Jean Maas and Daniel Pierlé, directors of MeesPierson Real Estate, comment.

Real estate is an attractive asset

The general rule of investment is ‘spread your risk’, and a model portfolio will therefore be made up of different asset classes, such as equities, bonds, commodities, cash and/or real estate.

The traditional features of real estate are a stable yield, a regular cash flow, inflation protection (in most European countries rents are index-linked), and the prospect of an increase in capital value.

Real estate investment produces the best risk/return ratio, as confirmed by the Sharpe ratio, which measures the performance of an investment fund, including adjustment for risk. The risk premium compared to 10-year government bonds continues to be attractive and real estate stocks are low in risk.

Upturn in the European real estate market

Worldwide, investment in real estate is continuing to grow. Institutional investors are increasing their holdings of real estate; investors with long-term liabilities, such as insurance companies and pension funds, view real estate as a useful investment. The increase in the percentage of portfolios held in real estate has resulted in a fundamental revaluation of the assets under management. US institutions invest between 10 and 15% in real estate, which compares with less than 10% in Europe.

There has been evidence of a recovery in the real estate market in a number of countries in the EU 25. Rents for prime commercial locations have flattened out and more and more private and institutional investors are turn to the real estate market. High premiums are being paid for real estate stocks on the stock market.

In the last five years, European real estate stocks have generated an average return of 11.2%, i.e. a higher return than on equities. Historically low interest rates have pushed up the prices of REIT’s (closed-ended Real Estate Investment Trusts) and elsewhere in the world, real estate stocks have also performed better than the stock market average.

Two ways to invest

Real estate investment can either be indirect, by buying real estate stocks on the stock market or direct, by buy and letting a suitable property. Direct investment can take place through the vehicle of a private fund. Both methods have particular features with regard to valuation, risk and return.

There are two categories of quoted real estate stocks. REITs are the quoted shares of companies that invest in a number of properties (in Belgium REITs are called Sicafi / Bevak ). Real estate certificates are securities of companies that invest in only one property and they generally offer a higher coupon than REITs in exchange for a higher risk.

Like real estate investment trusts (REITs), REIFs (Luxembourg’s version of REIT, or Real Estate Investment Fund) are tax-effective real estate investment instruments. The use of these instruments is continuing to grow in Europe; the Netherlands, Belgium, and France already have their versions, Germany is about to launch its version, and a UK version will follow later.

Direct or unquoted products are making a breakthrough, with private funds often investing in excellent real estate projects, which are more carefully selected and better managed. It is important that they ensure that the investor has the required transparency, however.

Indirect real estate

Investors who are concerned about liquidity will prefer indirect real estate investments. These quoted investment instruments are public or collective investment funds, and REITs.

There are advantages and disadvantages to holding indirect real estate investments. The principal advantage is the greater liquidity they offer. Investors can easily buy and sell real estate stocks on the stock market; the market is sufficiently liquid because there are hundreds, if not thousands, of shareholders.

The real estate investment is generally diversified in terms of geographical region (local or international) and sector (office, retail, logistics, and residential). This diversification reduces the risk of rental voids or a fall in rents.

Quoted products are subject to disclosure requirements and therefore offer high transparency to the investor. While the dividend is attractive, the volatility is higher. Indirect real estate stocks are sensitive to interest rate and stock market fluctuations. The increases in the share prices of REIFs in recent years are largely the result of the stock market malaise.

The prices of REITs are currently between 20 and 30% higher than their underlying value. This value determines the long-term price trend of a REIT. Potential investors must therefore be careful that they do not buy into a fund when its shares are overvalued and a sharp price fall lies ahead.

Direct real estate

Direct real estate means that real estate can be managed direct or through SPVs (special purpose vehicles or private equity structures for real estate investments).

There will be low correlation between this type of investment and the equity markets, in other words, the net asset value of the real estate projects in a private fund is virtually insensitive to equity market fluctuations. Overvaluation as a result of market speculation is impossible.

As private equity funds only have a few investors, the initial investmentis higher. An investor or a group of investors buys a property for a fixed period, which means taht the investment is much more stable, but is less liquid: it is more difficult for investors to purchase or sell the investment. On the other hand, the net return, which is the sum of the net rental income and the increase in value upon resale of the property, is high.

Direct real estate investment funds generally invest in one or a limited number of real estate projects, with the result that the investors have better information on the real estate they own.

Fortis Private Banking is a leader in the real estate market

Fortis Private Banking is a market leader in the Benelux and provides a wide range of financial services to high net worth individuals, their families and their businesses.

Fortis Private Banking has a broad spectrum of private wealth management services, which include investment, wealth structuring, financing, insurance, real estate as well as trust services.

Fortis’s investment philosophy with regard to direct real estate is flexible and creative. Instead of imposing one model portfolio on its clients, it has developed three investment vehicles. Each type is based upon a specific approach in order to meet a client’s individual requirements:

• One-to-one or 1-to-1: one property for one client.

• Private partnership structure: several properties for a small group of between 2 and 50 individual investors.

• MeesPierson Private Real Estate Investment Fund (REIF): a pan-European real estate investment fund that gives international investors the opportunity to invest in direct real estate in the 25 member states of the European Union. This is a completely new product on the market.

MeesPierson Private Real Estate Fund (REIF)

Through Fortis Private Banking, small and medium-sized private and institutional investors have the opportunity to invest in a unique direct real estate vehicle: MeesPierson Private Real Estate Fund. It is a closed-end real estate investment fund (REIF), which is a SICAF (investment company with fixed capital) registered in Luxembourg and quoted on the Luxembourg Stock Exchange.

The MeesPierson Private Real Estate Fund offers considerable flexibility with regard to profit distribution and allotment. Although it is quoted as an REIF on the Luxembourg Stock Exchange, it is an illiquid investment vehicle with a ten-year investment horizon. One of the unique features of this fund is that investors can sell their shares in the fund twice a year.

The fund offers a range of investment ‘compartments’, which each focus on a specific type of real estate (offices, logistics or shopping centres) and region (Western and/or Central Europe). Investors can therefore select the ‘compartments’ that best meet their requirements.

Of the four major real estate sectors - office, retail, logistics and residential - Fortis Private Banking is only involved in the first three, which offer the best potential. Initially, the fund’s regional focus will be on the eurozone in order to avoid exchange risk, with priority being given to the countries where Private Banking already has local teams, such as the Benelux, France, Italy, Spain, Poland, Hungary and the Czech Republic. In due course, the fund will invest throughout the European Union.

Investors can expect a minimum return of 9 to 11%, net of all expenses. This reflects in particular the tax-efficient structure of the fund and the quality of the underlying real estate. The income generated by the fund, from whichever EU member state in the structure, will not be subject to withholding tax on distributed income.