In the 10 years since the global financial crisis, Europe’s real estate securities market has evolved into a more diverse and investable asset class, with access to new and specialized property types coinciding with a shift toward more efficient business models and management practices. Yet we find that many investors underestimate the listed property market’s scale and sophistication despite its track record of superior returns relative to private real estate.
For European investors allocated to domestic property funds, history suggests that adding an actively managed portfolio of real estate securities may enhance long-term performance, while helping to diversify risk.
A Large, Highly Diverse Market
Since 2008, the European listed real estate market has grown from €174 billion to €441 billion, benefiting from increasing liquidity and recognition among institutional investors. New niche sectors and increasing specialization mean that long-term growth opportunities now exist well beyond the core retail, office and residential sectors. Property companies are also generally smarter about managing risks, raising capital and creating shareholder value. We believe these developments make listed property companies far more resilient than in years past and are central to their expected long-term success. Investors who cling to the old view of the public property market as just another equity bucket run the risk of being left behind.
Compelling Investment Characteristics
Investors across Europe have historically achieved better results with listed real estate than private. Since 2010, the European listed market has produced a 9.5% annualized return, compared with a 7.6% return for private real estate. Listed securities can also provide attractive income, with current yields considerably higher than those available from 10-year sovereign paper, nearly €12 trillion of which have negative yields.
With a larger listed universe comes increased liquidity and short-term volatility. We hear arguments that real estate securities are more like stocks than real estate. We strongly disagree—provided investors have a longer-term investment horizon. While equity market correlations can be high in the short term, public real estate more closely resembles private property for those who invest with a three-year or longer investment horizon. Moreover, the higher short-term volatility within the less volatile underlying real estate asset class can benefit active managers through relative value inefficiencies.
A Complement to Private Real Estate
Our analysis shows that a 50/50 mix of European listed and private real estate would have historically delivered better returns than a private allocation alone. The listed real estate market can offer distinct advantages over private investments through geographic diversity, daily liquidity and greater flexibility to adjust to tactical opportunities across sectors and geographies. The geographic diversity of listed real estate provides access to different property cycles and economic trends, allowing investors to capitalize on local opportunities without being overly exposed to any one market. At the same time, greater liquidity could potentially benefit investors in the case of unexpected market erosion or geopolitical events.
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