Applying a 360-degree approach to property allocations

Executive summary

• Applying a universal approach to property allocations can offer investors an opportunity to achieve superior risk-adjusted returns throughout the property occupancy cycle. The unique characteristics of the real estate asset class, combined with visibility on the underlying cash-flow streams, is what enables real estate investors with a deep understanding of the property cycle to implement a 360-degree approach to their property strategy and portfolio allocations.
• In practice, applying a 360-degree approach to property investment consists of looking at the four-quadrant universe in a given market or region to assess the underlying risk-reward characteristics, as well as market pricing for the entirety of the capital stack and various investment vehicles.
• Traditionally, each quadrant has been priced in isolation with specific capital sources driving pricing based upon regulatory constraints. A number of market participants price a given property investment relative to other asset classes rather than comparing debt and equity pricing on the same underlying property or, if applicable, to comparable quality listed property company stocks or bonds. The result is pricing that is often disconnected with the inherent risk-reward relationship up and down the property capital stack and across instruments.
• By combining a more universal approach to property portfolio construction through the cycle and constantly monitoring relative value pricing across the four-quadrant property-investment universe, property investors could optimize their overall risk-adjusted return profile. Of course, this approach is anchored on a manager’s ability to “read the cycle” and find relative value trades up and down the capital stack and across the various investment instruments but, ultimately, it could be a real alpha generator.
• In addition to portfolio construction, this universal approach to property could be used to create blended real estate products that seek to circumvent some of the inherent difficulties in building property allocations while remaining firmly rooted in offering underlying property-level investment performance.

The unique characteristics of property combined with visibility on the underlying cash-flow streams, enables real estate investors with a deep understanding of the property cycle fundamentals to implement a 360-degree approach to their investment strategy and portfolio allocations. Applying this universal approach to property allocations can, we believe offer investors an opportunity to achieve superior risk-adjusted returns throughout the property occupancy cycle. In addition to superior risk adjusted returns, a 360-degree investment approach can yield portfolio characteristics geared towards specific attributes, such as inflation linkage and certainty of income driven by recurring cash flows as well as a shift away from benchmarks towards a more total return/IRR driven portfolio strategy.