The topic areas of family offices, fund boutiques, and incubators often appear to be linked interestingly. Markus Hill spoke on behalf of FONDSBOUTIQUEN.DE with Martin Friedrich, Head of Economic and Market Research & Portfolio Manager, Lansdowne Partners Austria GmbH, about this professional connection and liquid investment in the asset class of real estate (REITs). These remarks are supplemented by thoughts on valuation issues for investments in real estate (liquid and non-liquid investments). This interview is directly related to the participation in the panel discussion “RealX: Real Estate Investment Opportunities for Family Offices” on September 18, 2020 (link to the video, further events: Family Office Panel, FundForum International, 6.10.2020 & Vienna Lecture at CDInvest, 15.10.2020, see below).
Hill: Lansdowne Partners is a well-known investment manager based in London. What was the reason for establishing the Vienna office?
Friedrich: Lansdowne Partners was founded in London in 1998 and manages assets for clients around the world. As a group, Lansdowne manages assets of approximately $10 billion and offers equity funds of various types in European and global markets, energy, China, and India, through to multi-asset strategies. As far as Austria is concerned, we opened our Vienna office in 2009 because Lansdowne Partners’ co-founder, Steven Heinz, moved here. Mr. Heinz is Austrian and lives in Vienna. Lansdowne Partners Austria was therefore established as a platform for the investment of internal capital and seeding and incubating new Lansdowne fund strategies.
Hill: What investment strategy do you pursue concerning real estate?
Friedrich: As far as real estate is concerned, Lansdowne has traditionally not been a core investment class, as the company focuses primarily on equity investments. Therefore, our natural approach is to invest only in listed real estate companies and not in direct real estate. The structure we use to make these investments is the Lansdowne Endowment Fund, a global multi-asset strategy which I manage myself.
Hill: How does invest in listed real estate stocks differ from investing in direct real estate?
Friedrich: There are several differences: First, REITs are liquid, which makes them much more volatile. This also means that they are correlated with stocks, especially in the short term. Because they can be traded daily, they also react much faster to changes in fundamentals. So if you look at how REITs are traded today, you will get a very good idea of how your direct real estate could react several months later. This is no coincidence: as anyone familiar with the asset class knows, property valuation follows strict standards. These valuation principles are necessary and sensible for investors, but in practice means that the current valuation is partly based on the past. Changes in fundamental data are therefore reflected with a certain delay. Mathematically, we see this as a result of a high degree of serial autocorrelation in the time series analysis of direct real estate returns. Autocorrelation is a sign that the full risk of the asset class is not 100% reflected by the reported returns – unlike with REITs. The second important difference is that REITs are legally structured as companies and are endowed with free capital. This makes them more volatile compared with existing real estate, even after adjustment for the aforementioned smoothing induced by the different calculation methods. On the other hand, this also means that their yield is higher.
Hill: What are the advantages and disadvantages of REITs?
Friedrich: The main advantage is that if you as an investor look up and down through the “noise” of the daily ups and downs, you gain access to the real estate asset class with the convenience of daily liquidity and minimal transaction costs. We can demonstrate this by performing correlation analysis with delayed returns on direct real estate: for example, the correlation of U.S. real estate to U.S. real estate stocks increases from 15% to 80% when they delay returns by just one quarter. In Europe or Asia, the time lag may be different, but the principle is the same. The second advantage that I mentioned earlier is that the returns are attractive. Let’s take US real estate once again as an example: the total return of a REIT index since 1990 has been 10.2%, which is significantly higher than the 7.6% per year that direct real estate generated according to NCREIF. Thirdly, listed real estate enables us to represent a globally diversified commitment even with a small investment. This is not possible on the direct side. The final advantage is that REITs are generally managed in a highly professional manner and often own high-quality real estate. Such properties are not necessarily available to investors in the private market. Of particular interest is the “alternative investments” sector within the real estate sector, in which we are heavily overweighted: Logistics, healthcare, data centers, mobile phone masts, and the like.
Hill: So far you have only talked about advantages; are there also disadvantages?
Friedrich: Of course. The main disadvantage is that REITs have a high correlation with traditional stock indices. From the perspective of quantitative portfolio construction, investors cannot therefore expect the same level of diversification as they would from direct real estate. This also limits our options for property allocation, as the fund I manage is subject to a systematic, disciplined investment process. In concrete terms, this means that we currently have just under 7% of our total equity allocation in REITs.
Hill: Looking at the direct market – what kind of opportunity/strategy would be attractive for family offices?
Friedrich: As I have already explained, Lansdowne Partners Austria is not a typical family office. The fund I manage sees itself as a patient, very long-term oriented investor with a mandate to ride out short-term market disruptions. For this reason, the higher returns and liquidity of REITs outweigh the volatility and occasional interim losses. For other investors, this compromise will probably be different. Ultimately, every investment policy has an emotional core – and many family investors appreciate the control and sense of security that comes with owning a physical structure.
Hill: Thank you very much for the interview.
Lansdowne Partners Austria GmbH: https://www.lansdownepartners.com/austria
RealX: Real Estate Investment Opportunities for Family Offices(Panel – Video):
“For family offices, the current period of uncertainty is of course a challenge, but it may also be a time of tremendous opportunity.If the typical priority is to maintain and grow a family fund’s wealth for the benefit of both present and future generations, can family offices move fast enough to adapt to the new market environment and out-manoeuvre the competition from institutional investors? Portfolio rebalancing may have become a more immediate necessity for wealth preservation, but is there sufficient stock of sufficient quality entering the market for purchase? And do typical lot sizes suit a family fund better than an institutional purchaser? How easy is it to balance sectoral diversity with critical mass across the sectors? Do family funds have the resources and expertise to manage and maintain a well-diversified portfolio? And what is the effect of geography? How does a family office balance geographical diversity and manageability while maximising opportunities? And do the increased management costs of a dispersed portfolio outweigh enhanced returns, or does diversification win the day?”
(SPEAKERS: Tobias Schultheiß FRICS SIOR Managing Blackbird Real Estate GmbH, Martin Friedrich Head of Economic and Market Research Lansdowne Partners Austria, Paul Lawrence Partner (MODERATOR) Taylor Wessing, Guillaume Turcas Managing Partner Faro Capital Partners)