Applying a “360-degree approach” to property allocations can deliver superior risk-adjusted returns throughout the property cycle, says AXA Investment Managers – Real Assets’ global head of research and strategy, Justin Curlow.
The real estate acquisition process is time-consuming and expensive. Assets are fixed, varied and the best properties tend to be “large, lumpy assets” that are generally inaccessible to small and medium-sized investors, Curlow explains.
The capital-intensive nature of real estate has led to a to a diverse capital market comprising four quadrants: public, private, debt and equity.
“Traditionally, each quadrant has been priced in isolation with specific capital sources driving pricing based upon regulatory constraints.”
Market participants price a property investment relative to other asset classes, rather than comparing debt and equity pricing on the same underlying property or, if applicable, to comparable quality listed property company stocks or bonds.
As a consequence, pricing is often “disconnected” from the “inherent risk-reward relationship up and down the property capital stack and across instruments”.
Curlow has published a white paper, Applying a 360-degree approach to property allocations, which recommends property investors combine a “universal approach” to property portfolio construction through the cycle.
This 360-degree approach looks at the four-quadrant universe in any market or region to assess the underlying risk-reward characteristics, as well as market pricing for the entirety of the capital stack and various investment vehicles.
This more holistic approach to real estate allocations can overcome some of the “pitfalls” associated with the traditional silo investment approach.
“In addition to superior risk-adjusted returns, a 360-degree investment approach can yield portfolio characteristics geared towards specific attributes, such as inflation linkage, certainty of cash flows, and potentially act as a balance sheet hedge for certain types of investors,” Curlow adds.
“Of course, this approach is anchored on a manager’s ability to ‘read the cycle’ and find relative value trades up and down the capital stack and across the various investment instruments.
“But, ultimately, it could be a real alpha generator.”
Download Applying a 360-degree approach to property allocations, contact Justin Curlow, AXA IM – Real Assets’ global head of research and strategy in London or Ben Taylor, investment manager – client capital group, in Sydney.
Important notice: The information has been established on the basis of data, projections, forecasts, anticipations and hypotheses which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different from the projections, forecast, anticipations and hypotheses which are communicated in this Material, as defined in the notice at the beginning of the document. For illustrative purposes only. Not intended to be investment advice and does not take into account the needs of the recipient. There can be no guarantee that any investment strategy presented will be implemented or ultimately be successful.
© 2019 AXA Real Estate Investment Managers and its affiliated entities.