Optimal Global Real Estate Portfolio
– A Practical Approach
17th Annual ERES Conference
Milan, June 25th 2010
Presented by:
Dr Jaroslaw Morawski, RREEF Research. Tel. +49 (69) 71704-204
Agenda
1. RREEF approach to a real estate investment strategy
2. Investment Universe
3. Global Allocation Analysis
2
Section I
RREEF approach to a real estate
investment strategy
3
Strategic market allocation is conducted in three stages
Stage 1:
Objectives
Return
Risk
Liquidity
Investment Universe
Stage 2:
Universe
Investment Style
Geography
Market pre-selection
Neutral Portfolio
Stage 3:
Strategic &
Tactical Allocs
Optimizations: Constraints & Risk Profiles
Allocations by Sector & Geography
4
Source: RREEF Research
…
Section II
Investment Universe
5
Global Investment Universe is Analysed In Terms of 12 Regions
Mature Asia
Volatile Asia
UK & Ireland
German Speaking
North America
Latin America
France & Benelux
Southern Europe
Nordics
CEE
6
Source: RREEF Research
Emerging Asia
Australia & NZ
The starting point for a RE “market portfolio” is the size of the investment market
Invested real estate and market maturity
Invested Real Estate
$bn
Emerging Asia
3%
3000
US: 3,900 / 6,800 bln US$
2500
Total RE Stock
2000
Invested Real Estate
1500
1000
Other
9%
South Europe
5%
France &
Benelux
7%
North America
45%
UK & Ireland
9%
500
United States
Japan
Germany
China
United Kingdom
France
Italy
Spain
Canada
Brazil
Russia
South Korea
India
Mexico
Australia
Netherlands
Belgium
Switzerland
Sweden
Poland
Taiwan
Norway
Austria
Denmark
Greece
Ireland
Finland
Argentina
Thailand
Hong Kong
Portugal
Czech Republic
Malaysia
Singapore
Chile
Romania
Hungary
New Zealand
0
7
Source: RREEF Research; DTZ 2008
Germany
11%
Mature Asia
11%
But markets differ also with respect to liquidity …
Real estate stock and investment volumes 2005-2008
Real estate stock
(bn€)
Investment volume as
% of invested stock
Invested real estate
Average investment volume 2005-08 as % of the invested stock
4500
14%
4000
12%
3500
10%
3000
2500
8%
2000
6%
1500
4%
1000
2%
500
0
8
Source: RREEF Research; DTZ 2008
Volatile
Asia
UK &
Ireland
Nordics
CEE
North
America
France
Benelux
South
Europe
Latin
America
Australia
German
Speaking
Emerging
Asia
Mature
Asia
0%
… and transparency
Jones Lang LaSalle Real Estate Transparency Index
9
Source: Jones Lang LaSalle 2008
10
Source: Global Insight March 2010
0%
China
India
Chile
Brazil
Malaysia
Thailand
Singapore
Mexico
Argentina
Hong Kong
Taiwan
Czech Republic
Romania
Poland
South Korea
United States
Australia
Russia
Hungary
Canada
New Zealand
United Kingdom
Ireland
Finland
Belgium
Denmark
Norway
Sweden
Netherlands
France
Austria
Spain
Portugal
Greece
Germany
Italy
Switzerland
Japan
Emerging markets will remain the main drivers of the global economy
Projected average annual GDP growth 2010-2040
8%
7%
6%
5%
4%
3%
2%
1%
Given the distribution of the global GDP, investment grade real estate stock can be
expected to grow particularly strongly in the emerging markets
Real estate stock and investment volumes 2005-2008
14%
12%
1,6
Share in the global GDP
Share in the global invested RE
1,4
RE-GDP Ratio (right scale)
1,2
10%
1
8%
0,8
6%
0,6
4%
0,4
0,2
0%
0
11
India
Brazil
China
Thailand
Russia
Argentina
Chile
Mexico
Greece
Romania
Poland
Hungary
Spain
Czech Republic
Taiwan
South Korea
Italy
Malaysia
Denmark
France
Belgium
Norway
New Zealand
Finland
Japan
Portugal
Ireland
Austria
Canada
Australia
Sweden
Switzerland
Netherlands
Germany
United States
United Kingdom
Hong Kong
Singapore
2%
Source: RREEF Research; Global Insight, DTZ 2009
… although there are still substantial structural risks
S&P sovereign rating vs. Transparency International Corruption Perception Index (CPI)
