THE RELEVANCE OF REAL ESTATE MARKET TRENDS FOR INVESTMENT PROPERTY FUNDS ASSET ALLOCATION: EVIDENCE FROM FRANCE, GERMANY, ITALY AND UNITED KINGDOM

Abstract

In the last decade, the development of investment funds specialized in the real estate investment, points out some interesting differences in the strategy adopted by fund manager in order to achieve an optimal portfolio allocation. An increasing number of real estate portfolio managers, manage several property classes because they recognize the benefits of an intra-asset diversification. Webb (1984) found that approximately 61 percent of institutional investors diversify by property type, and a more recent survey by Louargand (1992) found that 89 percent diversify by property type. The introduction of the market cycles and trend study for the investment decisions represent one new topic for the real estate asset industry. Recent studies found out that cycle strategy is important especially in project development, portfolio management and real estate finance (Wernecke, 2004). The aim of the paper is to study the usefulness of trend analysis, widely used in the asset management industry, in order to evaluate real estate time series and to define the best portfolio allocation strategy. Trends of real estate market are analysed using IPD index for main European countries (France, Germany, Italy and United Kingdom). Information about the portfolio composition are collected from official real estate market association (Assogestioni, Scenari Immobiliari, BVI, Aref, IEIF) and, if necessary, from the annual report of each real estate fund. The time frame is 2000-2009 and the frequency of the data is yearly. A preliminary analysis of the trend of indexes available is released in order to identify the main differences in the market trends in each country and in each sector. An analysis of all investment funds listed in each country is released in order to evaluate if funds manager consider market trends in constructing new investment vehicles and /or modify the portfolio composition in order to benefit from this investment opportunity. The study proposed considers separately the new portfolios constructed and the existing ones: for the first type of fund an analysis of the coherence with optimal portfolio structure is released and for the latter the paper proposes a study of presence /absence of portfolio re-balancement correlated with the trend in the real estate sector. Results obtained show that market trends in each country follow a different direction in each sector. Different property types are believed to be driven by different economic factors and consequently the study of market trends could have a positive impact on a sector diversification. Although a large percentage of managers do not consider the trends in order to modify their strategy, in some countries the portfolio allocation could be considered independent from the market trend.