Direct and Indirect Investment for International Diversification
Direct and Indirect Investment for International Diversification
Direct and Indirect Investment for International Diversification
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<strong>Direct</strong> <strong>and</strong> <strong>Indirect</strong> <strong>Investment</strong> <strong>for</strong><br />
<strong>International</strong> <strong>Diversification</strong><br />
Matthew Ryall<br />
Zurich - 24 th March 2006
Agenda<br />
• The need <strong>for</strong> cross border diversification<br />
• The diversification challenge<br />
• How to diversify direct / indirect
Traditional Institutional Property <strong>Investment</strong><br />
• Home region/country<br />
• Offices<br />
• Act as a portfolio diversifier <strong>for</strong> <strong>International</strong> equities/bonds<br />
“Cross border investment has traditionally been a mistake”
Why cross border<br />
• Higher returns<br />
• <strong>Diversification</strong><br />
• Safe haven<br />
• Lack of domestic opportunity<br />
• Matching liabilities<br />
• Environmental / Altitude
IPD Returns<br />
UK<br />
Portugal<br />
Spain<br />
France<br />
Irel<strong>and</strong><br />
IPD Europe<br />
Norway<br />
Netherl<strong>and</strong><br />
Denmark<br />
Finl<strong>and</strong><br />
Switzerl<strong>and</strong><br />
Sweden<br />
Germany<br />
Source: IPD Europe<br />
0 2 4 6 8 10 12 14<br />
Total Return pa (% ) Local currency<br />
UK<br />
Portugal<br />
Spain<br />
France<br />
I l d
Greater Choice : Major European Cities by GVA<br />
Rotterdam<br />
Edinburgh<br />
Birmingham<br />
London<br />
Leeds<br />
Manchester<br />
Zurich<br />
Geneva<br />
Stockholm<br />
Lisbon<br />
Warsaw<br />
Oslo<br />
Utrecht<br />
Glasgow Brussels<br />
Frankfurt<br />
Stuttgart<br />
Munich<br />
Berlin<br />
Hamburg<br />
Düsseldorf<br />
Copenhagen<br />
Madrid<br />
Amsterdam<br />
Barcelona<br />
Rome<br />
Bologna<br />
Valencia<br />
Seville<br />
Helsinki<br />
Milan<br />
Turin<br />
Dublin<br />
Budapest<br />
Paris<br />
Lyon<br />
Marseille<br />
Bordeaux<br />
Lille
Property <strong>Investment</strong> : Increasingly Cross Border<br />
$bn<br />
600<br />
500<br />
400<br />
300<br />
200<br />
North America<br />
Europe<br />
North America<br />
Domestic<br />
100<br />
0<br />
2003 2004 2005<br />
Source: Jones Lang LaSalle
Challenges<br />
• Finding trustworthy local partners/operators<br />
• Currency <strong>and</strong> political risk<br />
• Tax drag (in some markets)<br />
• Many countries have lower transparency<br />
• Lack of global benchmarks (except securities)<br />
• Communicating across time zones <strong>and</strong> cultures<br />
• Volatility of returns<br />
Cross-border real estate can compensate investors <strong>for</strong> these costs <strong>and</strong> risks
How to invest globally <strong>for</strong> diversification<br />
Take a step-by-step approach to international:<br />
1. Tax<br />
2. Fund of Funds / <strong>International</strong> global real estate securities<br />
3. Add private, indirect funds<br />
4. Add JVs <strong>and</strong> partnerships in transparent markets<br />
5. The ultimate goal is NOT a direct cross-border portfolio of buildings<br />
6. Put real estate into a currency overlay program
Global framework: style criteria <strong>for</strong> selecting markets<br />
<strong>International</strong><br />
Objective<br />
Target<br />
Return<br />
Fundamentals<br />
Relative Importance<br />
Capital<br />
Market Gap Transparency<br />
