Finding the right fund
We are often asked what European-based real estate securities funds are available to investors. This article aims to provide a broad picture of the funds available, their managers and the size of assets under management and the focus/strategy of the funds. Bloomberg ticker codes are highlighted to allow further analysis. The article takes into account open-ended funds investing in European quoted real estate securities1. It is important to note that the list does not include total assets under management of each of the asset managers.
The table lists the 51 real estate securities funds according to assets under management, which range from e429m in Credit Agricole’s Actions Foncier Euroland Fund to e5m in the AGF Immo Actions Fund. Total assets under management reach e4.1bn or 5.1% of the total market capitalisation (e80bn) of the listed European real estate sector. In Euro-zone terms, assets under management total e1.7bn, or 4.7% of the Euro-zone market capitalisation (e37bn). The average fund size is e81m. The funds are heavily weighted at the top end, with 17, exactly one-third, weighing in above the average size. There are 18 funds packed into the e30m–80m range and 16 have less than e30m under management. The funds listed operate under either the SICAV2 or the FCP3 structure. A number of the funds are eligible for the PEA.4
Investment strategies differ from fund to fund. However, in general the funds fall into three categories: pan-European, Euro-zone and pan-European ex-UK. The most common investment strategy is pan-European. Over half (32) of the funds invest in the broad European universe. Under this strategy, Balzac Real Estate Europe tops the list for assets under management. A number of funds invest on a pan-European basis but restrict the natural weight of the UK, which would otherwise be approximately 50% of European market capitalisation.
Patrick Sumner, director of property at Henderson Global Investors, explains the reasoning behind the approach used by the Horizon Pan-European Property Equities Fund: “Investors in this fund are looking for a broad European spread of risk and having half the benchmark in the UK is clearly not in line with that strategy. Some strategies limit the weight to 20–25%, but we are happy with the EPRA method that takes a simple average of the UK’s unrestricted weight (50%) and its share of European GDP (16%) to arrive at 33%. The UK is reweighted on this basis annually on 1 July and thereafter allowed to move in line with the market.”
Sixteen of the 51 funds invest on a Euro-zone basis. The Actions Foncier Euroland Fund tops the list at e429m, closely followed by AXA Investment Management’s Aedificandi Fund with e397m. Bruno Guiot, head of product development at AXA Investment Management, explained the decision to launch the AXA ETF product, “It was clear from our discussions with institutional investors that they wanted a pan-European exposure with the flexibility to weight the UK portion of the portfolio in accordance with their overall risk profile. They understood that the behaviour of the UK market is different from the Euro-zone, and of course currency exposure plays a major part in the investment process.”
With regard to the EasyETF EPRA Euro-zone product, he continues, “the diversification across the Euro-zone is the first step towards international investment for predominantly domestic investors. We felt this offered a perfect tool to take the initial diversification step away from local markets. The fund not only provides country exposure across eight Euro-zone markets but also five sub-sectors within the broad real estate sector.”
The third strategy, pan-Europe ex-UK, is used by three managers, Asset Value Investors being the largest. Mark Townsend, fund manager at Asset Value Investors, states, “Although we invest on a pan-Europe ex-UK basis, our approach to investments is dominated by a fundamental bottom-up stock-picking strategy, always bearing in mind general economic fundamentals. We seek to invest in companies that have capable management and can demonstrate steady solid revenue and NAV growth. UK property shares have enjoyed a strong run in anticipation of the UK PIF vehicle. However, we currently see better value in the pan-European property shares where a number of companies have already elected to assume REIT status and there is generally lower debt combined with strong cash flows.”
What are the trends in the future? We have seen a growing demand for global real estate products over the past 12 months. ING Clarion launched its Global Real Estate Income Fund in February with tremendous success. At the IPO the fund raised $1.4bn. At a lunch organised by EPRA and NAREIT in New York in June to promote the EPRA/NAREIT Global Real Estate Index, Steve Burton of ING Clarion indicated where ING felt there was a gap in the market for this type of product, “we saw a number of our clients looking for a high-income producing product providing diversification across the three main economic regions. A global real estate portfolio offers an investment opportunity set twice that of the US, exposure to newly formed REIT markets, compelling dividend yield, regional diversification benefits and valuations that are attractive with steep discounts to private market real estate. We expect total returns in the 8–12% range over time.” This view was mirrored by Scott Crowe, global real estate strategist at UBS, ”based on the developments in Asia and Europe with regards to the REIT structures, we clearly see a demand from investors in North America, Europe and Asia, for global real estate products that offer superior risk-adjusted returns coupled with low correlations with other asset classes.”
As investors look for opportunities elsewhere, the trend towards global real estate strategies will grow, and we expect this to continue as REIT markets around the world continue to develop. The research conducted by EPRA5 and NAREIT6 in the area of risk-adjusted returns and diversification opportunities derived from investment in listed real estate markets clearly makes a compelling investment case. Mike Grupe of NAREIT sums up the position, “Since we know that real estate always does well over long periods, we know it should be in everyone’s portfolio. While we don’t know what the right allocation for the individual investor is, we do know that it’s not zero.” For most investors, Grupe says, “a 5–10% holding in real estate should offer them adequate asset diversification”.
Fraser Hughes is research director of EPRA
1 For example, the TR Property Trust (TRY LN) managed by Henderson Global Investors has e628 m in real estate securities under management, but for the purpose of this list cannot be compared. The fund is a closed-end investment trust investing in both real estate securities and direct real estate. In addition, approximately e700m in French focused real estate securities funds is excluded from the list (see note 2).
2 Société d’Investissement à Capital Variable (SICAV) is an investment company with variable capital carrying out for the account of its shareholders the acquisition and the management of a portfolio of transferable securities. The shareholders can buy and sell intraday the units of the SICAV, on the basis of actual value of the credit that determines the value of the unit (realisable value).
3 Fond Commun de Placement (FCP), joint ownership of transferable securities managed by a trust company on behalf of the carriers of shares; the FCP does not have the legal personality.
4 The Plan d’Epargne en Actions (PEA) is a specific stock market investment savings account, linked to a cash account, enabling private individuals resident in France for tax purposes to invest in equities of European companies, mutual funds (SICAVs) and investment funds (FCPs) eligible for inclusion in a PEA, with fiscally advantageous conditions. Although the ‘normal’ life of a PEA is eight years, the tax advantages are acquired from the end of the fifth year of the scheme.
5 Diversification benefits of Global and European Property Stocks, EPRA Academic Circle Publication by Graeme Newell of the University of Western Sydney, October 2003. Available at www.epra.com or upon request at firstname.lastname@example.org
6 Diversification benefits of REITs, Ibbotson Associates, 2003. Available at www.nareit.com