optimal global real estate portfolio – a practical approach 17th annual eres conference milan,...
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Optimal Global Real Estate Portfolio – A Practical Approach
17th Annual ERES ConferenceMilan, June 25th 2010
Presented by:
Dr Jaroslaw Morawski, RREEF Research. Tel. +49 (69) 71704-204
2
Agenda
1. RREEF approach to a real estate investment strategy
2. Investment Universe
3. Global Allocation Analysis
3
Section I
RREEF approach to a real estate investment strategy
4
Stage 2:
Stage 3:
Stage 1:
Investment Style Geography
Risk LiquidityReturn
Investment Universe
Objectives
Universe
Strategic & Tactical Allocs
Market pre-selection
Neutral Portfolio
Strategic market allocation is conducted in three stages
Optimizations: Constraints & Risk Profiles
Allocations by Sector & Geography
…
Source: RREEF Research
5
Section II
Investment Universe
6
Global Investment Universe is Analysed In Terms of 12 Regions
UK & Ireland
Southern Europe
Nordics
CEE
North America
Mature Asia
France & Benelux
Volatile Asia
Latin America
Emerging Asia
Australia & NZ
German Speaking
Source: RREEF Research
7
Invested real estate and market maturity
The starting point for a RE “market portfolio” is the size of the investment market
0
500
1000
1500
2000
2500
3000
Uni
ted
Sta
tes
Japa
nG
erm
any
Chi
naU
nite
d K
ingd
omF
ranc
eIt
aly
Spa
inC
anad
aB
razi
lR
ussi
aS
outh
Kor
eaIn
dia
Mex
ico
Aus
tral
iaN
ethe
rland
sB
elgi
umS
witz
erla
ndS
wed
enP
olan
dT
aiw
anN
orw
ayA
ustr
iaD
enm
ark
Gre
ece
Irel
and
Fin
land
Arg
entin
aT
haila
ndH
ong
Kon
gP
ortu
gal
Cze
ch R
epub
licM
alay
sia
Sin
gapo
reC
hile
Rom
ania
Hun
gary
New
Zea
land
Total RE Stock
Invested Real Estate
US: 3,900 / 6,800 bln US$
Invested Real Estate $bn
Source: RREEF Research; DTZ 2008
Mature Asia11%
Germany11%
UK & Ireland9%
France & Benelux
7%
South Europe5%
Emerging Asia3%
Other9%
North America45%
8
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Ma
ture
Asi
a
Em
erg
ing
Asi
a
Ge
rma
nS
pe
aki
ng
Au
stra
lia
La
tinA
me
rica
So
uth
Eu
rop
e
Be
ne
lux
Fra
nce
No
rth
Am
eric
a
CE
E
No
rdic
s
UK
&Ir
ela
nd
Vo
latil
eA
sia
0%
2%
4%
6%
8%
10%
12%
14%
Invested real estate
Average investment volume 2005-08 as % of the invested stock
Real estate stock (bn€)
Investment volume as % of invested stock
But markets differ also with respect to liquidity …
Real estate stock and investment volumes 2005-2008
Source: RREEF Research; DTZ 2008
9
… and transparency
Source: Jones Lang LaSalle 2008
Jones Lang LaSalle Real Estate Transparency Index
10
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jap
an
Sw
itze
rla
nd
Italy
Ge
rma
ny
Po
rtu
ga
l
Gre
ece
Sp
ain
Au
stri
a
Fra
nce
Ne
the
rla
nd
s
No
rwa
y
Sw
ed
en
De
nm
ark
Be
lgiu
m
Fin
lan
d
Un
ited
Kin
gd
om
Ire
lan
d
Ne
w Z
ea
lan
d
Ca
na
da
Hu
ng
ary
Ru
ssia
Un
ited
Sta
tes
Au
stra
lia
So
uth
Ko
rea
Po
lan
d
Ro
ma
nia
Ta
iwa
n
Cze
ch R
ep
ub
lic
Ho
ng
Ko
ng
Arg
en
tina
Me
xico
Sin
ga
po
re
Ma
lays
ia
