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Levelling the Field: How Kempen integrates listed and non-listed real estate investment

13 January 2020
Real Estate
Todor, how do you combine the analysis of listed and non-listed real estate investments? 
Both listed and non-listed real estate ultimately represent investment in physical real estate. The distinction between them often is just the legal wrapper of the real estate portfolios, however the underlying investment in these structures consists of physical buildings that can be part of both listed or non-listed structures. Often listed companies trade assets with non-listed funds and vice versa. As a result, we see that the value drivers of real estate are the quality of physical location, the property itself, and the quality of the tenant occupying the building. By identifying these key characteristics we are able to identify nuances between the assets irrespective of their legal structure.

What are the difference between ‘listed’ and ‘non-listed’?

You can transact listed real estate shares daily. That means that investors can see how much the market values the investment. However non-listed funds are open only to professional buyers and sellers and prices are based on quarterly appraisal values. This pricing difference means that comparing listed and nonlisted real estate is not a straightforward process.

What are the challenges in approaching real estate investing in this way?
For listed instruments one can obtain exposure instantly on the stock exchange, whereas nonlisted investments trade quarterly in private non-homogeneous structures, and therefore the time to get exposure to such real estate is longer. This difference in speed of execution poses implementation challenges when listed and non-listed are integrated together. In addition, the two structures have different levels of transparency. For example on the listed structure you are obliged to provide information to all investors and it is publicly available. However, non-listed funds disclose information only to the investors in the fund. When analysing them we want full transparency of all possible investments, not only the fund we are invested in. At Kempen we have a strong network through which we can access knowledge about those non-listed funds, and we are also active in many industry initiatives. For example INREV (European Association for Investors in Non-Listed Real Estate) facilitates transparency and uniform data distribution on the non-listed side. This improves transparency of non-listed funds and makes the integration of listed and non-listed possible.

A logical combination?
Usually the industry sees listed and non-listed real estate investments as two separate asset classes and separates them in terms of investment analysis. We at Kempen see that what ultimately drives value for our clients is:

 The quality of the underlying real estate,
 The management team that operates the assets,
 How the structure is financed and
 How the structure is governed.

This is ultimately the same for both listed and non-listed real estate structures and thus it makes perfect sense to integrate them. The challenge of difference in valuation methodology discussed earlier, related to the implementation, can also pose an opportunity to create value. If you have a forward-looking view you can generate added value for your clients by efficient allocation over listed and non-listed alternatives as prices of the two can differ substantially. The industry values real estate on comparable transactions that occurred in the recent past and therefore they are backward-looking. Our investment approach of applying data allows us to have an unbiased forward-looking long-term view on the market, and we are able to select the best real estate investment for our clients.

Integrated approach
As we found in the white paper Listed and nonlisted real estate investment: why combine the two?, as the investment horizon lengthens, correlation between the equity market and listed real estate decreases, whilst the correlation of listed and non-listed real estate increases. In our team we apply the same investment framework to the two structures and we are able to identify quality characteristics unique to the underlying real estate, and to trade on those differences. This creates an integrated approach suitable for some of our clients. Real estate is a market that inherently lacks transparency. By applying the same data approach to both listed and non-listed real estate investments, we are able to increase our insights in the real estate market and improve our decision making. This way we are able to avoid personal biases and to objectify the investment decision.

 

Source: EPRA Monthly Statistical Bulletin Dec 2015, MSCI 2016.

This infographic is for information purposes only and provides insufficient information fora n investment decision. Kempen Capital Management N.V. (Kempen) is licensed as a manager of AIF’s and UCITS and to provide investment services and is subject to supervision by the Autoriteit Financiële Markten (AFM). Amsterdam, October 2017.

This article has been published in Kempen Insight- October 2019

Disclaimer
Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

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Thomas van der Meij
Jags Walia
Todor Ristov