Kempen: Real estate done differently

October 6, 2020

Many investors treat listed and non-listed real estate as distinct asset classes, applying two different investment frameworks to what we see as one asset class. This inevitably leads to mispricing. At Kempen, we believe this represents a massive opportunity for investors adopting a holistic approach to the asset class.

While the short-term investment dynamics between listed and non-listed clearly differ, essentially they both involve investing in physical buildings. Over the long run and correcting for leverage, the returns of both types of real estate investment have been shown to be driven by the same underlying factors: quality of location, quality of buildings and quality of the wrapper (the structure in which the real estate is organised).

We’ve developed a consistent framework that enables us to compare listed and non-listed real estate portfolios in exactly the same way, taking into account factors such as the quality of their management, their ESG credentials and strength of their balance sheet. Our framework enables us to calculate expected risk-adjusted returns for each form of the asset class, so that we – and our clients – can make apples-to-apples comparisons between the two.

Our analysis has resulted in some interesting findings. For example:

• in contrast to what many investors believe, the physical quality (in terms of their location and building quality) of listed and non-listed real estate funds is on average quite similar
• the different average returns of listed and non-listed funds can in large part be explained by the different amounts of leverage they take on
• if you have a long holding period and corrected for leverage, it doesn’t really matter if you invest in listed or non-listed real estate.

We’ve also made some noteworthy observations at a more granular level, such as:

• non-listed European residential and UK funds generally apply very low leverage
• conversely, listed European retail funds apply too much leverage
• non-listed UK real estate funds tend to have higher overhead costs than any other listed or non-listed category.

Having this kind of knowledge at hand enables us to invest differently to most other asset managers.

It means our clients can adopt a building-block approach, picking and choosing the best return opportunities from an investment universe of 27 liquid non-listed European real estate funds and 64 listed European funds based on their needs, constraints and the kind of solution that they want to create for themselves.

From this universe our clients can choose to invest solely in non-listed real estate, solely in listed funds, or capture the best of both worlds by combining both forms in one portfolio. And they can make informed decisions: if they want to optimise returns by using leverage, they might want to avoid non-listed European residential and UK funds. But if they don’t like high leverage, we can suggest they avoid listed European retail funds.

Our approach also enables our clients to make tactical calls based on what’s happening in the listed and non-listed markets. For example, listed real estate slumped in value in the aftermath of the coronavirus outbreak, which some of our clients are taking advantage of by increasing their allocation to listed relative to non-listed.