Th
aila
nd
Bra
zil
Ch
ile
Ind
ia
Ch
ina
Source: Global Insight March 2010
Emerging markets will remain the main drivers of the global economy
Projected average annual GDP growth 2010-2040
11
0%
2%
4%
6%
8%
10%
12%
14%
Ind
ia
Bra
zil
Ch
ina
Th
aila
nd
Ru
ssia
Arg
en
tina
Ch
ile
Me
xico
Gre
ece
Ro
ma
nia
Po
lan
d
Hu
ng
ary
Sp
ain
Cze
ch R
ep
ub
lic
Ta
iwa
n
So
uth
Ko
rea
Italy
Ma
lays
ia
De
nm
ark
Fra
nce
Be
lgiu
m
No
rwa
y
Ne
w Z
ea
lan
d
Fin
lan
d
Jap
an
Po
rtu
ga
l
Ire
lan
d
Au
stri
a
Ca
na
da
Au
stra
lia
Sw
ed
en
Sw
itze
rla
nd
Ne
the
rla
nd
s
Ge
rma
ny
Un
ited
Sta
tes
Un
ited
Kin
gd
om
Ho
ng
Ko
ng
Sin
ga
po
re
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6Share in the global GDP
Share in the global invested RE
RE-GDP Ratio (right scale)
Source: RREEF Research; Global Insight, DTZ 2009
Given the distribution of the global GDP, investment grade real estate stock can be expected to grow particularly strongly in the emerging markets
Real estate stock and investment volumes 2005-2008
12
0
2
4
6
8
10
12
14
16
18
New
Zea
land
Den
mar
k
Sw
eden
Sin
gapo
re
Sw
itzer
land
Net
herla
nds
Fin
land
Can
ada
Aus
tral
ia
Nor
way
Ger
man
y
Aus
tria
Uni
ted
Kin
gdom
Uni
ted
Sta
tes
Fra
nce
Hon
g K
ong
Bel
gium
Irel
and
Japa
n
Chi
le
Spa
in
Tai
wan
Sou
th K
orea
Cze
ch R
epub
lic
Mal
aysi
a
Italy
Chi
na
Pol
and
Mex
ico
Por
tuga
l
Tha
iland
Bra
zil
Rus
sia
Hun
gary
Rom
ania
Indi
a
Gre
ece
Arg
entin
a
S&P sovereign rating
Transparency International Corruption Perception Index
… although there are still substantial structural risks
S&P sovereign rating vs. Transparency International Corruption Perception Index (CPI)
C
B
BB
BBB
A
AA
AAA
S&P Rating / CPI
Source: Transparency International, S&P, April 2010
13
Germ
an
Sp
eaking
UK
& Irelan
d
Fran
ce &
Ben
elux
So
uth
Eu
rop
e
No
rdics
CE
E
No
rth A
merica
Au
stralia
Matu
re Asia
Vo
latile Asia
Em
ergin
g A
sia
Latin
Am
erica
Imp
ortan
ce
Invested real estate (%) 10.7 8.7 7.2 4.7 2.6 1.3 45.5 2.5 11.0 1.2 3.0 1.4
Liquidity ▼▼ ▲▲ ▼ ▼ ▲ ▲ ▲ ▼ ▼▼ ▲▲ ▼▼ ▼ Very high
Long term economic growth ▼ ▼ ▼ ▼ ▼ ◄► ◄► ◄► ▼ ▲ ▲▲ ▲▲ Very high
Transparency ▲ ▲ ▲ ◄► ▲ ▼ ▲ ▲ ▼ ▲ ▼▼ ▼▼ High
Market growth potential ▼ ▼▼ ◄► ▲ ◄► ▲▲ ▼▼ ▼ ◄► ▼▼ ▲▲ ▲▲ High
Country risk ▲ ▲ ▲ ▼ ▲ ▼▼ ▲ ▲ ◄► ▲ ▼ ▼▼ Medium
Corruption ▲ ▲ ▲ ▼ ▲▲ ▼▼ ▲ ▲▲ ▲ ▲ ▼▼ ▼▼ Medium
Neutral allocation (%) 8 10 7 4 3 2 50 3 7 2 3 1
Taking all these issues into account leads to a neutral portfolio …
Source: RREEF Research, April 2010
14Source: RREEF Research, April 2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ger
man
Spe
akin
g
UK
& I
rela
nd
Fra
nce
&B
enel
ux
Sou
th E
urop
e
Nor
dics
CE
E
Nor
th A
mer
ica
Aus
tral
ia
Mat
ure
Asi
a
Vol
atile
Asi
a
Em
ergi
ng A
sia
Latin
Am
eric
a
Rational allocation ranges = optimization constraints
Neutral portfolioShare in invested RE stock
… and to rational allocation ranges around the neutral portfolio
Neutral portfolio and rational allocation ranges
How close to the neutral portfolio shell we stay?
