Real Estate Risk in a Multi Asset Context

Transcription

1 Real Estate Risk in a Multi Asset Context Peter Hobbs, Managing Director, IPD Jean Martin Aussant, Executive Director, MSCI 7 th May Investment Property Databank Ltd. All rights reserved. ipd.com 1

2 Agenda 1. Real Estate in Institutional Portfolios 2. Risk Management through the Investment Process 3. Real Estate Risk in a Multi Asset Class Portfolio 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 2

3 Multi asset class Allocations: 40:40:20 has Replaced 60:40 Asset Class Allocations Across Regions 38% Global 2% 19% 41% Alternatives Fixed Income Equity Cash 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Note: Based on 138 asset owners in Survey Universe. Calculated on % of assets in each category, not number of asset owners. Sources: IPD; MSCI Regional Australia USA Canada Benelux UK Other DE, AT, CH Asia Nordic 2013 Investment Property Databank Ltd. All rights reserved. ipd.com 3 % Alternatives Equity AUM ($tn) Fixed Income Cash AUM $tn

4 Real Estate is the Favoured Alternative Asset Class Alternative Allocations Across Regions Global % 30 Regional 24% 35% Real Estate Infrastructure Hedge Funds 15 21% 15% 5% Private Equity Other Note: Based on 138 asset owners in Survey Universe. Calculated on % of real estate assets in each category, not number of asset owners. Sources: IPD; MSCI 2013 Investment Property Databank Ltd. All rights reserved. ipd.com 4

5 Driven by Attractive Real Estate Investment Performance Behaviour Global asset class risk and return (3 year returns and 10 year volatility*) Notes: Volatility for global real estate (fund level) is calculated on a 5 year horizon due to the length of the time series Sources: MSCI (equities, property equities); JP Morgan 7 10 year (bonds); and IPD (asset level & fund level real estate) 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 5

6 More Capital Is Heading into Real Estate INREV: The size of the investor universe is expected to grow by an average of 27%. IPE/Invesco: Over 60% pension funds aim to increase their allocation, though a smaller number are planning a decrease. Cornell/Hodes & Weill: institutional portfolios 100 bps below the average target real estate allocation of 9.8%. APREA: Continued potential and strong momentum for increased levels of real estate in Asian pension funds 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 6

7 These Are Challenging Times for Real Estate Investors Strong weight of capital & poor governance Financial Times Article Feb Increasingly aggressive pricing Income Yields end 2013 relative to past 10 years 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 7

8 Many Investors Remember the Mistakes of the Past Cross border investment disasters by source of capital, 1970s 2010s 1970s 1980s 1990s 2000s 2010s Aggressive pricing of domestic market and strong capital inflows led to surge of activity in US and continental Europe, followed by failures Deregulation of domestic market increasing allocations to real estate and a wave of foreign activity at the top of the real estate investment cycle. Significant value declines in early-1990s North American & Japanese investors driven by strength of domestic market leading to wave of foreign investment at top of the cycle leading to significant value loss & bankruptcies Overleverage and aggressive pricing followed by massive credit-crisis leading to questions over role of real estate and tightening regulatory regimes Source: IPD 2013 Investment Property Databank Ltd. All rights reserved. ipd.com 8

9 Real Estate is a Favoured Asset Class, but it is Dripping With Issues * Objectives and execution options can create a disjointed investment process Board of Trustees/CIO Real Estate Dept Real Estate Managers Theory Allocation Strategy Implementation $ $ Reality Limited clarity on Real Estate Risks Misaligned policy benchmarks *Roger Urwin (2013) Private markets A dynamic approach to thematic investing, FT Seminar, November Cannot see impact of property specific factors Source: IPD 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 9

10 Agenda 1. Real Estate in Institutional Portfolios 2. Risk Management through the Investment Process 3. Real Estate Risk in a Multi Asset Class Portfolio 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 10

11 Real Estate Varies Significantly in Importance for Asset owners Real Estate holdings across regions % Note: Based on 138 asset owners in Survey Universe. Sources: IPD; MSCI 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 11

