22 April 2021, Amsterdam – New research commissioned by INREV reveals the current scale, breadth and future potential of European non-listed real estate in a detailed examination of the asset class that marries academic rigour with practical insights for investors and investment managers.
The Characteristics of Non-listed Real Estate in Investment Portfolio paper identifies how significantly the European non-listed real estate funds market has grown over the past two decades – and especially since the global financial crisis – more than doubling in size from €88.6 billion in 2009 to €211 billion in 2020 (1).
For seasoned real estate investors – and maybe even for those without real estate experience – the paper provides useful context for making increasingly complicated decisions about asset allocations, as they search for returns in a low interest environment. For example, it highlights how the asset class – with its solid income generating component – can be used as a proxy for direct real estate investments and as a diversifier for bond-heavy portfolios.
Drivers of growth
The report indicates that non-listed real estate is poised for yet further significant expansion. A rise in global wealth and the share of AUM in global wealth are, on their own, sufficient to boost demand for real estate. Moreover, real estate allocations for all types of investors are constantly increasing and this phenomenon is not expected to change any time soon.
The rapid evolution of a wide range of product offerings over recent years has enabled the growing investor appetite for the asset class to be absorbed. This is set to continue to expand, with a strong focus on core strategies.
Over the past decade, European open ended diversified core equity (ODCE) vehicles are gradually becoming a real estate vehicle of choice, especially for mid-sized and smaller investors. In 2011, the total net asset value of this segment was €1.9 billion, rising to €25.7 billion by 2020 (2). The popularity of these vehicles is largely due to their ability to meet investors’ demand for core diversified multi-country multi-sector, low risk strategies at low fees. Importantly, they also provide accessibility as an investment route for smaller and medium sized investors who wouldn’t otherwise be able to build a diversified direct real estate portfolio.
Similarly, non-listed real estate debt funds have gained traction on account of their attributes as providers of stable income, downside protection and attractive risk-adjusted returns. In 2020 non-listed real estate debt products accounted for 20% of all capital targeting a European strategy in 2020 (3) – a significant jump from only 4.6% in 2019.
Portfolio construction is key
An important dimension to the paper is its practical guidance for investors. In particular, it looks at the complexities and constraints around the five pillars of portfolio construction and diversification – size, geography, sector, investment route and investment style. It provides a framework of insights for investors about how to navigate the practical aspects of portfolio allocations, recognising that the five pillars of diversification are bespoke for each individual investor.
Iryna Pylypchuk, INREV’s Director of Research and Market Information, said: ‘Above all, this paper paints a very comprehensive picture of an asset class that has firmly established itself as a significant target for allocations. The findings signify the rapid evolution of non-listed real estate which has reached a certain level of maturity – or what I would call a ‘Core evolution’, the appeal of which for investors will only intensify.
‘This also means a further improvement in liquidity, both through secondary trading and the evolution of new products, such as open ended diversified core equity funds and non-listed real estate debt. Between the lessons learned from the global financial crisis and the Covid-19 pandemic, not only do we see measurable evidence of the broadening of investment choice, but also an improvement in investor accessibility across all five pillars of portfolio construction and diversification.’
(1) Source: Based on Net Asset Value, INREV Annual Fund Index, preliminary 2020 results
(2) Source: Based on Net Asset Value, INREV European ODCE Funds Index Q4 2020
(3) Source: Capital Raising Survey 2021
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Notes to Editors
INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, was launched in May 2003 as a forum for investors and other participants in the growing non-listed real estate vehicles sector. The association represents and reflects an industry with a total value of €2.8 trillion and INREV members deliver €385 billion of stimulus to the real economy of Europe.
INREV has 453 members which include 91 of the largest institutional investors as well as 40 of the 50 largest real estate fund managers, plus banks and advisors across Europe and elsewhere.
The non-profit association is focused on increasing the transparency and accessibility of non-listed vehicles, promoting professionalism and best practice, and sharing knowledge. It is based in Amsterdam, the Netherlands.