Allocation
15
0%
10%
20%
30%
40%
50%
60%
70%
80%
Europe North America Asia Latin America
Rational allocation ranges = optimization constraints
Neutral portfolioShare in invested RE stock
… by continent
Neutral portfolio and rational allocation ranges
Source: RREEF Research, April 2010
Allocation
16
Section III
Global Allocation Analysis
17
The focus is on the risk-return profiles of the markets
Return volatility 1990-2009Average gross returns 1990-2009 and 2010-14
Source: RREEF Research, IPD, PMA, April 2010
18
Allowing for transaction costs, hedging and taxes…
Estimated tax leakageTransaction and hedging costs
Note: One-off transaction costs amortized over a10 year holding period, average estimated hedging cost against USD
Source: RREEF Research, April 2010
19
Average gross and net returns 1999-2009
… can substantially change the relative attractiveness of markets
Source: RREEF Research, IPD, PMA, April 2010
20
Efficient Frontiers 1990-2014f
Average Return
Efficient Frontiers Based on Different Return Definitions
Return Volatility
0%
2%
4%
6%
8%
10%
12%
14%
0% 5% 10% 15% 20% 25%
Efficient frontier based on:
… gross returns (unconstrained)
… gross returns (constrained)
… net returns (unconstrained)
… net returns (constrained)
Source: RREEF Research, April 2010
21
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
7,26% 7,26% 7,28% 7,29% 7,31% 7,34% 7,37% 7,40% 7,50% 7,64% 7,79% 7,94% 8,12%
German Speaking UK & Ireland France South EuropeNordics CEE North America AustraliaMature Asia Volatile Asia Emerging Asia
Efficient Allocations depending on the Level of Volatility based on Net Returns
Return Volatility
Constrained Allocation Dominated by the US
Source: RREEF Research, April 2010
Allocation
22
Constrained Efficient Frontiers for selected Sub-Periods based on Net Returns
Average Return
0%
20%
40%
60%
80%
100%
7,26% 7,35% 7,51% 7,69% 7,90% 8,18% 8,50%
German Speaking UK & I reland FranceSouth Europe Nordics CEENorth America Australia Mature AsiaVolatile Asia Emerging Asia
Return Volatility
0%
20%
40%
60%
80%
100%
7,26% 7,27% 7,36% 7,50% 7,68% 7,87% 8,13%Return Volatility
Changing Market Situation Calls for Short Term Tactical Allocations, which can Deviate from the Long Term Strategy
Source: RREEF Research, April 2010
23
Efficient Frontiers 1990-2014f
Average Return
Return Volatility
Potential effect of active portfolio adjustments
Applying Annual Tactical Adjustments to the Investment Strategy Could Allow Increasing the Average Return Level by Over 100 bps
Source: RREEF Research, April 2010
24
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010f 2012f 2014f
-10%
-5%
0%
5%
10%
15%
20%
German Speaking UK & Ireland France & BeneluxSouth Europe Nordics CEENorth America Australia Mature AsiaVolatile Asia Emerging Asia Portfolio Return (right scale)
Year-by-Year Tactical Allocations for a Maximum Volatility of 7.5%
Year-by-Year Optimal Allocations for a Conservative Strategy
Source: RREEF Research, April 2010
Allocation Return
25
0%
10%
20%
30%
40%
50%
60%
70%
GermanSpeaking
UK &Ireland
France &Benelux
SouthEurope
Nordics CEE NorthAmerica
Australia MatureAsia
VolatileAsia
EmergingAsia
LatinAmerica
Strategic allocation range
Tactical allocation 2011-14
Strategic and tactical allocation with a maximum volatility of ca. 7.5%
Long-term strategic allocations and the tactical tilt in 2011-2014 for a low risk portfolio
Source: RREEF Research, April 2010
Allocation
26
0%
10%
20%
30%
40%
50%
60%
70%
Europe North America Asia Pacific Latin America
Strategic allocation range
Tactical allocation 2011-14
Strategic and tactical allocation with a maximum volatility of ca. 7.5%
… by continent
Source: RREEF Research, April 2010
Allocation
27
Important Information
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