Part B

• Macro: interest rates, inflation, GDP affect cap rates, debt costs, demand

  • Example: Falling interest rates after the 1992 ERM exit drove a strong real estate recovery across both listed and unlisted vehicles.

• Sector: Returns depend on asset class.

  • Example: Since 2015, industrial/logistics outperformed retail and office due to the rise of e-commerce and supply chain restructuring.

• Geographic exposure: Markets respond differently based on liquidity and policy.

  • Example: After the GFC, US REITs rebounded faster than European peers due to earlier monetary easing and stronger capital markets.

• Manager skill: Alpha is generated through strategic leasing, development, and capital recycling.

• Traded in public markets: Priced daily; highly sensitive to investor sentiment and forward expectations.

• High volatility: Reacts sharply to interest rate movements, macro shifts, and equity market trends.

  • Example: During the 2007–2009 GFC, listed REITs fell by over 60% within months, well before unlisted NAVs were marked down.

• Cycle leadership: leads the cycle by 6–12 months.

  • Example: In the 2009–2015 QE recovery, listed RE rebounded quickly due to low interest rates and yield compression.

• NAV deviations: Share price often diverges from NAV due to sentiment, liquidity, and risk perception

• Liquidity premium/discount: Public trading allows rapid entry/exit but can exaggerate downside

• Appraisal-based valuation: lagged NAV updates

  • Example: In COVID-19 (2020), NAVs in unlisted funds declined slowly despite sharp declines in public markets.

• Valuation lag: Delays adjustment in downturns, potentially misleading investors during crises

• Lower volatility but can mask real-time risk

• Leverage: higher in value-add and opportunistic strategies; magnify both gains and losses.

• Fee drag: layered management & performance fees

• Liquidity risk: Capital is locked in; redemptions can be frozen during stress.

  • Example: In 2020, several UK open-ended property funds suspended redemptions due to pricing uncertainty and mismatched liquidity.

• Cyclical drivers: Short-term factors such as interest rate shocks, pandemics, and financial crises.

  • Examples:

    • GFC: Caused severe repricing in REITs.

    • COVID-19: Triggered immediate market corrections in listed RE.

• Structural drivers: Long-term shifts affecting sector viability and asset pricing.

  • Examples:

    • E-commerce → long-term uplift in logistics.

    • Hybrid working → downward pressure on office demand.

    • ESG & regulatory pressure → green buildings gain value; brown assets face discounts.

• Listed RE tends to adjust faster to both structural and cyclical change due to capital market exposure and investor pressure.

• Asset type: prime vs secondary

• Lease profiles: long stable vs short cyclical

• Leverage: from <30% to >60%

• Business plan: stable income vs development

• Return objectives: absolute vs risk-adjusted

1. Core: prime, low leverage (<30%), 6–8% IRR

2. Core Plus: moderate repositioning, ~30–40% leverage, ~8–10% IRR

3. Value Add: active asset mgmt, 10–14% IRR, 40–60% leverage

4. Opportunistic: dev/distressed, >14% IRR, high leverage

• Strategy Requires Illiquidity – Vehicle is Liquid

  • Example: Development strategy housed in a listed REIT

  • Problem: Public investors expect income and stability; mismatch leads to price volatility, and investor exits

• Strategy Requires Control – Vehicle is Pooled or Passive

  • Example: Opportunistic or Value Add strategy in a blind pool fund

  • Problem: Investors lack asset-level decision rights; governance issues arise

• Long-Term Strategy – Vehicle Has Short-Term Capital

  • Example: Core real estate in a closed-end 7-year fund

  • Problem: Forced exits at suboptimal pricing

• Complex Strategy – Vehicle has Retail Investors (Privatanleger)

  • Example: ESG repositioning in an open-ended daily-dealing retail fund

  • Problem: Misunderstood risk; potential redemption mismatch (e.g. UK open-ended fund suspensions)

• Match structure to strategy (REIT for stable income, closed-end for dev)

• Gates or lock-ups in open-ended funds

• Hybrid models: semi-liquid structures

• Transparency & investor education

• Secondary market development

• Consider:

  • Return target: income vs growth

  • Risk appetite: core vs opportunistic

  • Liquidity: daily dealing vs long lock-up

  • Regulation: Solvency II, fair value rules

• Tailor mix of listed/unlisted vehicles

Listed Vehicles (e.g. REITs, Listed Property Companies)

• Advantages:

  • Daily liquidity and transparent pricing.

