Indirect Real Estate

• Listed Funds: REITs or REOCS (real estate operating companies), traded publicly

• Unlisted Funds: private vehicles, not traded on stock exchange (open/closed‐ended)

Main Differences

1. Liquidity

   1. Listed: Daily liquidity via stock exchanges

   2. Unlisted: Limited liquidity, depends on redemption mechanisms or fund life-end disposals

2. Valuation & Volatility

   1. Listed: Real-time pricing because traded in public markets, highly sensitive to investor sentiment and future expectations. High volatility: Reacts sharply to interest rate movements, macro shifts, and equity market trends

   2. Unlisted: Return smoothing due to appraisal-based valuations, NAV updates quarterly/semi-annually, potentially misleading investors during crises

      1. COVID-19: NAVs declined slowly while public markets had sharp declines

3. Control & Governance

   1. Listed: public reporting requirements enhance transparency, but minimal investor control

   2. Unlisted: Greater control over property strategy, but investors rely heavily on fund manager’s quality

4. Leverage & Strategy

   1. Listed: Regulated leverage (REIT rules typically cap debt ratios)

   2. Unlisted: Wide leverage flexibility depending on fund style (core-opportunistic)

5. Fees & Costs

   1. Listed: Lower entry and exit costs, similar to equity transactions

   2. Unlisted: Fee drags. Management & performance fees reduce investor returns

Advantages

• Listed: Small lot sizes and daily liquidity allow flexible portfolio management

  • Even during volatile periods (Brexit), REITs offer quick access & exit to investors

• Unlisted:

  • Closer link to direct RE fundamentals; wide style variety (core-opportunistic)

  • Low correlation to equities & bonds enhances diversification effect

  • Offers access to high-quality assets

    • Example: NREV (2019) shows institutions use unlisted funds to access specialist markets and managers

Disadvantages

• Listed: Short-term correlation with stock markets dilutes diversification benefits

  • Example: During GFC, REITs dropped >60% within months alongside equities despite underlying property fundamentals

• Unlisted: Illiquidity risk during market stress; high entry thresholds

  • E.g. After GFC & Brexit, many UK unlisted property funds stopped redemptions

Conclusion: The choice between listed and unlisted vehicles depends on investors’ liquidity needs, risk tolerance, and preference for stable property exposure versus equity-market sensitivity. Larger institutions often blend both forms to optimise their RE allocation.

• Term

  • Open-ended: Indefinite lifespan; continuous subscriptions and redemptions.

  • Closed-ended: Fixed term (typically 5-7 years) with predefined liquidation timelines

• Liquidity

  • Open-ended: Daily, monthly or quarterly subscriptions and redemptions, after initial lock-up

  • Closed-ended: Illiquid until maturity, secondary trades are possible but rare

• Investment Strategy

  • Open-ended: Focus on stable income (core / core-plus)

  • Closed-ended: Value-add & opportunistic strategies with capital appreciation targets

• Return Pattern

  • Open-ended: Steady income, lower capital gains

  • Closed-ended: J-curve effect: negative returns early, profit realised after sales

• Diversification

  • Open-ended: Broader portfolio rebalancing is possible over time

  • Closed-ended: Narrower portfolio, constrained by investment window

• Valuations

  • Open-ended: Appraisals may significantly vary from the actual realised value once sold

  • Closed-ended: Return calculated once each asset is sold (based on market value)

• Administrations

  • Open-ended:  Complex

  • Closed-ended: Relatively straightforward

• Open-ended: Legal & General’s UK Property Fund an open-ended fund that prioritises core assets with long, secure income streams

• Closed-ended: Blackstone's European Core+ fund

Introduction: Unlisted real estate funds are typically classified by “style” (core, value-add, or opportunistic), which defines their risk–return profile, property strategies, and use of leverage.

How style supports different life cycles and strategies:

• Core Funds:

  • Stabilised properties with long leases and strong tenants

  • Minimal refurbishment or repositioning needed

  • Low leverage (≤40% LTV)

  • Target steady income returns with lower risk

    • Example: Open-ended UK balanced funds (Legal & General’s UK Property Fund) focus heavily on core assets with long income

• Value-Add Funds:

  • Invest in assets needing moderate improvements, like re-leasing, refurbishments, or repositioning

  • Medium leverage (~40–60% LTV)

  • Higher management intensity to increase property values and rents.

    • Example: The Adelphi Building (2012) by Blackstone

• Opportunistic Funds:

  • Invest in developments or major turnaround projects

  • High leverage (>60% LTV) common to amplify returns

  • High risk, but potential for strong capital appreciation

    • Example: Westlight Berlin (2017–2020), full ground-up development aiming for institutional-grade office leasing

Value Enhancement Strategies:

• Core: Small lease re-gears, keeping buildings fully let

• Value-Add: Refurbishments, improving energy standards (e.g. ESG upgrades), partial expansions

• Opportunistic: Full repositioning or complete developments, lease-up strategies, re-zonings

Conclusion: Fund style shapes how managers select properties, how much risk they take, and how much debt they use. Different styles allow managers to match their portfolio strategies to investors' return targets and risk appetites.

1. Low entry barriers

   1. Example: REITs enable retail investors to invest with just a few hundred dollars, unlike direct RE where entry usually requires millions

2. Diversifies real estate specific risk quickly

   1. Example: A single REIT may hold hundreds of assets across cities or countries

3. Small lot size: Investors can easily scale their exposure up or down without needing to buy or sell entire buildings

4. Low transaction costs: Buying and selling REIT shares involves typical equity transaction fees (no high stamp duty, legal, and brokerage costs)

5. Liquidity & Divisibility: daily trading, partial share holdings.

6. Strong governance: REITs must follow strict financial reporting standards, providing investors with regular insights into performance

7. Access overseas: REITs can hold foreign assets easily.

8. Tax benefits: often enjoy tax pass-through structures, reducing tax leakage at corporate level and improving after-tax returns

9. Geared returns: many REITs use moderate leverage to enhance returns.

1. Volatility: Listed real estate vehicles can experience significant short-term price swings linked to broader stock market sentiment.

   1. Example: REITs dropped sharply alongside equities during the COVID-19 crash, even when underlying properties remained cash-flow positive

2. Inflation hedge: conflicting short-run evidence; can be overshadowed by equity market sentiment

3. Correlation with Stock Market: short-run REIT returns may track equities more than the direct property index, diluting diversification.

4. Low diversification benefits to the multi-asset portfolio if REITs behave like small-cap stocks.

5. Loss of Control: minimal direct say over property-level decisions, unlike direct ownership.

6. Different Analytical Framework: REIT pricing can reflect broad investor sentiment, not purely real estate fundamentals in the short run.