The performance implications of adding global listed real estate to an unlisted real estate portfolio: A case study for UK Defined Contribution funds

This paper seeks to provide a better understanding of the performance implications for investors who choose to combine listed real estate with an unlisted real estate allocation. Specifically, it provides a detailed investor level analysis of the impact of combining UK unlisted fund and global listed real estate fund exposures to satisfy the requirements of a real estate allocation in a UK Defined Contribution Pension fund.

The catalyst for this paper was the recent report by the Pensions Institute: “Returning to the core: rediscovering a role for real estate in Defined Contribution pension schemes”. This highlighted both the rationale for real estate in DC funds, and specifically, the use of a blended product, which combined a 70% UK unlisted allocation with a 30% global listed allocation, to provide this exposure. We call this 70/30 mix a DC Real Estate Fund.

In addition there are currently three factors which are of utmost importance to investors, which lie behind the increased interest in blending listed and unlisted real estate:

  1. Liquidity
  2. Cost
  3. Ease of implementation

It is well understood that direct real estate can be a beneficial component of a multi-asset portfolio primarily due to the diversification benefits that it provides. However, one of the key challenges for both asset allocators and product developers is how to provide a direct or at least a direct-proxy real estate exposure in a mixed asset portfolio with acceptably high levels of liquidity and low levels of cost. This is a challenge for all private market asset classes. Clearly, a 100% exposure to unlisted funds or direct real estate would not be expected to meet this criteria.