Aberdeen Property Investors - Aberdeen Asset Management

Operations
The value chain – how value is created
In today’s more demanding investment
climate the difference between skilled
and less skilled investment managers
will become increasingly apparent, and
investors will need to be even more
careful in choosing managers they
can trust.
A changing market environment
Over recent years, more and more investors have come to
realise the benefits of property. When credit was readily and
cheaply available, investment in property benefited from a
positive yield gap. As a consequence the yields on property
gradually moved towards the financing cost. At the same
time, with few exceptions occupier markets were generating
sluggish to moderate rental growth. Despite modest rental
growth, property returns were very good as a result of
compressing yields. Yield compression affected property
markets widely and explains why it has been relatively easy
to earn good returns from property.
As the availability of credit has decreased and the pricing
of risk has moved out, this equation is changing. The market
effect stemming from a broad re-pricing of the asset class is
at an end. From now on, returns to property will not be driven
by yield compression but will have to be generated from the
income side.
Moving from beta to alpha
The re-pricing of property is a fact – as it is for other asset
classes – and is a function of the increased transparency and
accessibility of property as well as a greater understanding
of its potential and limitations. This re-pricing is also a
consequence of property’s integration with the wider financial
markets and its development as an accessible asset class at
an international level. Thus, the strong performance of
property in the recent past has been driven by underlying
structural market factors: i.e. strong beta. The difference
between skilled and not so skilled managers (alpha) has been
relatively small.
As the effect of integration – both within the property
investment markets and with the wider financial markets –
loses momentum, the investment manager’s skill in adding
value will grow in importance. The ability to improve cash
flows from property will be crucial, and this will increase the
differential between managers and their performance.
How to create value
We strongly believe that property will continue to offer value
to investors, but that this value will have to be earned through
intelligent and hard work. Creating investor value begins with
a robust, proven investment and asset management process:
one that Aberdeen has developed and refined over many years.
It is supported by our top-class research capability and can be
applied consistently to all property sectors and extended to
new countries, regions and cities.
The three disciplines
Allocation Selection Management
Investment
strategy
Forecasts
and relative
pricing
Investment
plan
Portfolio
analysis
Asset
selection
Transactions
Holding
strategy
Investment
management
Cost
optimisation
Follow up
Source: Aberdeen Property Investors, Investment strategy
8 Aberdeen Property Investors 2007