EQUITY INVESTMENT IN REAL ESTATE THROUGH LISTED REITS

Transcription

1 Your Fund s Real Estate Investments: Approaches for Today s Market and a Better Tomorrow EQUITY INVESTMENT IN REAL ESTATE THROUGH LISTED REITS National Association of Real Estate Investment Trusts REITs: Building Dividends & Diversification October 28, I St, NW Suite 600, Washington, DC

2 The Developed Global Equity Real Estate Opportunity Set Region Underlying Property Market ($bn) Listed Property Market ($bn) Listed as a Percent of Underlying Stock Market Listed Property as a Percent of Stock Market Europe 7, , North America 8, , Asia-Pacific 4, , Africa / Middle East Global $20,240.4 $2, % $51, % Commercial real estate investment is a large part of the worldwide market portfolio Note: Underlying Property Market Data as of March 30, 2014; Listed Property and Stock Market Data as of June 2014 Source: EPRA Monthly Statistical Bulletin, June

3 Real Estate in the Institutional Investment Portfolio Commercial real estate investment has been viewed as a core asset class by many institutional market segments, including endowment, pension, and retirement funds Basically, there are only four types of investment categories that you need to consider: Cash, Bonds, Common Stocks and Real Estate. Burton G. Malkiel (Princeton), The Random Walk Guide to Investing Commercial real estate investment provides a unique combination of investment attributes Strong return (like stocks) with strong, steady current income (like bonds) Investment grade property provides a measure of inflation protection Supply inelasticity leads to a distinct real estate cycle Moderate correlation over time contributes to portfolio diversification Commercial real estate investment can be accessed through different platforms, including direct property investment, unlisted property funds, and listed real estate securities 3

4 Real Estate Allocations of Institutional Investors Current and target allocation Ranges: August % 50% 52% 49% Target Allocation 40% Current Allocation 30% 32% 29% 20% 13% 16% 10% 0% 5% 2% 0.5% 0.8% Less than 5.0% 5% - 9.9% 10% % 15% % More than 20% Across all plans investing in real estate, the average actual allocation is 6.8%; while the average targeted allocation is 7.6%; suggesting more capital is available for investment Source: Preqin Real Estate Online 4

5 Institutional Investors in the Real Estate Asset Class Exposure to Listed REITs 60.0% 57.7% 53.2% 50.0% 40.0% 36.5% 38.1% 30.7% 27.5% 28.4% 29.1% 30.0% 20.0% 10.0% 0.0% Public Sector Pensions Private Sector Pensions Foundations Endowments Asset Weighted # Plans Source: Preqin Real Estate On-line. June

6 U.S. Institutional Investors in Listed REITs Distribution by Total Plan Assets Endowments 3% Foundations 3% Public Sector Pensions 59% Private Sector Pensions 35% $ 3,722,790 Total Plan Assets Source: Preqin Real Estate On-line. June

7 The Use Of Real Estate, Including REITs and Global Listed Real Estate Securities by Pension and Retirement Plans 7

8 Real Estate Investment through REITs REITs are Real Estate equities REITs deliver competitive long-term performance REITs provide stable dividend income REITs provide portfolio diversification REITs are a source of market liquidity REITs are a complement to private investment in the real estate portfolio REITs are an efficient way to gain exposure to global property markets 8

9 Publicly Traded REIT Industry Growth Equity Market Capitalization 900 Billions ($) : REITs created by Congress : Equity Office Properties LBO : Taubman Centers IPO (First UPREIT) 1991: Kimco IPO Modern REIT Era Begins 1993: Relaxation of the Five or Fewer Rule for Pension Funds s-1970s: Mortgage and Hybrid REITs Dominant 1989: Collapse of Real Estate Market 1986: Tax Reform Act Permits Internal Management : Great Financial 0 Crisis Note: Data as of August 31,

10 Listed REITs and Property Companies Contribute Solid Portfolio Performance Highest return over period FTSE NAREIT U.S. Equity REITs TR FTSE EPRA/NAREIT Developed TR S&P 500 TR MSCI EAFE TR Barclays Capital U.S. Aggregate Bond Index Barclays Capital Global Aggregate Bond Index 1-Year Year Year Year Year Year Year NA NA 30-Year NA NA 35-Year NA NA 40-Year NA NA NA Note: Monthly data as of August 2014 Sources: NAREIT analysis of data from IDC accessed through FactSet. 10