12 Core Dominates Investment Style, Particularly in the Nordics Allocations to Investment styles of real estate across regions Global Regional Note: Based on 138 asset owners in Survey Universe. Calculated on % of real estate assets in each category, not number of asset owners. Sources: IPD; MSCI 2013 Investment Property Databank Ltd. All rights reserved. ipd.com 12

13 Home Bias Remains but Appetite for Non Domestic is Growing Across all Markets Geographic exposure for real estate portfolios Global Regional Note: Based on 138 asset owners in Survey Universe. Calculated on % of real estate assets in each category, not number of asset owners. Sources: IPD; MSCI 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 13

14 Significant Changes are Underway, Driven by Increasingly Sophisticated Asset Owners Sophistication of approach to Real Estate risk management L E S SE R STRATEGIC ROLE OF REAL ESTATE G R E A T E R LAGGARDS THEORISTS LEADERS INDUSTRY NORM L E S S RISK MONITORING M O R E Note: Positioning of individual asset owners on two key dimensions of risk management Source: MSCI/IPD 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 14

15 Profound Changes Through the Investment Process 1. Increased Granularity of Analysis Implementation Capital Growth by WALT: USA, UK, France and Germany, 2012 Theory Reality Monitoring fund and property specific risk, and integrating with MAC Analysis Note: Based on office properties; Source: IPD Real Estate thinks like fixed income managers 30 years ago when there was little regard to investmentspecific risks. The risk team struggles to drill through to the real estate risks and boil these down to six or seven numbers. SWF, IPD/MSCI Survey Feb Investment Property Databank Ltd. All rights reserved. ipd.com 15

16 2. Benchmarking Across Global Portfolios Strategy 70% of Asset Owners Have Policy Benchmarks Theory Reality Aligning policy benchmarks with strategy and seeking to avoid style drift Note: Based on % of 110 asset owners in IPD/MSCI Survey Sources: IPD; MSCI I feel there should be a benchmark tree all the way down to help in reporting to the board and in providing discipline for the real estate teams., Nordic Pension Fund, IPD/MSCI Survey Feb Investment Property Databank Ltd. All rights reserved. ipd.com 16

17 3. Real Estate Increasingly Understood in a Multi Asset Class Context Allocation Conceptualisation of Multi asset class risk modelling Theory Reality Clarity of objectives & integration with other asset classes Note: Based on BarraOne Analytical model Source: MSCI I am on a mission to win the hearts and minds of the real estate staff in building a Risk culture. U.S. Plan Sponsor, IPD/MSCI Survey Feb Investment Property Databank Ltd. All rights reserved. ipd.com 17

18 Three Critical Requirements For Strong Risk Management Board of Trustees/CIO Real Estate Dept Real Estate Managers Allocation Strategy Implementation $ 1. Alignment of teams and processes 2. Robust Data and Transparency 3. Embedding through the organisation 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 18

19 Agenda 1. Real Estate in Institutional Portfolios 2. Risk Management through the Investment Process 3. Real Estate Risk in a Multi Asset Class Portfolio 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 19

20 Approach to Measuring Multi Asset Class Risk Asset owners measure and decompose risk Alternative assets are no longer exempt MSCI focuses on risk as standard deviation of returns Alternatives: Value at Risk, expected tail loss, etc. Portfolio variance, portfolio weights covariance matrix W 1 W 2 Var 1 Cov 12 W 1 Cov 12 Var 2 W Investment Property Databank Ltd. All rights reserved. ipd.com 20

21 Multi Asset Class Covariance: Barra Integrated Model (BIM) Decomposes volatility into fundamental sources BIM provides: The structural relationship to estimate covariance among the world s local risk factors A consistent framework for analyzing multi asset class strategies Long horizon risk forecasts (6 12 months) 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 21

