What can non-listed real estate do for you?

This important new INREV research paper compares the performance characteristics of non-listed real estate in a mixed-asset portfolio as well as other real estate investment routes, in particular listed real estate and direct property, asking how they contribute to an investor’s overall strategy.  The in-depth analysis marries academic rigour with practical insights for investors and investment managers. Among many interesting conclusions, it reveals the current scale, breadth and future potential of the European non-listed real estate and supports the view that non-listed real estate has an important role to play in institutional investor portfolios. 

The findings reveal the asset class is a strong diversifier for bond-heavy portfolios and displays lower volatility than most other asset classes.  All of these characteristics, combined with its high and stable income, make the case for European non-listed real estate even more compelling. Income has accounted for 65% of the overall performance of the INREV European Annual Fund Index over the 2001-2019 period. The asset class is also inflation-sensitive, a feature that is expected to become more important as governments’ COVID-19 stimulus packages start to unwind.  In addition, the paper shows that non-listed performance has closely mirrored direct real estate, while simultaneously being easier for many investors to access. 

Among many interesting conclusions, it reveals the current scale, breadth and future potential of the European non-listed real estate and supports the view that non-listed real estate has an important role to play in institutional investor portfolios

Besides looking at the multi-asset context, the key part of the paper explores the different routes into real estate and longer-term property trends, and investigates how an investor can go about constructing their real estate portfolio.  For small and medium-sized investors in particular, non-listed funds represent a practical way to get exposure to real estate, but it can be complex for them to apply a full diversification strategy given the constraints their portfolio may face and the availability of investment products to support their chosen strategy. Importantly, this means that investors may benefit from combining the non-listed, listed and direct investment allocations, as some pockets of real estate may be easier to access via one of these routes. 

The key part of the paper explores the different routes into real estate and longer-term property trends, and investigates how an investor can go about constructing their real estate portfolio

Still, investors in the non-listed industry have many options when building their target portfolio.  There is a wide range of vehicles from single-country to multi-country as well as more tailor-made structures such as segregated accounts and club deals. In addition, non-listed products cover a wide range of investment styles and structures, from specialist closed-end funds and open-end diversified core equity vehicles to debt funds. 

This reflects the huge growth in European non-listed real estate over the last 20 years, and especially since the Global Financial Crisis, with the INREV Annual Fund Index expanding from 45 vehicles with €16.9 billion NAV in 2001 to 368 vehicles and €216.8 billion NAV at the end of 2020.  Investors often look to diversify their real estate portfolios through strategies defined in terms of investment size/scale, geography, property sectors, investment route and investment style. Helpfully, the European non-listed sector covers a broad universe in terms of all five pillars of real estate portfolio construction and diversification and the new paper reveals numerous examples of widening and deepening of ‘investment choice in European non-listed real estate space.

The findings reveal the asset class is a strong diversifier for bond-heavy portfolios and displays lower volatility than most other asset classes

But for all the wide range of non-listed vehicles available across Europe, there are significant variations in coverage at the national market level, particularly by sector.  This means that the vehicles theoretically needed to achieve particular country-sector weightings across the continent may not always be available – in turn confirming the need to treat listed, non-listed and direct real estate allocations as complementary to each other, as was discussed earlier.

For example, in the UK, Europe’s largest real estate market by value, has a fairly balanced representation of the ‘traditional’ sectors of retail, office and industrial, with both listed and non-listed routes having a considerable offering. However, one can get exposure to health care/ senior housing mainly through the listed sector, while hotels can be accessed only through non-listed or direct investments. Some less traditional emerging sectors, such as self-storage are investible only through the listed route.
In Germany the situation is completely different, with listed vehicles here overwhelmingly focused on the residential sector.  This suggests that in order to access any other sector, investors will be likely to have to use the non-listed route.

The new report suggests that the European non-listed real estate sector is at an inflection point of maturity and that the range of vehicles now available to access the market is set to expand further to accommodate the ever diverse investor demand

Alternatively, rather than constructing their own real estate sector-region allocation using single-country vehicles, some investors may prefer to leave the detailed strategy to investment managers.  To meet this demand, the last years saw an exponential growth of open-end diversified equity (ODCE) funds within Europe and offer quick access to a diversified portfolio of large stable income producing assets. ODCE funds offer size and economies of scale in investing and managing their portfolio, low fees, diversification, low risk profile and liquidity. These features make them attractive to both small and large investors, targeting a passive core pan-European exposure. 
The new report suggests that the European non-listed real estate sector is at an inflection point of maturity and that the range of vehicles now available to access the market is set to expand further to accommodate the ever diverse investor demand. 

For further insights into the Characteristics of non-listed real estate, please download the full report and replay the recording of this session at the INREV Annual Conference 2021.