Real estate, alternative real assets and other diversions

Property’s broken crystal ball

The Fund Manager

Real estate share prices have been implicitly forecasting property declines that are yet to materialise – what’s going on?

The most noticeable impact of the EU referendum in June 2016 upon the UK real estate sector has been the sharp contrast in demand (and as a result valuations) between the listed sector and the underlying assets themselves. 

The share prices of the leading UK REITs traded down 20–25% immediately on the announcement of the referendum result. While commercial property values (with the exception of Q3 2016) improved, and occupational demand for industrial and London office space remained robust, the sector languished. It still trades at discounts to underlying value (NAV) of 30% for office-based REITs and >50% for retail-based portfolios. 

This contrast in fortunes cannot be completely explained away by the decline in the value of sterling (making UK property assets more attractive to overseas investors) and the timing difference between forward-looking (ex-ante) share prices and backward-looking (ex-post) property valuations. 

Typically (as last witnessed in the global financial crisis of 2007–09) real estate share prices lead the change in movement of property values (both up and down) by six to nine months. Historically there have been longer lags of 12, even 18, months. This time round, however, share prices have been (implicitly) forecasting property value declines of 10–15% – which, for over two years, have failed to materialise. 

Does this signal the end of the connection between the public and private markets, and the usefulness of REITs as an implicit forecasting tool for real-estate valuations in the UK? I believe that the relationship still exists, but there are reasons why the lead/lag relationship has been both longer and more divergent.

Why was it different this time?

There are five factors in particular that added noise to the pricing signals from the listed market and distorted the accuracy of future property value predictions. These are:






The Fund Manager, zLead Article

About Alex Moss

Alex Moss

Alex is responsible for developing the newly created Centre for Real Estate Research at Cass Business School. He also runs Consilia Capital, a research and advisory firm, which specialises in the performance and strategies of real estate, infrastructure and real asset funds, work that combines academic research with practical applications. He has been involved in research and transactions in the global real estate sector for over 30 years. His career has encompassed sell side research (BZW, Macquarie), investment banking (CSFB), private equity (Apax Partners Capital), and fund management (M&G and Investec). He is Chairman of the EPRA Research Committee, a member of the EPRA Advisory Board, and Chairman of the Investment Committee for the Investec Global Real Estate Securities Fund, where he acts as a consultant. Alex is best known for his academic and commercial work in the area of Global REITs, and their use in investment strategies. In 2013, with Professor Andrew Baum they produced two innovative papers for EPRA which received wide acclaim, looking at whether listed real estate was managed as part of the real estate allocation, and the wider use and applications of listed real estate securities in asset management. His work with Kieran Farrelly on combining direct and listed property for Defined Contribution Pension schemes won a Best Paper award at the 2014 ERES conference. A particular area of interest is the use of Smart Beta and automated trading strategies, most notably Trend Following and Momentum, and his work in this area with Professor Andrew Clare and Professor Steve Thomas has been widely cited. In 2017, with Reitsmarket he produced two multifactor Global REIT Smart Beta indices, which are listed on Euronext, and marketed by Goldman Sachs. Most recently he has been concentrating on the use of listed real estate within real asset strategies.

Articles by Alex Moss

Subscribe to our print magazine now!

SUBSCRIBE