEMENT

• INREV

• Real Capital Analytics

Documents

THE PERFORMANCE AND DIVERSIFICATION BENEFITS OF EUROPEAN NON-LISTED REAL ESTATE FUNDS PROFESSOR GRAEME NEWELL University of Western Sydney ([email protected])