Demand for property funds has surged over the last two quarters with 22% of continental European fund selectors looking to increase their exposure, according to Last Word Research.
Another 34% of pan-European fund buyers looked to hold real estate funds; 8% to decrease, and 36% did not use the asset class over the 12 months to March 2020.
During Q1 2019, property funds were ninth most popular asset class out of 26. While this is a drop from Q4 2018 at sixth, there are still a lot of buyers for property despite more selectors placing their bets on emerging market equity and debt.
Source: Last Word Research
Since the selectors’ lowest sentiment towards property in Q2 2018, sentiment has only risen and is at its highest since Q2 2016.
KZVK/VKPB head of asset management Axel Rahn told Portfolio Adviser sister publication Expert Investor that he had increased his allocation towards real estate funds to mitigate challenges with fixed income.
Rahn said fixed income yields were likely to stay lower for longer. The yield on German bunds is 10 basis points, he said, adding that that risk with a coupon of 10 basis points was not adequate.
“While real estate is expensive it is not as expensive as fixed income… We have to some extent frozen new allocation towards fixed income,” he said.
According to Morningstar data, property funds enjoyed inflows of €7.9bn (£6.8bn) over the year to February 2019. The asset class has not experienced outflows since May 2016.
The asset class had the fifth largest inflows for the year to February 2019, bettered by alternative global macro (€8.5bn), developed markets government bonds (€9.2bn), emerging market debt (€9.2bn), emerging market debt (€10.1bn), and US equities (€10.4bn).
Since the start of 2019, real estate investment trusts (Reits) garnered the second largest returns out of 10 asset classes at 77.4%, according to Bank of America Merrill Lynch (BofAML). Commodities bettered Reits at 90.8%.
Total returns
Source: BofAML Investment strategy, Bloomberg
BofAML’s latest survey also found that about 10% of European fund managers were looking to be overweight real estate in April, compared to 0% in March.
Source: BofAML
Real estate positions were also the most overweight relative to history, above financial services, utilities, and technology.
Source: BofAML
German real estate particularly expensive
Rahn said that his firm invested in funds that covered Europe and mostly in Germany, France, Italy, Spain, Netherlands, and the Nordics.
Rahn noted that German real estate was particularly expensive at the moment and that he looked for funds that were invested outside the country unless there was an attractive niche.
“We don’t invest in the US or Asia as their fund structures are not appropriate for German regulated funds,” he said.
“We also want to have a good understanding of real estate, visit the buildings we own, and meet the teams on a regular basis.”
The German fund selector said when picking a property fund it was also important to focus on the team, how many people the fund had on the ground, and how much of the value chain in real estate.
“We like core-plus and value-add funds more than core funds. If you have yield rising from 25 to 50 basis points the rate of return would be close to zero in a typical core fund,” he said.
“However, in a core plus and value add fund they have more space for yields widening as long as there is no recession.”
Rahn said during a recession there was clearly a flight to quality real estate and that he preferred strategies that focused on high-quality developments and had an active manager.
“We like players who are specialists for a country or sector because we believe specialists are able to understand their market dynamics more than a fund manager that tries to cover every sector and market,” he said.
Asian property comes out tops
According to FE Analytics, the top performing property fund was Asia focused – Morgan Stanley Asian Property I – that returned 33.1% over the three years to 31 March 2019, according to FE Analytics.
The fund has its highest geographical weighting towards Japan (38.1%), followed by Hong Kong (35%), Australia (13.3%), China (6.1%), and Singapore (3.6%).
In terms of sector the fund had its highest allocation towards diversified (51.6%), retail (16.8%), office (15%), residential (5.2%), and industrial (5.1%).
Top property funds three years to 31 March 2019
Source: FE Analytics
Both the FCA Recognised Asia property and Offshore mutual Asia property sector averages were the highest (27.9% and 24.1% respectively) compared to global, North American, and Europe property sector averages.
Sector returns three years to 31 March 2019
| Sector | FCA Recognised | Offshore Mutual |
| Asia property | 27.9% | 24.1% |
| North American property | 15.5% | 10.9% |
| Global property | 14.1% | 10.5% |
| European property | 7.6% | 7.3% |
Source: FE Analytics
However, none of the funds beat the FTSE EPRA Nareit Asia Pacific index that returned 43.4% over the three years to 31 March 2019.
The Morgan Stanley fund was followed by Cohen and Steers European Real Estate at 32.6%, Janus Henderson Global Real Estate A at 30%, Parvest Real Estate Securities Pacific Classic Cap at 28.8%, and AXA World Funds Framlington Europe Real Estate Securities F at 28.2%.
The top funds were found using FE Analytics, were domiciled in either Luxembourg or Ireland, were in either the FCA Recognised or Offshore Mutual universes, available for sale in at least three continental European countries, and were rebased in euros.