<strong>Diversification</strong><br />
Costs<br />
(Tax, currency<br />
& legal)<br />
Core<br />
6% - 9%<br />
Value Added<br />
10% - 15%<br />
Opportunistic 15%+<br />
Source: LaSalle <strong>Investment</strong> Management
<strong>Direct</strong> vs. <strong>Indirect</strong>
The UK Property Market Universe<br />
Listed<br />
AIM<br />
Pooled<br />
Property<br />
Funds<br />
Listed<br />
Offshore<br />
<strong>Direct</strong><br />
Private<br />
Funds<br />
Derivatives<br />
Source: LaSalle <strong>Investment</strong> Management
Property Risk/Return profile<br />
Volatility of returns<br />
over benchmark<br />
<strong>Direct</strong> Asset<br />
REITs<br />
Specialist Funds<br />
Balanced Funds<br />
Property Derivatives<br />
Potential return over the benchmark<br />
Source: LaSalle <strong>Investment</strong> Management
Past Per<strong>for</strong>mance – Alternative <strong>for</strong>ms of Real Estate<br />
100.00%<br />
80.00%<br />
60.00%<br />
40.00%<br />
20.00%<br />
0.00%<br />
-20.00%<br />
1990<br />
1991<br />
1992<br />
1993<br />
1994<br />
1995<br />
1996<br />
1997<br />
1998<br />
1999<br />
2000<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
-40.00%<br />
Balanced Funds Index FTSE Real Estate Index <strong>Direct</strong> Property IPD
Option 1: <strong>Direct</strong> property ownership<br />
Products<br />
• Domestic<br />
• Collection of national portfolios<br />
• Regional portfolios<br />
• Global portfolio<br />
Positives<br />
• Maximum diversification benefits<br />
• Maximise control<br />
• National benchmarks<br />
Negatives<br />
• Scale, specific risk / portfolio size<br />
• No global or regional benchmarks<br />
• Low liquidity<br />
• Management<br />
• Administration<br />
• Tax <strong>and</strong> legal
Option 2: Unlisted/private indirect property funds<br />
Global funds<br />
• <strong>Investment</strong> banks<br />
• Opportunistic<br />
• Highly leveraged<br />
• No control over regional weights<br />
Targeted funds<br />
• Specialist managers/<br />
<strong>Investment</strong> banks<br />
• Open or closed end<br />
• Sector/country/regions<br />
• Varying risk profiles<br />
• Availability<br />
JVs/ Clubs<br />
• Specialist managers<br />
• Usually closed end<br />
• Varying risk profiles<br />
Positives<br />
Negatives<br />
• <strong>Diversification</strong> retained<br />
• Utilise expert management<br />
• Private equity model<br />
• Low liquidity <strong>and</strong> control<br />
• Lack of benchmarks<br />
• Global funds rarely<br />
balanced by region<br />
Fund of funds or individual investments
Option 3: Listed/public property company securities<br />
“REITs”<br />
Conventional listed corporations<br />
Real Estate <strong>Investment</strong> Trusts<br />
• Property owning vehicle<br />
• Lower dividend yield<br />
• Distributes 80% - 100% of taxable income<br />
• High dividend yield<br />
• Limited ability to generate reserves <strong>for</strong> investment<br />
• Country opportunities<br />
‣ North America – US <strong>and</strong> Canada<br />
‣Europe – Belgium, Netherl<strong>and</strong>s, France, shortly UK<br />
<strong>and</strong> Germany<br />
‣Australasia – Australia, Singapore, Japan, Hong Kong<br />
• Higher correlation with general equities<br />
Positives<br />
• Established benchmarks<br />
• Liquidity<br />
• Transparency<br />
• <strong>Investment</strong> period: immediate<br />
Negatives<br />
• Influence of general equity markets<br />
• Relatively immature market in some<br />
countries
Australia<br />