S&P Rating / CPI
C
18
S&P sovereign rating
16
B
BB
Transparency International Corruption Perception Index
14
12
10
BBB
8
A
AA
6
4
2
12
Source: Transparency International, S&P, April 2010
Argentina
India
Greece
Romania
Russia
Hungary
Brazil
Portugal
Thailand
Mexico
Poland
Italy
China
Malaysia
South Korea
Czech Republic
Taiwan
Chile
Spain
Japan
Ireland
Belgium
Hong Kong
France
United States
United Kingdom
Austria
Germany
Norway
Australia
Canada
Finland
Netherlands
Switzerland
Sweden
Singapore
Denmark
0
New Zealand
AAA
Taking all these issues into account leads to a neutral portfolio …
UK & Ireland
France &
Benelux
South Europe
Nordics
CEE
North America
Australia
Mature Asia
Volatile Asia
Emerging Asia
Latin America
10.7
8.7
7.2
4.7
2.6
1.3
45.5
2.5
11.0
1.2
3.0
1.4
Liquidity
▼▼
▲▲
▼
▼
▲
▲
▲
▼
▼▼
▲▲
▼▼
▼
Very high
Long term economic growth
▼
▼
▼
▼
▼
◄►
◄►
◄►
▼
▲
▲▲
▲▲
Very high
Transparency
▲
▲
▲
◄►
▲
▼
▲
▲
▼
▲
▼▼
▼▼
High
Market growth potential
▼
▼▼
◄►
▲
◄►
▲▲
▼▼
▼
◄►
▼▼
▲▲
▲▲
High
Country risk
▲
▲
▲
▼
▲
▼▼
▲
▲
◄►
▲
▼
▼▼
Medium
Corruption
▲
▲
▲
▼
▲▲
▼▼
▲
▲▲
▲
▲
▼▼
▼▼
Medium
Neutral allocation (%)
8
10
7
4
3
2
50
3
7
2
3
1
13
Source: RREEF Research, April 2010
Importance
German
Speaking
Invested real estate (%)
… and to rational allocation ranges around the neutral portfolio
Neutral portfolio and rational allocation ranges
Allocation
80%
Rational allocation ranges = optimization constraints
70%
Neutral portfolio
Share in invested RE stock
60%
How close to the neutral
portfolio shell we stay?
50%
40%
30%
20%
10%
14
Source: RREEF Research, April 2010
Latin America
Emerging Asia
Volatile Asia
Mature Asia
Australia
North America
CEE
Nordics
South Europe
France &
Benelux
UK & Ireland
German
Speaking
0%
… by continent
Neutral portfolio and rational allocation ranges
Allocation
80%
Rational allocation ranges = optimization constraints
70%
Neutral portfolio
Share in invested RE stock
60%
50%
40%
30%
20%
10%
0%
Europe
15
Source: RREEF Research, April 2010
North America
Asia
Latin America
Section III
Global Allocation Analysis
16
The focus is on the risk-return profiles of the markets
Average gross returns 1990-2009 and 2010-14
German Speaking
Return volatility 1990-2009
1990-2009
German Speaking
2010-2014
UK & Ireland
UK & Ireland
France & Benelux
France & Benelux
South Europe
South Europe
Nordics
Nordics
CEE
CEE
North America
North America
Australia
Australia
Mature Asia
Mature Asia
Volatile Asia
Volatile Asia
Emerging Asia
Emerging Asia
-5%
17
0%
5%
Source: RREEF Research, IPD, PMA, April 2010
10%
15%
-5%
0%
5%
10%
15%
20%
25%
Allowing for transaction costs, hedging and taxes…
Transaction and hedging costs
-3%
-2%
-1%
0%
Germany
Austria
Sw itzerland
UK
Ireland
France
Netherlands
Belgium
Sw eden
Denmark
Norw ay
Finland
Spain
Portugal
Italy
Greece
Hungary
Czech
Poland
United States
Canada
Australia
New Zealand
Japan
South Korea
Hong Kong
Singapore
China
Malaysia
Taiw an
Thailand
1%
2%
3%
Estimated tax leakage
4%
5%
Transfer Tax
Agent's Fees
DD Fees
Exp. hedging cost
0%
10%
20%
Germany
Austria
Sw itzerland
UK
Ireland
France
Netherlands
Belgium
Sw eden
Denmark
Norw ay
Finland
Spain
Portugal
Italy
Greece
Hungary
Czech
Poland
United States
Canada
Australia
New Zealand
Japan
South Korea
Hong Kong
Singapore
China
Malaysia
Taiw an
Thailand
Note: One-off transaction costs amortized over a10 year holding period, average estimated hedging cost against USD
18
Source: RREEF Research, April 2010
30%
40%
… can substantially change the relative attractiveness of markets
Average gross and net returns 1999-2009
Gross
Net unleveraged
Net leveraged
German Speaking
UK & Ireland
France & Benelux
South Europe
Nordics
CEE
North America
Australia
Mature Asia
Volatile Asia
Emerging Asia
