Investors seeking exposure to real estate should consider listed as well as direct given the returns, diversification and volatility of the asset classes are very similar over the long term, according to AMP Capital.

 

In a white paper, AMP Capital reveals the correlation between listed and direct real estate increases significantly as the investment horizon lengthens. The daily liquidity of listed real estate, however, means it behaves more like equities if they only invest in the short term.

 

“Real estate, both listed and direct, is a long-term investment by the very nature of leases that are contractually committed to and the longevity of the physical assets,” says co-head of global listed real estate James Maydew.

 

"The two asset classes are essentially the same over five years and beyond as the returns are driven by the underlying real estate cash flows they have in common. For investors who want to maximise risk adjusted returns, an asset allocation between both listed and direct should be utilised at different points in the cycle.  Listed real estate can also be a useful proxy for direct for investors who want to get set in real estate but who are struggling to deploy their capital given global competition for quality assets.”

 

The paper also highlights how listed real estate can be used by investors as a harbinger of what the direct market is likely to do.  Analysis of whether real estate investment trusts (REITs) are trading at a premium or discount to net asset value (NAV) has proven to be an accurate predictor of how the direct market will move in the coming year. 

 

“Put very simply, if a REIT trades at a premium to its NAV, the market believes its assets will appreciate above levels indicated by market pricing of the underlying direct real estate. If we look at listed real estate in the US since 1988, whenever prices have been at a premium to NAV, direct real estate appreciated 96% of the time in the following 12 months,” says Maydew.

 

Globally, listed real estate is currently trading at a discount to NAV. The biggest discounts are in Asia, with the US and the UK markets also trading at a discount. Australian Reits are trading at a slight premium, with larger premiums ascribed to Continental Europe and the Japanese Reit market.    

 

Maydew adds: “In individual markets where listed real estate is trading at a discount to NAV, the best management teams are taking advantage of strong pricing in direct real estate markets, selling on-core assets and utilizing the proceeds to either de-lever balance sheets or shrink their equity base by returning capital to investors.”

 

 

 

 

“More global investors are allocating to listed real estate and they are hungry for knowledge and insights about the asset class,” he adds.