The role of diversification in real estate was tested by the global financial crisis, when markets across the world suffered. A decade on, with asset values at record highs, a panel debate at Expo Real in Munich was well timed
Diversification is important, but pursuing the right investment strategies and having an understanding of market cycles and structural trends are even more important, delegates at Expo Real heard during a panel session moderated by 91传媒在线 editor Richard Lowe.
Commerz Real invests all over the world and this 鈥渟trategically wise decision鈥� enables the German real estate fund manager to invest at all times in different markets, CEO Andreas Muschter said. 鈥淭he strategy for Commerz Real is to diversify by country and by the use.鈥�
He cited examples of shifting from office into hospitality and into retail or even a complete conversion of an asset for a different use. 鈥淲e鈥檝e even seen office buildings being turned into residential, which was impossible 10 years ago in Frankfurt,鈥� he said.
David Skinner, managing director of real estate strategy and fund management at , provided a slightly different perspective. The fund management arm of UK insurer Aviva found itself 鈥渕assively over-diversified鈥�, with, for example, investments in 57 office markets in the UK alone, he said. 鈥淲e ended up consolidating into somewhere around five office markets. We did something similar in retail and logistics markets.鈥�
Skinner said Aviva Investors believes there is a very high correlation between national office, retail and industrial markets, and therefore the 鈥渂enefit of having a large number across various markets is overstated鈥�.
For this reason, the company鈥檚 strategy today is to be a big player in fewer markets and forge deep relationships with municipalities, local authorities and planning regimes. 鈥淭his information advantage far outweighs the marginal benefit of being spread across geographies,鈥� Skinner said.
鈥淲e don鈥檛 think of diversification in terms of geography, but rather [across different characteristics] in terms of the underlying tenants and business activity, building quality and lease length, and making sure we don鈥檛 have too many concentrations of unexpired leases at any point in time.
鈥淪o the preference is for a big presence in fewer markets and diversifying across different characteristics.鈥�
Kiran Patel, CIO of , said there was recognition of the need to diversify, but he questioned how it can be achieved in a meaningful way. 鈥淒iversification in itself comes at a price鈥�, he said. 鈥淚t is not free鈥�, and it requires skills of execution.
鈥淲e do see the demand for a global allocation across the board, but people are mindful of where they are in the cycle today, so it doesn鈥檛 happen immediately.鈥�
For example, there is a reluctance to invest in the US today because of the perception that the US is ahead in the cycle, he said, while 鈥渞etail as a sector has headwinds鈥�.
Patel added: 鈥淪o it is a pragmatic approach, but it can take you years to achieve your diversified portfolio.鈥�
Managing director and head of transactions at Dominik Brambring said diversification for the sake of it will only give investors, at best, benchmark returns.
You need to diversify, he said, but 鈥渇irst of all, you should have a strategy in mind that is focused on global megatrends, sector megatrends, regional trends, and that鈥檚 what we are doing and that鈥檚 our first objective鈥�.
Diversification should not preclude the ability to invest in different markets at different points in their cycles. 鈥淭here are limits to diversification and I think you should focus on your strategies first and then diversify,鈥� he said.
The panelists were also asked if they could build defensive qualities into real estate portfolios at a time when asset prices are at record highs.
Patel said investors could start looking at how to secure low-volatility cash flows and focus on things resilient to downturns.
Investing in real estate debt is another way of diversifying, said Patel, while also providing some downside protection at the late-stage of the market cycle.
is also sticking to major markets. 鈥淲e are not going anywhere near the secondary, tertiary-type locations; we are staying in the main markets and will accept the lowering of returns but diversify through other means,鈥� he said.
Skinner agreed and said Aviva investors was 鈥減ositioning our portfolio defensively in a number of ways to reflect the fact that we are at a more matured stage in the cycle鈥�.
The company had sold non-core assets during the past three years. 鈥淸It] would be a surprise for many people to understand that we sold the best part of 500 assets in the last three years鈥�, Skinner said.
The current strategy focuses on durable assets that will perform well throughout the cycle, can be leased in weaker market conditions and are future-proofed, he said.
For Muschter, the threat is disruption caused by digitisation and climate change. 鈥淚 think we shouldn鈥檛 underestimate both of these megatrends,鈥� he said. 鈥淥ur tenants our users are changing.鈥�
He said collaboration, co-working and data were also big issues. 鈥淲e need to do more than just present a building which is capable of having tables and chairs.鈥�
The panel was asked whether the growing interest in diversified, pan-European core real estate funds could one day match the multi-billion-dollar market in the US.
鈥淲e are lacking the size, liquidity and benchmark,鈥� said Brambring. 鈥滱 lot of homework needs to be done to offer a truly diversified open-ended fund in Europe.鈥�
The open-ended fund industry in the US is more mature in the US, said Skinner. 鈥淲hen you come to Europe, you are dealing with [a] high level of diversity鈥� differences in regulatory regimes across countries [and] tax treatments 鈥� that鈥檚 a lot of complexity,鈥� he said.
Patel said: 鈥淭he open-ended fund model has benefits, but you are far away from what the US has done. You鈥檝e still got decades to go.鈥�
There was also a recognition that it was difficult to invest in the UK today, with so much uncertainty ahead of the country鈥檚 planned departure from the EU next year.
On the subject of Brexit, Skinner said 鈥渋t is fair to say both domestic and international investors are cautious about investing in the UK, but high-quality assets continue to attract interest from investors.鈥�
Patel said the UK is attracting Asian investors, but they are investing for different reasons. European institutional money, he said, is more likely to wait and see.
Bambring said needed more certainty on the outcome of Brexit before investing. 鈥淲e are in a wait-and see-mode, despite the influx of Asian money into the UK,鈥� he said. 鈥淏ut there might be some opportunities, so we鈥檒l definitely be monitoring it.鈥�
Muschter said Commerz Real would like to invest in London, but this would only be possible if pricing came down.
