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Real Estate - December 14, 2007

EDHEC European Real Estate Investment and Risk Management Survey

The EDHEC Risk and Asset Management Research Centre has released a new survey that is drawn from its research programme in asset allocation and alternative diversification. This programme has led to extensive research on the benefits, risks, and integration methods of alternative classes and instruments in asset allocation.

Real estate, probably the most traditional of alternative classes, is enjoying renewed favour as institutional investors search for diversification benefits and competitive yields. Institutional demand for real estate exposure has brought about improvements in market transparency and the development of new indirect and synthetic investment tools. With target allocations to real estate increasing, research into real estate as an asset class must enable industry participants to refine traditional approaches and to consider real estate within the bounds of asset management and asset-liability management. It is in this way that research can help real estate take its place in multistyle, multi-class portfolios, contribute to the design of integration methods that optimise its risk/return trade-off, and, finally, enable the class to deliver on its full potential.

The EDHEC European Real Estate Investment and Risk Management Survey, the first phase of this research, takes stock of developments in the real estate investment market, reviews academic evidence on allocation to and management of real estate, and analyses the results of a large-scale, pan-European survey of institutional practices.

The survey covers 143 European institutional investors from 19 countries, representing more than 3,000 billion euros in assets under management and over 400 billion euros in real estate assets.

The results show that real estate is perceived as a distinct asset class which covers direct investment, non-listed and listed real estate equity vehicles. The justifications for investing in this asset class are diversification of the overall portfolio, the search for performance, and, to a lesser degree, a hedge against inflation. The quest for alpha appears to be of secondary interest. The main vehicles for exposure to the class are direct investment in the underlying asset, non-listed funds and listed real estate. The role of debt is marginal and allocations to new products (indices, structured products and derivatives) are modest.

Among the other key results of the study:

  • The specific risk of the property is considered to be the central risk factor; other key concerns are sector and geographic risks.
  • Diversification is thought to be the only appropriate approach to risk management and should be carried out by property type and geographically.
  • Investors approach real estate primarily in absolute return terms but also adopt relative return performance analysis tools.
  • 66% of investors consider that an investable European index (or derivative thereof) would be the best diversification solution for a portfolio with a strong home bias.
  • 81% of the investors do not plan to use derivatives in the short run due to investment policy constraints, a lack of familiarity with the products or the unsuitability of the products for their needs.
  • Investors identify the quality of the index (transparency, representativeness) and contract liquidity as being the key success factors for real estate derivatives.

This report was sponsored by Aberdeen Property Investors and Groupe UFG.