11 Effect of Dividends on Total Investment Performance $10,000 invested from 1990 through 2013 Source: NAREIT analysis of data from IDC accessed through FactSet. 11

12 Diversification and Risk-Adjusted Performance of Domestic Equity Investments Sharpe ratio Risk-Adjusted Performance and Diversification Potential U.S. Investment Benchmarks, January 1990 August REITs Value Stocks Broad Market Indexes Growth Stocks Publicly traded commercial real estate contributes both strong riskadjusted returns and diversification to a domestic equity portfolio % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Correlation with Dow Jones U.S. Total Market Note: Based on monthly returns. Source: NAREIT analysis of data from Interactive Data Pricing and Reference Data accessed through FactSet. 12

13 Correlation Listed Equity REITs are More Correlated with Private Real Estate, and Less with Stocks, over Longer Horizons 1.0 Correlation of Listed U.S. Equity REIT Returns with U.S. Stock Returns and U.S. Private Equity Real Estate Returns over Increasing Investment Horizons 0.9 with NCREIF Property Index (4- quarter lag) with NCREIF ODCE Index (4- quarter lag) with NCREIF Property Index (Core Properties) with NCREIF ODCE Index (Core Funds) with S&P Financial Sector Index Investment Horizon (Number of Quarters) with Dow Jones U.S. Total Stock Market with S&P 500 U.S. Stock Index Graph shows correlation of total returns computed over rolling one-quarter periods, rolling two-quarter periods, etc. Data begin in 1989Q4, the earliest data available for the S&P Financial Sector index. Source: NAREIT analysis of data from NCREIF (NPI and ODCE) and FactSet.

14 From 1998 to 2011, Allocations to Real and Alternative Assets Increased by as Much As 20 Percent 11.31% 11.10% 9.85% 7.61% 4.77% Actual Returns & Costs REITs Private Equity Other Real Assets Private Real Estate Net Return Annualized total return % net of fees Hedge Funds Fees Investment costs in basis points 51 BPS 238 BPS 103 BPS 113 BPS 125 BPS Source: CEM Benchmarking, Inc. Asset Allocation And Fund Performance Of Defined Benefit Pension Funds In The United States Between

15 A comparison: Listed Equity REITs and Private Equity Real Estate Equity REITs vs. Private Real Estate (private real estate standardized for smoothing and lag) Fund Average: Listed Equity REITs Private Real Estate Gross Return: 11.82% 8.73% Investment Cost: 0.52% 1.13% Net Return: 11.31% 7.61% Volatility: 20.17% 16.48% Compounded Net Return: 9.17% 6.01% Correlation: 0.9 CEM is currently collecting 2013 data. Lag in all illiquid assets (private real estate included) implies that for these asset classes, 2013 data corresponds to 2012 returns. Thus, 2011 is currently the earliest date for which real comparisons between asset classes (and funds themselves) may be made. Source: CEM Benchmarking, Inc. Asset Allocation And Fund Performance Of Defined Benefit Pension Funds In The United States Between

16 Blended Portfolios of Listed REITs and Unlisted Real Estate Funds Optimal Allocations Optimal Portfolio Allocation 7.11% 7.42% 7.73% 8.04% 8.35% 8.66% 8.97% 9.28% 9.59% 9.91% 10.22% 10.54% 10.85% 11.17% 11.48% 11.80% 12.12% 12.44% 12.76% 13.08% 13.40% 100% 90% 80% 70% 60% Target Net Return 8.5%/yr 16.5% REITs, 65.2% ODCE, 18.3% Opportunistic Volatility 7.24%/yr Maximum Sharpe Ratio Portfolio 23.0% REITs, 38.0% ODCE, 39.1% Opportunistic Average Net Return 9.64%/yr Volatility 8.52%/yr 50% 40% 30% Minimum-Volatility Portfolio 4.7% REITs, 95.3% ODCE Average Net Return 7.11%/yr Volatility 6.34%/yr 20% 10% 0% Portfolio Annual Average Net Return Listed Equity REITs Core Funds (ODCE) Value Added Funds Opportunistic Funds Blended portfolios have produced better risk-adjusted returns than either REITs or private equity real estate funds alone Note: Based on quarterly net total returns for NCREIF/Townsend Fund Indices (ODCE, Value Added, and Opportunistic) and FTSE NAREIT Equity REITs Index for 1992q1 2013q3. Fees and expenses are assumed to be 50 bps per year for publicly traded equity REITs; fees and expenses for core, value added, and opportunistic funds are as reported by NCREIF. Source: NAREIT analysis of data from NCREIF and FTSE NAREIT Equity REITs Index 16