22 % pa 40 Wide Variations in Real Estate Behaviour Need to be Captured in Multi Asset Class Models All property returns by country, % pa in local currency Global 8.3% Source: IPD Investment Property Databank Ltd. All rights reserved. ipd.com 22

23 Appraisal Data Needs to be Adjusted to Account for Smoothing Valuation and transaction based volatility, 10 years to end 2013 % Transaction linked index volatility Valuation based index volatility Ireland UK Norway Sweden France Netherlands Denmark Germany Switzerland Source: IPD 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 23

24 The MSCI/Barra Private Real Estate Risk Model is Driven by Private Real Estate Factors and Public Market Proxies IPD data Global coverage Factor model Property Return = Public Real Estate Pure Private Real Estate Common factors correlated with other assets Asset Specific Idiosyncratic Long term risk accounting for smooth valuations 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 24

25 Real Estate Risk in the Multi Asset Class Context: Assumptions for a major Swedish investor Illustrative allocations for modeling purposes Asset Class Allocations 10% 50% 40% Real Estate Fixed Income Equity Real Estate Geographic Allocations 10% 5% Sweden 15% Europe 70% North America Asia Pacific Office Sweden specific Real Estate Exposure Type Residential Retail Industrial Other Geography Stockholm CBD Stockholm Central Area Rest of Greater Stockholm Rest of Sweden Gothenburg Malmo Stockholm Central Area Rest of Greater Stockholm Rest of Sweden Gothenburg and Malmo Sweden Sweden Sweden 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 25

26 Understanding the Risk Contributions of Real Estate Compared with Other Asset Classes Illustrative Swedish Risk Contributions Estimated by Barra Integrated Model Asset Class Weight Stand Alone Risk Correlation Risk Contribution Fixed Income Equity Real Estate Total Fixed Income: Swedish bonds including Treasuries, Corporates and Agencies (close to the Barclays Aggregate for Sweden) Equity: Swedish Stock diversified across GICS sectors (close to the SIX Index) Real Estate: Swedish private real estate based on IPD Global Property Index allocations (keeping the same relative weights within Sweden / No leverage) 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 26

27 Risk Contributions of National (Swedish) Property Type Factors Compared with Other Asset Classes Illustrative Risk Contributions Estimated by Barra Integrated Model Asset Class Type Weight Stand Alone Risk Correlation Risk Contribution Fixed Income Equity Real Estate Office Retail Residential Industrial Hotel Other Total Investment Property Databank Ltd. All rights reserved. ipd.com 27

28 Leverage Increases Risk Equity Debt Exposure Loan/Value Leverage Risk E D D + E D/(D + E) (D + E)/E With non recourse mortgages, risk increases less than proportionally The lender bears part of the asset risk in exchange for a higher interest rate 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 28

29 The Impact of Leveraged Real Estate on Multi Asset Class Risk Asset Weight Stand Alone Risk Direct Real Estate Real Estate Funds LTV = 0 LTV = 0.5 Risk Contribution Stand Alone Risk Risk Contribution Fixed Income Public Equity Real Estate Total Investment Property Databank Ltd. All rights reserved. ipd.com 29

30 Conclusions: Tightening alignment through the investment process Real estate is becoming a more attractive asset class, and more global, but lags behind other asset classes Risk management is being tightened through the Investment Process: Allocations, Strategy, Implementation Requires better Alignment and Integration: In the role of real estate in multi asset portfolios Within the real estate exposure 2014 Investment Property Databank Ltd. All rights reserved. ipd.com 30

31 Disclaimer 2014 Investment Property Databank Ltd (IPD). All rights reserved. This information is the exclusive property of IPD. This information may not be copied, disseminated or otherwise used in any form without the prior written permission of IPD. This information is provided on an "as is" basis, and the user of this information assumes the entire risk of any use made of this information. Neither IPD nor any other party makes any express or implied warranties or representations with respect to this information (or the results to be obtained by the use thereof), and IPD hereby expressly disclaims all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall IPD or any other party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages Investment Property Databank Ltd. All rights reserved. ipd.com 31