Top Real Estate Fund Managers Go Global
[March/April 2006]

By Fraser Hughes & Jorrit Arissen, European Public Real Estate Association

The appetite for global real estate is not a new phenomenon. The first global fund, the Alpine International Real Estate Equity Fund, was introduced in 1989.However, the real growth in the number and size of global real estate funds has occurred in the last couple of years. At the end of the last decade only 10 global funds existed, by the end of 2003 that number had doubled to 20. In 2004, the total number of funds more than doubled again to 41. In 2005, momentum continued as 26 more funds launched. With one fund already added so far in 2006, that makes a current total of 68 global real estate funds. In addition, we are aware of a number of funds to come to the market in the near future.

At the end of 2005, global real estate funds had total assets under management (AUM) close to $14.5 billion with the top five funds accounting for approximately half of this amount. The average AUM per fund is $245 million. Among the funds, 11 are domiciled in Japan, the most of any country, illustrating the enormous demand from Japanese investors seeking premiums over the bond rate. Ten funds are domiciled in Australia, nine in Luxembourg and eight funds originate in the U.S.

Growth in both number and size of the global funds is driven by a number of reasons. However, the most publicized driver is the diversification benefits offered by a global real estate portfolio. Real estate, in general, is a strong diversifier within mixed-asset portfolios. A global real estate investment program provides additional diversification characteristics within mixed asset portfolios. From a U.S. standpoint, the addition of Europe and Asia to your investment universe doubles the size of your investment pool. In market capitalization terms, the investment pool increases from approximately $320 billion to $610 billion. In addition, current REIT developments in Europe and Asia offer investors a wealth of new opportunities. It is estimated that the size of the institutional quality global listed real estate market will hit $1 trillion within the next five years.

Going Global: The Rationale

Obviously the number of global funds wouldn’t be increasing if there wasn’t strong investor demand. “The reason U.S. investors and others are looking abroad is two-fold,” says T. Ritson Ferguson, chief information officer and managing director at ING Clarion Real Estate Securities. “A global approach offers a much expanded universe of potential investments which offers diversification benefits and more total return potential.”

Ferguson adds that many countries in the Asia-Pacific region are experiencing higher levels of economic growth which leads to more demand for real estate and more dynamic rent growth potential. In Europe, he says the opportunities are driven in part by the underdeveloped public market for real estate companies which is changing, in part, by the proliferation of REIT-type vehicles in many countries. For example, Germany and the U.K. represent two large economies and real estate markets that are actively considering REIT-enabling legislation.

Andrew Parsons at Resolution Capital in Australia sees similar incentives for Australian investors.

“An increasing number of Australian investors are broadening their mandates to invest in international real estate. This capital migration is motivated by a number of factors including the ability to achieve greater diversification and prospect of superior risk adjusted returns,” Parsons says. “Consistent with their preference for investments with efficient pricing, liquidity and transparency, as well as access to some of the world’s leading management, Australian institutional investors are opting to gain exposure to global real estate through securities listed on the world’s leading exchanges. The emergence of the REIT structure in an increasing number of countries will serve to accelerate this trend.”

Michael Acton, a principal and director of research at AEW Capital Management, touches on another reason why U.S. investors are looking at investment opportunities in Europe and Asia.

“With respect to the real estate allocation itself, most U.S. institutional investors have increased their target allocations to real estate in recent years and are finding it difficult to reach these new targets purely through direct property market investment,” Acton says.

As a result, Acton says many investors have added U.S. REIT portfolios to their real estate allocations as a way to get capital invested in a timely manner (it has been a difficult period to remain in cash).

“U.S. REIT performance over the past six years has been very strong, far in excess of anything that was expected when these investments were made,” Acton says. “As a result, many investors now find themselves in a situation where they are over-allocated to U.S. REITs, but below allocation target in real estate generally. The listed markets in Europe, Asia and Australia provide them with another investment option where they can deploy capital in the real estate asset class.”

Looking ahead, there seems to be no signs of the global demand for real estate securities slowing.

“The fundamental forces driving the growth in global real estate securities we expect to remain in place for years if not decades,” says Steve Burton, senior director with ING Clarion Real Estate Securities. “Property is an enormous asset class with only a 7 percent penetration rate of public companies versus the size of the market. From a macro standpoint, property companies remain in the early stages of development as an asset class. Investors in the U.S. and elsewhere increasingly want to take part in the opportunities that naturally arise from an expanding asset class.”

Top Funds Go Global

Source: EPRA, company reports, Bloomberg, Morningstar