17 Case Study: Listed Equity REITs and Unlisted Real Estate Funds Complements in a Total Real Estate Allocation Percent of 5-Year Investment Periods Five-Year Net Returns 60% 100% ODCE 100% Opport 50% 50.6% 49.4% 44.4% 50/15/35 100% REITs 40% 40.7% 38.3% 33.3% 33.3% 33.3% 30% 24.7% 25.9% 20% 10% 6.2% 11.1% 8.6% 0% 0.0% Avg. Annualized Return <0 0-10% 10% - 20% >20% Since 1988Q3, there has never been a five-year investment period during which a 50/15/35 blend of core funds, opportunistic funds, and listed equity REITs experienced negative net returns Source: NAREIT and NCREIF (70% NPI 30% FTSE NAREIT Equity REIT Index, 1978 September 2008) 0.0% 0.0% Note: Based on quarterly net total returns of FTSE NAREIT Equity REIT Index, NCREIF Open-End Diversified Core Equity Fund Index (ODCE), and NCREIF/Townsend Opportunistic Fund Index, 1988Q4-2013Q3. Source: NAREIT analysis of data from NCREIF and Interactive Data Pricing and Reference Data accessed through FactSet. 17

18 Global Expansion of the REIT Business Model Today, REITs have been introduced and accepted in 35 countries worldwide, validating the REIT business model and expanding the global opportunity set for all investors Data as of August 10,

19 Summary & Findings Securitized commercial real estate equity is a meaningful part of the worldwide market portfolio and contributes potential diversification benefits to risk averse and risk tolerant investors When developing a strategic asset allocation, REITs and listed real estate equities provide investors an effective and efficient method of investing in commercial real estate equity worldwide Listed REITs and property companies are high utility portfolio assets for pension funds and retirement plans, endowments and foundations The public markets are positioned to capitalize on opportunities in commercial real estate equity investment as the global economy and financial markets stabilize and recover The opportunity set for investment in the real estate asset class through securitized vehicles is expanding worldwide 19

20 Disclaimer NAREIT is the worldwide representative voice for REITs and listed real estate companies with an interest in U.S. real estate and capital markets. Members are REITs and other businesses that own, operate and manage income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. NAREIT is the exclusive registered trademark of the National Association of Real Estate Investment Trusts, Inc., 1875 I St., NW, Suite 600, Washington, DC Follow us on REIT.com. Copyright 2014 by the National Association of Real Estate Investment Trusts, Inc. All rights reserved. This information is solely educational in nature and is not intended by NAREIT to serve as the primary basis for any investment decision. NAREIT is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to buy or sell any security or real estate investment is being made. Investments and solicitations for investment must be made directly through an agent, employee or representative of a particular investment or fund and cannot be made through NAREIT. NAREIT does not allow any agent, employee or representative to personally solicit any investment or accept any monies to be invested in a particular security or real estate investment. All REIT data are derived from, and apply only to, publicly traded securities. While such data are believed to be reliable when prepared or provided, such data are subject to change or restatement. NAREIT does not warrant or guarantee such data for accuracy or completeness, and shall not be liable under any legal theory for such data or any errors or omissions therein. See for important information regarding this data, the underlying assumptions and the limitations of NAREIT s liability therefore, all of which are incorporated by reference herein. Performance results are provided only as a barometer or measure of past performance, and future values will fluctuate from those used in the underlying data. Any investment returns or performance data (past, hypothetical or otherwise) shown herein or in such data are not necessarily indicative of future returns or performance. Before an investment is made in any security, fund or investment, investors are strongly advised to request a copy of the prospectus or other disclosure or investment documentation and read it carefully. Such prospectus or other information contains important information about a security s, fund s or other investment s objectives and strategies, risks and expenses. Investors should read all such information carefully before making an investment decision or investing any funds. Investors should consult with their investment fiduciary or other market professional before making any investment in any security, fund or other investment. For more information please visit: 20