Risk Factors Of European Non-Listed Real Estate Fund Returns
Jean-Christophe Delfim
University of Geneva
Martin Hoesli
University of Geneva – Geneva School of Economics and Management (GSEM); University of Aberdeen – Business School; Ecole Polytechnique Fédérale de Lausanne – Swiss Finance Institute
May 30, 2016
Swiss Finance Institute Research Paper No. 16-37
Abstract:
This research contributes to a better assessment of risk factors impacting non-listed real estate fund returns. Both macroeconomic and fund-specific factors are considered, additionally taking into account the phase of the real estate cycle. Using a rich database of fund-level data for Europe, we apply panel regression techniques with random effects. Our results highlight the significant impacts of real GDP growth, interest rates, inflation components, money supply and stock market returns in explaining non-listed fund returns. Size, gearing, investment style, vehicle structure and vintage also affect returns, whereas property type does not appear to matter. For comparison purposes, the same analysis is performed for listed and direct real estate. The three kinds of real estate exposure are found to react broadly in the same way to macroeconomic risk factors although our analyses suggest that non-listed real estate is more akin to direct real estate than it is to securitized real estate.
Risk Factors Of European Non-Listed Real Estate Fund Returns – Introduction
There are three main ways of investing in real estate. First, it is possible to invest directly by acquiring buildings. Second, one can purchase shares of a listed real estate firm. Finally, one can invest in a non-listed fund. Whereas much research exists on the risk factors of direct and listed real estate (Ling & Naranjo, 1997; Pavlov, Steiner & Wachter, 2015), limited evidence exists regarding the risk factors of non-listed investments given the heterogeneity of fund characteristics and the lack of publicly available information. Understanding the determinants of non-listed fund performance is of great importance to investors in order to make relevant allocation decisions, in particular to gauge whether such investments are akin to the other two types of real estate exposure.
This research seeks to expand the literature by identifying macroeconomic risk factors affecting the performance of non-listed real estate funds in Europe, controlling for their specific characteristics. We apply panel regression models with random effects using non-listed real estate fund level data sourced from the European Association for Investors in Non-Listed Real Estate Vehicles (INREV). Our analyses are based on yearly data for the time period 2001-2014. We focus on funds invested in France, Germany, Italy, the Netherlands and the United Kingdom or in a mix of these countries1.
Funds are differentiated by sector, investment style and vehicle structure. In addition, several other fund characteristics such as size, leverage, age and vintage are included in the analysis. With the notable exception of sector classification, significant impacts of these variables on fund returns are reported. Our research further highlights the existence of an optimal fund size and gearing level, as well as of an optimal investment horizon. With respect to macroeconomic factors, we find that real GDP growth, inflation, money supply, and stock market returns are positively linked to non-listed fund performance, whereas unexpected inflation and long term real interest rates are negatively linked to real estate fund returns.
For comparison purposes, the same analysis is performed for direct and securitised real estate. Moreover, the linkages between non-listed fund returns and direct and listed returns are explored. We find that all three types of real estate exposure respond similarly to most macroeconomic risk factors although non-listed fund returns are more closely related to the returns of direct real estate than to those of listed investments.
This research provides several contributions to the literature. We explore in detail the relationship between non-listed fund returns and size, gearing and age. The analysis also provides results differentiating for various phases of the business cycle and characteristics such as investment style and fund structure. The time period considered is also longer than that in previous studies focusing on Europe and includes the global financial crisis. In addition, our research uses more relevant macroeconomic risk factors by considering country-specific factors unlike several studies in the extant literature. Another contribution of this study is the comparison of non-listed risk factors with risk factors for listed and direct real estate investments. Finally, another important contribution is in extending the literature on the linkages between the various types of real estate exposure by considering the linkages between non-listed fund returns and those of both listed and direct investments.
The remainder of the paper is structured as follows. After a review of the literature in section 2, we provide a description of our methodology in section 3 and of our data in section 4. Then, in section 5, we discuss our results and emphasize the practical implications of those. Section 6 provides some concluding remarks.
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