  • Benchmarkable (e.g. FTSE EPRA NAREIT indices).

  • Easier diversification across sectors/regions.

  • Suitable for tactical asset allocation and shorter-term mandates

• Risks:

  • Higher volatility and equity market correlation.

  • Share price reflects sentiment, not underlying asset value.

  • Potential NAV discount/premium can distort real estate fundamentals.

Unlisted Vehicles (e.g. Core Funds, Value Add Funds)

• Advantages:

  • Access to specific strategies (e.g. urban logistics, refurbishments).

  • Greater control (e.g. governance rights in club deals).

  • Lower short-term volatility.

• Risks:

  • Illiquidity and valuation lag.

  • Higher fees and complex structures.

  • Complexity in vehicle governance and reporting.

• Blend listed and unlisted:

  • Listed for tactical shifts, liquidity, and diversification.

  • Unlisted for income stability, core assets, or thematic exposure.

• Allocate by region, sector, and vintage year to diversify risk.

• Use scenario modelling to test downside resilience (e.g. rising rates, recession).

• Consider cost efficiency, co-investment alignment, and risk-adjusted returns.

1. Financial: rental income, costs, interest, net debt, LTV

2. Valuation:

   • Listed → P/NAV, EPS multiples, yield spreads

   • Unlisted → IRRs, appraised NAV, fee layers

3. Scenario testing and peer comparisons

Capital Structure and Liquidity Profile

• Assess debt structure, leverage, maturity profile, and hedging policies

• For listed companies: Consider public equity issuance capacity and shareholder liquidity

• For unlisted vehicles: Examine commitment terms, lock-up periods, and secondary liquidity constraints

1. Strategic focus: income-driven (core) vs growth-oriented (development/value add) vs hybrid. Is it a REIT, developer, or investor platform?

2. Sector allocation: logistics, office, retail, residential, or alternatives. Watch for thematic tilts (e.g. life sciences).

3. Geographic exposure: domestic vs international; concentration vs diversification.

4. Pipeline: developments, acquisitions/disposals, and capital deployment schedule.

5. Asset quality: tenant diversification, lease length, vacancy, ESG standards, retrofit needs.

6. Track record: peer-relative performance, consistency, stability of earnings and NAV growth.

7. Context: global positioning, sector leadership, innovation, benchmark relevance.

8. Unlisted funds: assess governance, business plan (buy-and-hold, repositioning, opportunistic), and investor representation.

• ESG: climate risk, carbon targets, GRESB, Net Zero strategy

• Risk: interest cover, debt maturity, tenant quality

• Presentation:

  • Sell side: short-term calls, target prices

  • Buy side: internal weighting, scenario analysis

  • Catalysts: major lease, disposal, new CEO

  • Consensus: average analyst sentiment, discount levels

• Leverage: high leverage → limit dev risk, short debt → refi pressure

• Ownership: activist vs stable shareholder base → short-term focus?

• Listing status: demands quarterly transparency, valuation discount/premium can reshape strategy

• Cost of capital: equity vs debt shapes acquisition & disposal decisions

• Environmental: carbon targets, EPC ratings, retrofits, TCFD

• Social: tenant retention, community impact, D&I metrics

• Governance: board structure, pay, GRESB, UN PRI

• Green bonds or sustainability-linked loans as signals

• Specialist Aggregator: builds scale in a niche, e.g. Tritax Big Box

• Specialist Major: large, top-quality in a single sector, e.g. Derwent London

• Investment Stylist: satisfies a specific investor need (inflation, secure income), e.g. Supermarket REIT

• Beta Play: diversified, general sector exposure, e.g. AEW UK REIT

• Adaptor: evolves from legacy sector to new (Cofinimmo: offices to healthcare)

• Specialist Aggregator: aims to trade at a premium to NAV to issue equity

• Specialist Major: maintain leadership, trade at premium to peer group

• Stylist: provide bond-like returns, focus on dividend vs equities

• Beta: produce stable total return, often measured vs IPD/MSCI

• Adaptor: pivot to growth areas, beat old single-sector peers