Latest research on non-listed real estate funds highlights a number of significant return drivers

A new research paper was released by INREV recently¹, focusing on the link between sustainability and returns. Besides the fact that it highlights a significant positive relation between these two factors, it also highlighted a number of other important return drivers. This is a typical research paper that investors and managers should use to improve their portfolio return. In this blog, I highlight a few of the lessons learned.

Figure 1 is one of the most insightful charts of the research paper. It highlights different segmentations and the impact on return and GRESB score. Large funds, for instance, show better returns and higher GRESB scores, while high levered funds show the opposite. Also, both segments that focused on specialisation are outperforming the more diversified funds.

Figure 1: Average non-listed real estate fund return over period ’11-’21 vs average GRESB score in 2021. Source: GRESB, INREV

In the final part of the paper, a regression model is shown, which controls for all variables in one model. The full regression is shown in the paper, but the most important drivers are shown in table 1, including the impact on return. As shown, funds participating in GRESB achieved an average outperformance of 70 bps per annum. This is a rather significant difference and is probably related to the fact that better managed funds are more likely to participate. Market return is also a very strong indicator for fund return. When decomposing fund returns, it shows that fund returns are made up using 70% of the market return.

Table 1: Most important return drivers for non-listed real estate funds

Leverage is typically used to boost returns, but evidence is showing the opposite. Especially when leverage exceeds 50%, there is no additional return while risk is clearly increasing. Size is a well known factor and in real estate funds scale really matters. The analysis shows that a 1 billion fund outperformed a 500 million fund by 1% per year on average over the analysed period. 

Finally, there are some interesting observations around specialisation. Funds which are specialised in either a country or sector, clearly achieved outperformance over more general/diversified funds. The typical premium is around 1% per annum. For non-core funds, the average historical premium is even higher (around 2.5%), but only for those funds who participate in GRESB. Interestingly, funds not participating strongly underperformed. As non-core funds usually have a shorter life, participation is probably more likely if the fund is focused on sustainability or the manager already participates with other funds. 

The paper provides clear tools to further improve your strategy and boost your return in the long run. As shown, good positioning can lead to substantial outperformance.

 ¹https://www.inrev.org/news/inrev-news/new-paper-impact-esg-european-non-listed-fund-performance

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