- As investors’ allocations to private real estate increase, many have sought to diversify holdings globally. Some have turned to pan-regional funds as a way to construct diversified exposure quickly.
- As of December 2020, unlisted private real estate funds comprised only 19% of the institutional real estate market in Asia-Pacific. Within the segment, the market for pan-regional, quarterly valued funds was a miniscule 1%.
- Appropriate peer-group benchmarks can offer insight into the performance measurement and attribution of such funds versus broad-market property indexes, given significant differences in exposures.
As investors have increased exposure to private real estate, many have also sought to diversify their holdings internationally,1 with some turning to pan-regional investment vehicles, helping investors quickly gain diversified international exposure. Such pan-regional, core, open-end funds are long established in the U.S. and are developing rapidly in Europe, but they remain nascent in Asia-Pacific.
Such funds’ exposures can be significantly different from the market at large, which consists of assets held in a variety of investment vehicles by a range of managers and investors with diverse investment objectives and strategic focus. Focused peer-group benchmarks can be useful for investors to gauge the performance of their diversified fund investments against a competitive set of vehicles with similar aims and capabilities.
Different Players in Asia-Pacific
In research to support our recent report on real estate market size, we offered new insight into the split between investment-vehicle types across the institutionally managed real estate market. The exhibit below shows how unlisted real estate funds held a smaller proportion of real estate in Asia-Pacific than they did in both Europe and North America. Listed entities dominated the Asia-Pacific market, holding nearly 60% of assets by gross asset value, as of the end of 2020.
Unlisted Vehicles Are Less Significant Constituents of the Asia-Pacific Property Market
Size of funds and market are calculated based on gross asset value/assets under management of holdings. Source: MSCI Real Estate.
In aggregate, not only are unlisted vehicles a smaller proportion of the respective institutional real estate markets; open-end, pan-regional funds that offer the transparency of quarterly valuation are even more rare. This latter group comprises only 4% of unlisted vehicles, or less than 1% of the entire market. The majority of funds in Asia-Pacific are closed-end, have less frequent valuation regimes or are not diversified across national markets.
In contrast, in North America, unlisted funds make up 34% of the institutional market; and within this segment, nearly a third (or 10% of the overall market) are open-end, diversified, core equity (ODCE) funds. The North American region is dominated by the U.S. and Canadian property markets, however, and the ODCE-style funds in this region are primarily country-specific; pan-regional investing is not a pain point for investors in this region. Nor is it needed as the two countries are extremely large and diversified, with many gateway markets in one currency. This is reflected by the high proportion of domestic-transaction activity in North America versus Europe and Asia-Pacific.
In Europe, investing across the region is more complex, driven by currency risk and variations in taxes, market practices and legal requirements. Even so, there are significantly higher levels of cross-border transaction activity. Unlisted vehicles in total make up a larger percentage (39%) of the European market than in North America or Asia-Pacific, but of this, pan-regional ODCE-style funds are less significant, representing only 5% of funds (or 2% of the overall market), despite the higher proportion of cross-broader transactional activity.
Pan-Regional ODCE Funds Are an Even Smaller Slice of the Asia-Pacific Market
Size of funds and market (expressed in %) is calculated based on gross asset value/assets under management of holdings. Source: MSCI Real Estate.
North America Is a Relatively Domestic Transactional Market
*U.S. and Canada only. Source: Real Capital Analytics.
With pan-regional ODCE-style funds comprising a small percentage of the overall market, and with the overall market consisting of a variety of diverse investment-vehicle types, the potential for a mismatch of risk exposures between such portfolios and broad, market-size-weighted property indexes increases. The exhibit below illustrates this by comparing the geographical exposure of MSCI pan-regional fund indexes against those of the broader-market property indexes, which are weighted by market size rather than the aggregate country exposures of the underlying portfolios, as is the case with the fund benchmarks.
Exposures of Pan-Regional Funds Can Vary Substantially from the Broader Market
Source: MSCI Real Estate.
The geographical weightings of the MSCI Europe Annual Property Index and MSCI Pan-European Quarterly Property Fund Index are broadly similar, but the latter has noticeably lower exposure to the U.K. and Nordic countries with conversely higher exposures to Germany, Benelux and Southern Europe. This may be partly driven by certain funds investing only in the eurozone to reduce complication with currency risk management. We see a similar difference in Asia-Pacific. While exposure to Australia and Japan is broadly similar, the MSCI/APREA Pan-Asia Quarterly Property Fund Index has significantly higher exposure to Korea at the expense of exposure to the “Other” category — which, in the MSCI Asia Pacific Annual Property Index, is chiefly composed of China, Hong Kong and Singapore.2
The Importance of Benchmark Alignment
While broad-market property indexes are very useful to gauge a portfolio’s underlying property performance against a broad measure of the investment opportunity set, more focused peer-group benchmarks allow comparison with a competitive set of funds competing for capital from investors. These have been more aligned from a strategic point of view, but also in their provision of liquidity and frequent reporting of both fund- and property-level performance. In the case of core, open-end, pan-regional real estate fund investing — especially in Europe and Asia-Pacific — such peer groups can be small in number, but this focus brings relevance. Tracking both property-level and fund-level returns, and reconciling the two, helps investors and their managers understand the complex variety of return drivers that impact such pan-regional funds, from geographic and property-type exposure to leverage, currency and fees.
1“2020 Institutional Real Estate Allocations Monitor.” Hodes Weill & Associates.
2The “Other” category cannot be broken out in the Pan-Asia Quarterly Property Fund Index for confidentiality reasons.