Risk Decomposition of UK Unlisted Property Funds

This study sets out a practical methodology for assessing and measuring the risk of unlisted property funds on a forward looking basis. Renewed investor interest in property as an asset class had led to tremendous growth in the size and importance of the indirect property investment market. Having emerged during the early part of the century, unlisted property funds are now a widely used institutional investor conduit for property investment. However, the academic and commercial literature relating to the estimation of risk and return in property portfolios remains scant, in part due to the paucity of available data. However, this study makes use of a unique dataset of UK institutional unlisted property funds, provided by both Investment Property Databank and CBRE Investors Global Multi Manager. The data set is quarterly data covering the period Q4 2003 to Q4 2010, and provides significant depth in terms of the characteristics of the underlying property portfolios and the financial structure of the unlisted fund vehicles themselves. Modern factor modelling techniques are employed to identify and attribute the key drivers of both risk and return in these funds. The significance of a range of both fundamental and macroeconomic risk factors is tested. Conditional on the estimated factor models, we also look to identify if managers are adding value, that is, generating positive alphas. The final results are presented and their relevance for investment analysis and portfolio construction are discussed.