The risk and return characteristics of direct, listed, unlisted and multi-manager approaches to real estate investment

Baum, Andrew and Colley, Nicholas (2017) The risk and return characteristics of direct, listed, unlisted and multi-manager approaches to real estate investment. ABACUS. (Accepted)

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Abstract

This paper compares the risk and return characteristics of real estate investment approaches which employ varying formats of domestic real estate (direct exposure, balanced and specialist unlisted funds, a multi-manager approach and listed securities) to deliver returns relative to a UK market index. Because there is an absence of relevant published literature in this specific field, the particular aim of the research is to examine the case for the multi-manager solution to institutional real estate investment. Based on a random stochastic simulation of historic performance data from 2003 to 2012, we draw several conclusions which accord reasonably well with finance theory.
Firstly, we find that it is extremely difficult and/or costly to access or replicate direct property market returns as measured by the IPD All Property Index. The results of our analysis indicate that an investor in UK real estate expecting to receive UK direct market performance (as defined by the IPD UK All Property Index) would, on average, have been disappointed regardless of the investment approach selected. This suggests that an investor/manager setting out to deliver returns in line with the IPD index would have to demonstrate significant levels of skill.
It is estimated that over the 10 year analysis period both direct and listed investment strategies outperformed multi-manager strategies (by 121 bps and 59bps per annum respectively). However, this outperformance would have been delivered at the cost of significant tracking error against direct property benchmarks.
As expected, it is clear that multi-manager strategies were able to deliver returns that more effectively replicated a direct benchmark. However, multi-manager fees negatively impacted on returns and largely accounted for average under-performance of 0.15% against the direct benchmark. It is also clear that the number of investments or funds held in a multi-manager mandate should not impact the average return but significantly reduces the average tracking error against direct benchmarks. The range of returns and tracking errors narrows considerably as the number of underlying funds increases, reducing both risk and the opportunity to out-perform an index.

Item Type: Article
Keywords: finance
Subject(s): Finance
Date Deposited: 10 Apr 2017 10:21
Last Modified: 10 Apr 2017 10:21
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6340

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