The link between listed real estate and its underlying holdings

It takes about 18 months for an investment in listed real estate to shed the influence of the general equities market and to start mirroring the performance of the companies’ underlying portfolio, according to new research by MSCI for the European Public Real Estate Association (EPRA).

Medium- to long-term ownership of listed real estate provides investors with much higher liquidity and lower costs than direct property investments once the background price volatility caused by the general equities market fades, the study shows.

According to Ali Zaidi, EPRA's director of Indices & Research, "The matched-sample analysis adds to the evidence that European listed real estate generates the returns of direct property over the long term and confirms that listed real estate should be an integral component of investors overall property portfolio strategy."

MSCI researchers Bert Teuben and Ian Cullen examined the relationship over time between the performance of the properties held by 19 European listed real estate companies and the volatility of their share prices.

According to EPRA, this is the first time that a large sample of listed company portfolios has been assessed in depth. The MSCI research demonstrates how investors can analyse performance at an asset, vehicle and security level to support better allocation and selection decisions.

At the highest level of aggregation, asset, vehicle and equity headline index performance trends were broadly synchronised over the longer term, the report shows. The relationship appeared to be stronger for UK companies than for their continental European peers.

Over shorter measurement periods – of up to around 18 months – the cost of the increased liquidity provided by listed real estate in a property investment portfolio comes in the form of additional volatility. Beyond that period listed real estate – at both company and market levels – seems to converge ever more closely with the correspondingly directly-held assets at the three- and five-year milestones.

In other words, the longer you hold a listed real estate investment, the more the investment delivers the performance and risk profiles of the underlying real estate. Which, really, is what it should do.