International investment 'boom'
There has been an “unprecedented boom” in European cross-border real estate investing said Jacques Gordon, international director of research at Lasalle Investment Management, based in Chicago. Addressing the IPD European Property Strategies conference in Wiesbaden, Gordon considered the rationale for investment cross-border. Whereas, only a few years ago, real estate investment managers tended to remain within their own domestic comfort zones, institutional investors have been increasingly attracted by the prospect of higher returns offered by cross-border investing. Greater diversity than the domestic-only approach; rising transparency; improved quantity and quality of cross-border service providers have also provided incentives. Wealth preservation given unstable local currencies or markets was another consideration. With growing confidence in the euro, the reduced risk for euro-based investors has facilitated investing outside the domestic marketplace.
Serious obstacles do however remain, said Gordon. Foremost of these is tax and investor legal requirements. Furthermore, with 5-10% of the total institutional portfolio, real estate “does not have the same capacity for international diversification as stocks and bonds”.
The Investment Property Databank (IPD) itself is driving towards a full European coverage, expanding performance measurement systems, indices and benchmarks “necessary to support a modern property investment market”, said Tony Key, IPD director in London. The IPD property performance databanks currently operate in 15 countries. The challenge with property is “keeping pace with it”, said Key. In 2001, property returns may have been modest, but outperformed both equities and bonds for the second year running, with the exception of Germany.
Pension reform is “starting to have an effect on flows of capital, particularly into property markets” said Neil Cable, investment director of Standard Life Investments, based in Edinburgh. He looked at the UK investor rationale for international investing. Factors were increasing exposure to euro denominated investments; the desire to diversify internationally, as with other asset classes; the desire to outperform the home market and moving to indirect investment. Cable considered the practicalities of investing indirectly. With an increasing number of investment vehicles, direct investment is “not a realistic option for most investors”, he said. Moreover, the popularity of indirect investing reflected the trend towards fund of funds. The euro was also “having a big influence”. Internationalisation of real estate investment was now “well entrenched”, said Cable.
The proliferation of real estate vehicles has given international investors an ever growing choice when considering investment styles, target returns and risks, managers and portfolio structures. European private real estate funds over the last three years have “grown explosively” said Phillip Rose, European head of real estate at ABN AMRO in London. Private real estate funds stand at E28bn, more than quadrupling since 1998 and still growing. Although 2001 saw a decline in launches of real estate funds as institutions cut back their allocations to property, “the value of commitments at £1bn exceeded net investment in existing direct portfolios”. The sources of capital for private real estate funds reflect that of “conventional” property. Insurance funds and pension funds held 36% and 17% respectively of the total value of property in real estate funds at the end of 2001. It is a “very young industry” said Rose, “with funds only one years old it is very much a start up industry”.
Real estate “opportunity funds” also known as “opportunistic investment” have also become an “accepted component of many institutional investor portfolios” said Nori Gerado Lietz, managing director of Pension Consulting Alliance (PCA) in the US. Opportunity funds are “totally orientated towards total returns” said Lietz and aim in the range of a net 20% internal rate of return in contrast to core real estate investments. In the US, pension funds allocate, on average, around 20-30% of their property portfolios to opportunity funds. Yet, despite the proliferation of these investment vehicles, “there is a dearth of performance and fund statistics available to the investor community”. The need to promote standardisation and address investor concerns was the main aim of the PCA Opportunity Fund survey.