China<br />
Benchmark Weightings<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
US<br />
Canada<br />
Mexico<br />
Brazil<br />
Germany<br />
France<br />
Italy<br />
Spain<br />
Netherl<strong>and</strong>s<br />
Sweden<br />
UK<br />
Switzerl<strong>and</strong><br />
Japan<br />
GDP Listed Real Estate
Correlation of Global Asset Class Returns<br />
Correlation of Total Returns (1986-2004), US Dollar<br />
Global Stocks<br />
Global Bonds<br />
Global <strong>Indirect</strong><br />
Real Estate<br />
Global <strong>Direct</strong><br />
Real Estate<br />
Global Stocks 1.00<br />
Global Bonds 0.19 1.00<br />
Global <strong>Indirect</strong> Real Estate 0.47 0.30 1.00<br />
Global <strong>Direct</strong> Real Estate 0.10 -0.35 0.15 1.00<br />
Sources: GPR Index, UBS Global Property Investors Index; MSCI Global Equity, JP Morgan Global Bond Index, LaSalle <strong>Investment</strong> Management
Switching Model – <strong>Indirect</strong> or <strong>Direct</strong><br />
4.0<br />
3.0<br />
IPD EY less 5-year Swap Rate (%)<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
-2.0<br />
-3.0<br />
-4.0<br />
-5.0<br />
<strong>Direct</strong> market to outper<strong>for</strong>m<br />
over following 12 months<br />
<strong>Indirect</strong> market to outper<strong>for</strong>m<br />
over following 12 months<br />
Point of indifference<br />
Oct-03 to Sept-04<br />
Oct-02 to Sept-03<br />
Oct-01 to Sept-02<br />
-6.0<br />
-6.5 -5.5 -4.5 -3.5 -2.5 -1.5<br />
FTSE Real Estate DY less IPD EY (%)<br />
Sources: Datastream, IPD
Option 4: Derivatives<br />
“Available” today<br />
• <strong>Direct</strong> Property – UK <strong>and</strong> US only<br />
• Property equities- ETF’s on<br />
EPRA/NAREIT<br />
Positives<br />
• Quick/easy/cheap to trade<br />
• Instantaneous exposure<br />
• Price transparency<br />
• Strategic or tactical use<br />
Negatives<br />
• Currently small size/ limited supply<br />
• Very limited coverage of property markets<br />
• No guarantee of roll-over<br />
• Negative per<strong>for</strong>mance relative to market after costs
Cost of Currency: Swiss Example<br />
Investors’ gain/loss of investing abroad (capital only) per annum<br />
Country of <strong>Investment</strong><br />
/ Number of Years<br />
1<br />
3<br />
5<br />
10<br />
15<br />
Eurol<strong>and</strong><br />
0.2%<br />
-0.4%<br />
0.8%<br />
0.4%<br />
1.0%<br />
USA<br />
-11.3%<br />
-9.3%<br />
-3.6%<br />
-0.2%<br />
-1.9%<br />
UK<br />
-2.9%<br />
1.6%<br />
1.3%<br />
-1.4%<br />
1.0%<br />
Source: LaSalle <strong>Investment</strong> Management; DataStream. As at 25th August 2004.
Conclusion: <strong>Direct</strong> <strong>and</strong> <strong>Indirect</strong><br />
SIZE OF FUND<br />
Derivatives<br />
Balanced Funds<br />
REITs / Fund of Funds<br />
Domestic Portfolio - <strong>Direct</strong><br />
<strong>Direct</strong><br />
Assets<br />
Specialist Funds<br />
CROSS BORDER PROPORTION
Cross-border investing – the Swiss perspective<br />
• Switzerl<strong>and</strong> has an important real estate market but returns have<br />
been low<br />
• Investors can enhance returns as well as enjoy diversification<br />
benefits by going cross-border<br />
• Real estate securities are a low risk option <strong>for</strong> diversified global<br />
exposure<br />
• Consider:<br />
– Opportunistic – Asia<br />
– Value-add – Canada, US, France<br />
– Core – global securities, UK, Germany, Netherl<strong>and</strong>s <strong>and</strong> Sweden
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