Trading Private Real Estate: Pricing Evolution and Current Opportunity

In the second of three pieces looking at the benefits of secondary trading of private real estate, we use historic trade and bid:offer data to construct pricing series for individual funds and groups of funds.

• There is a high degree of correlation between individual UK balanced funds and each other and the overall aggregate series. This suggests a degree of interchangeability, allowing investors to confidently transact what is available.
• Historically, the balanced funds pricing series is very strongly correlated with the CBRE Monthly Index. Both lag UK REITs by a couple of months.
• The current discounts on offer on UK balanced funds – of the order 10% or so to NAV – look generous compared to the movement on the Monthly Index and also the rebound in REIT pricing. This could be an opportunistic value play.

In an ideal world, funds would trade every month (if not every day!) and creating a monthly price series at fund level would be simple. This doesn’t occur in reality, and so it is necessary to draw on other data – strong, but less so than actual trading data – to try to establish what pricing would have been had funds traded. We have set out in Figure 1 what we believe is the hierarchy of alternative data sources to a trade in the current month, as well as the relative value of those different data sources. This latter is useful to establish a margin of error around fund series and around amalgamated series seeking to combine a number of funds.

Figure 1: Creating a Pricing Series from PropertyMatch data

Source: CBRE Research, PropertyMatch

Figure 2 shows the PropertyMatch Index for 12 UK Balanced funds for which there is sufficient trade, pricing and NAV data (the latter from MSCI/AREF). It then combines these into a weighted composite to show more clearly the evolution of pricing for this fund type. The chart shows that while there are continuous fluctuations in pricing at the fund level, overall the funds broadly move together, particularly in times of significant market movement (e.g. post Brexit Referendum and onset of COVID-19).

Indeed, the 12 funds are highly correlated with each other and with the overall Index, with size tending to increase correlation as well as data quality. This suggests that investors may be rewarded for having a flexible outlook on the specific funds they invest in; if (particularly large) funds are interchangeable, tactical pricing opportunities on entry and exit may drive out-performance more than fund selection.

The range of pricing has typically been NAV-5% across the cohort, although this arguably tightened, and declined a little, in 2018-19. Having been at or just below NAV for much of 2010-12, 2013-18 saw UK Balanced fund pricing move to a small premium (c1-3%) – excluding 6-9 months either side of the Brexit Referendum. In early 2019, pricing shifted downwards to a discount of roughly -2.5% to NAV, until the onset of COVID-19 saw a sharp drop to -10.2% in April and -11.4% at the end of June. This apparent further fall is driven by more funds having updated pricing, rather than ever weakening sentiment; transaction prices have in fact been tightening since April.

Figure 2: PropertyMatch UK Balanced Funds Composite Pricing Index

Source: CBRE Research, PropertyMatch

The benefit of having a secondary market pricing index is that it enables comparison with other indices. Figure 3 plots the PropertyMatch UK Balanced Funds Index, CBRE Monthly Index and the EPRA UK Diversified Index. The first two are very strongly correlated, while the latter is a leading indicator of both; thus, what happens to REITs usually also happens within a couple of months to direct property and secondary fund pricing.

Figure 3: PropertyMatch UK Balanced Funds Composite Pricing Index versus CBRE Monthly Index and EPRA UK Diversified Index

Source: CBRE Research, EPRA, PropertyMatch

Figure 4 then plots observations on the PropertyMatch UK Balanced Funds Index against the CBRE Monthly Index. The strength of the relationship is clear, though it has strained a little of late. Arguably, secondary fund pricing has corrected further than would be expected – a view perhaps backed up by the recent sharp upturn in REIT prices. This might suggest that current pricing of UK Balanced funds on the secondary market represents an attractive potential tactical entry point.

Figure 4: PropeartyMatch UK Balanced Funds Composite Pricing Index versus CBRE Monthly Index

Source: CBRE Research, PropertyMatch