CASE STUDY

Global Real Estate

Italian Pension Fund | 2018

Engagement at a glance

This Italian pension plan had an extensive domestic real estate portfolio and was seeking to make a second allocation into Core/Core+ global real estate, including a review of the incumbent global real estate manager alongside the available options.






Client-specific Concerns

The investor was looking for quite conventional ‘Core/Core+’ exposure, with limitations on leverage and ground up development: a 4-5% income stream was considered more important than overall returns. ‘Diversified’ sector exposure was a priority, with a preference for managers who have been successfully navigating the recent strong growth of Logistics and weak performance of Retail across most markets. The client’s preference for a global strategy rather than a collection of region-specific strategies meant that the group of managers with relevant capabilities was relatively modest. Commingled funds, fund of funds, open end and closed end structures could all be considered.

Outcome

  • There is an increasingly wide range of “global” solutions for real estate investing, including ‘Global Funds,’ ‘Global Fund of Funds’ and ‘Internal Fund of Funds’ wherein managers combine regional funds with centralised reporting and oversight (see Going Global in Real Estate, bfinance 2018). While the list includes some of the world’s largest real estate managers it also features smaller boutiques, either independent or part of a broader financial group. Some make extensive use of external joint venture partners.

  • Although this research focused on ‘Core/Core+’ investment styles with high income, this ranged from traditional ‘Core’ with 6-7% target returns to ‘low risk value add’ targeting 11-12%. Leverage levels have been coming down for most strategies, but maximum levels for funds still range from 35% to 55%.

  • While the individuals running these strategies were broadly very experienced, many had relatively short track records either for the specific fund or for similar types of mandate, reflecting the emerging nature of the ‘global core/core+ real estate’ segment.

  • One key area of scrutiny was manager approach to the late stage of the current real estate cycle. This involved detailed examination of the status of the current portfolio as well as the strategies that managers are pursuing to provide resilience/protect on the downside while continuing to add value.

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