There has been a significant amount of research in recent years, produced by both academics and practitioners, which has focussed in particular on two areas. First, much attention has been paid to the investment merits of listed real estate as part of a mixed-asset portfolio; second, academics and investment firms have explored the relationship between the performance of the listed sector and both direct real estate and unlisted real estate funds.
The conclusions are broadly consistent, as follows.
First, REITs can act as both a return enhancer and diversifier in a mixed asset portfolio (Lee, 2012), and adding listed real estate to an unlisted portfolio can enhance returns as well as liquidity (NAREIT, 2011).
Second, while listed real estate returns do not reflect direct or unlisted real estate returns in the short run (one to two years), listed real estate and direct real estate are more correlated or co integrated over the medium to longer term (three and more: see, for example, Hoesli and Oikarinen, 2012).
Third, listed real estate performance appears to lead direct market indicators by around six months (Cohen and Steers 2009), although whether this lag is capable of being exploited to deliver abnormal or excess returns is questionable (Baum and Hartzell, 2012).
The first and second of these findings suggests that listed real estate should be attractive to investors, especially pension funds interested in the longer term. The global financial crisis of 2007-9 and the associated price and liquidity collapse of illiquid real estate assets over that period should arguably have led to an increase in listed real estate allocations at the expense of privately held assets. However, no significant change in behaviour has been observed. There may be many reasons for this, some of which are likely to be behavioural, or institutional, rather than purely based on rational economics.
Until now, however, there has been little work published regarding done the behavioural or institutional aspects of incorporating listed real estate into an investment strategy. To rectify this gap we have undertaken two pieces of research for EPRA. The first, published in March 2013 (The use of listed real estate securities in asset management), examined both the different strategies and the various fund types available to investors who are prepared to use listed real estate, citing a number of examples, and how listed real estate is or may be combined with other types of real estate and real assets. These other assets include internal and external unlisted funds (the product of the investor or a third party asset manager), derivatives, property debt, direct property, and real assets such as infrastructure and commodities in their various forms.
This second piece of work is a logical extension of the first paper, and concentrates on survey evidence examining whether or not listed real estate is managed as part of the overall institutional real estate allocation. Our starting point is as follows. If there is a strong rational case for including more listed real estate in multi-asset or real estate portfolios, and if there is little evidence that this is happening, then there may be an explanation which is to do with the organisational structures or investment processes employed by investors or sub-contracting asset managers. Hence, while we might recognise the apparent benefits of listed real estate noted above, it is important to understand and capture the organisational processes that determine whether European investors do include listed real estate in their real estate portfolios – and, if not, we would like to know why not. To the extent to which investors do utilise listed real estate, we would like to understand what (if anything) limits the weight they place on listed real estate.