0%
19
2%
4%
Source: RREEF Research, IPD, PMA, April 2010
6%
8%
10%
12%
14%
16%
18%
Efficient Frontiers Based on Different Return Definitions
Efficient Frontiers 1990-2014f
Average Return
14%
12%
10%
8%
6%
Efficient frontier based on:
4%
… gross returns (unconstrained)
… gross returns (constrained)
… net returns (unconstrained)
2%
… net returns (constrained)
0%
0%
5%
10%
15%
20%
25%
Return Volatility
20
Source: RREEF Research, April 2010
Constrained Allocation Dominated by the US
Efficient Allocations depending on the Level of Volatility based on Net Returns
Allocation
South Europe
Australia
France
North America
Emerging Asia
UK & Ireland
CEE
Volatile Asia
German Speaking
Nordics
Mature Asia
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
7,26%
7,26%
7,28%
7,29%
7,31%
7,34%
7,37%
7,40%
7,50%
7,64%
7,79%
7,94%
8,12%
Return Volatility
21
Source: RREEF Research, April 2010
Changing Market Situation Calls for Short Term Tactical Allocations, which can
Deviate from the Long Term Strategy
German Speaking
South Europe
North America
Volatile Asia
Constrained Efficient Frontiers for selected
Sub-Periods based on Net Returns
UK & Ireland
Nordics
Australia
Emerging Asia
France
C EE
Mature Asia
100%
Average Return
14%
80%
1999-2001
60%
12%
2005-2007
40%
10%
20%
0%
7,26%
100%
8%
6%
7,35%
7,51%
7,69%
7,90%
8,18%
8,50%
80%
4%
60%
40%
2%
0%
7,0%
20%
7,5%
8,0%
8,5%
9,0%
Return Volatility
0%
7,26%
7,27%
7,36%
7,50%
7,68%
7,87%
Return Volatility
22
Source: RREEF Research, April 2010
8,13%
Applying Annual Tactical Adjustments to the Investment Strategy Could Allow
Increasing the Average Return Level by Over 100 bps
Efficient Frontiers 1990-2014f
Average Return
Efficient frontier based on:
… gross returns (constrained)
… net returns (constrained)
… net leveraged returns (constrained) with tactical adjustments
8,0%
7,5%
7,0%
6,5%
Potential effect of active portfolio adjustments
6,0%
5,5%
5,0%
5,0%
5,5%
6,0%
6,5%
7,0%
7,5%
8,0%
8,5%
9,0%
9,5%
10,0%
Return Volatility
23
Source: RREEF Research, April 2010
Year-by-Year Optimal Allocations for a Conservative Strategy
Year-by-Year Tactical Allocations for a Maximum Volatility of 7.5%
Allocation
German Speaking
South Europe
North America
Volatile Asia
UK & Ireland
Nordics
Australia
Emerging Asia
France & Benelux
CEE
Mature Asia
Portfolio Return (right scale) Return
100%
20%
90%
15%
80%
70%
10%
60%
50%
5%
40%
0%
30%
20%
-5%
10%
0%
1990
24
1992
1994
Source: RREEF Research, April 2010
1996
1998
2000
2002
2004
2006
2008
2010f
2012f
-10%
2014f
Long-term strategic allocations and the tactical tilt in 2011-2014 for a low risk portfolio
Strategic and tactical allocation with a maximum volatility of ca. 7.5%
Allocation
70%
Strategic allocation range
60%
Tactical allocation 2011-14
50%
40%
30%
20%
10%
0%
German
UK &
Speaking Ireland
25
France &
Benelux
Source: RREEF Research, April 2010
South
Europe
Nordics
CEE
North Australia Mature
America
Asia
Volatile Emerging Latin
Asia
Asia
America
… by continent
Strategic and tactical allocation with a maximum volatility of ca. 7.5%
Allocation
70%
Strategic allocation range
60%
Tactical allocation 2011-14
50%
40%
30%
20%
10%
0%
Europe
26
Source: RREEF Research, April 2010
North America
Asia Pacific
Latin America
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agents as to or in relation to the accuracy or completeness of this document. The information stated, opinions expressed and estimates given constitute best
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activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia:
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(*) For DSI, financial advisory (not investment advisory) and distribution services only.
27