Investors interested in exposure to the real estate sector should take into account the fact that the correlation between direct and listed real estate tends to increase significantly over the long-term, according to a new study released by AMP Capital.
This means that the returns for both the asset classes are almost the same over five years or beyond as they are generated by the “underlying real estate cash flows they have in common”.
Also, the analysis of the listed real estate and whether they are trading at a premium or discount to net asset value (NAV) helps predict on how the direct market will move.
AMP Capital co-head of Global Listed Real Estate, James Maydew, said investors wanting to maximise risk adjusted returns should “utilise asset allocation between both listed and direct real estate at different points in the cycle”.
“Real estate, both listed and direct, is a long-term investment by the very nature of leases that are contractually committed to and the longevity of the physical assets,”
Additionally, listed real estate is currently trading at a discount to NAV in the global perspective, with some of the biggest discounts seen in Asia and across the US and the UK markets, while Australian real estate investment trusts (REITs) are trading at a slight premium, with even larger premiums observed in the Continental Europe and in the Japanese market.
“Put very simply, if a REIT trades at a premium to its NAV, the market believes its assets will appreciate above levels indicated by market pricing of the underlying direct real estate. If we look at listed real estate in the US since 1988, whenever prices have been at a premium to NAV, direct real estate appreciated 96 per cent of the time in the following 12 months,” Maydew said.
