Residential property as an Institutional Assets (Swiss & Dutch Case)
Journal of Property Research, December 2006, 23(4) 323-345
By Joaquim Montezuma (Imoeconometrics, Portugal) and Kenneth Gibb (Univ. of Glasgow, UK)
Housing is the most important institutional property asset type in Switzerland and Netherlands, comprising over 52% and 50% of the Swiss and Dutch institutional property portfolios respectively (Wuest & Partner 2003 and Institutional Property Investors in the Netherlands, 2003).
Two criteria used to evaluate residential property as an institutional asset group:
Direct residential property is compared with other asset groups: shares, government bonds, and indirect non-residential property.
Swiss and Dutch housing systems have a large rental sector, which is related to historical government intervention in the form of subsidies and allowances to both the social and private rented sectors and restrained encouragement of owner-occupation tenure.
The mixed provision within the rental sector is, however, significantly different in those two countries. Netherlands has predominance of social renting, i.e. 40% of Dutch housing stock, while, Switzerland has a clear preponderance of private renting, i.e. 60% of Swiss housing stock. (Balchin, 1996 and Kleinman et.al., 1998).
There have been numerous empirical studies to understand the risk-return characteristics of housing property and its contribution to risk diversification within a mixed-asset portfolio according to the Modern Portfolio Theory (Markowitz, 1952).
In 1984, a study compared the US property returns (commercial, farm, residential) witho those of shares, corporate and government bonds, short-term bills and inflation over the 1947-1982 period. The later studies confirmed that returns on direct residential property have been between those of shares and bonds, and that residential returns are lowly correlated with the returns on financial assets. Furthermore, the studies also indicated that direct residential property offers attractive diversification opportunities for share and bond portfolios.
Empirical studies report that residential property is weakly correlated with non-residential property. thus, housing investment should provide property diversification opportunity. Housing investment could play a potential role within portfolios of different property types. However, since other property segments can offer diversification benefits to financial assets, and since diversification across property segments involves high cost and the administrative burden of selecting and managing the investment, the former conclusion is not certain.
Europe Housing Policy and Private Rented Sector
European private rental markets tend to have experienced secular decline in size both in absolute and relative terms (Balchin, 1996). European rented markets have relied heavily on various forms of rent controls in the belief that such measures protect tenants and redistribute income. Such regulation remains widely in place in Europe, but not in the UK.
Key question for rental market policy concern, on the supply side, the composition and objectives of private landlords, as well as the fiscal and other forms of financial support that may be open to investors. Regulatory measures are also important through the monitoring of landlord behaviour and the achievement and enforcement of minimum standards.
On the demand side, policies are concerned typically with the affordability of rental housing and the use of housing allowances, rent controls and such measures to achieve reasonable housing costs.
Many countries also impose anti-discrimination regulation to enable access for minority groups seeking rented housing.
Analysis of the rental market in different national housing systems has identified a number of tensions that undermine the coherence of rental housing policy.
1. Policy often failed to distinguish between the different motivations of the main types of supply actors in rental markets. Individual landlords with small portfolios of property, relatively unresponsive to economic signals, often constitute the largest landlord interest group by size of stock. Their stock is typically older than the average. Institutional investment in private renting, on the other hand, consisting pension funds, banks and insurance companies tend to be economically rational and focused on diversifying risk. Housing policy (not just fiscal policy) has to reconcile these wholly different interests.
2. Policies aimed at the owner-occupied sector at one extreme and at social housing on the other, may not take sufficient account of their consequent impact on private renting. This is despite the fact that rental markets play a key role as housing of the last resort or easy access housing (in relation to social housing) and as a means to assist would-be home owners set up home and save towards a downpayment. From a housing system point of view, changes in one part of the market directed at the other sectors can all too easily spill over into the rental market. Rental markets are often therefore the pressure point of the entire housing system.
3. Policies aimed at protecting tenants continue to be based around rent controls despite the extensive international evidence about their negative effects, albeit that one has to examine the design of individual policies before assessing the impact of controls on non-controlled tenants, on investment and housing quality disincentives and on housing shortages.
It is in this challenging environment that one needs to consider residential investment within a mixed asset portfolio.
Housing policies and the market environment for private rented housing in The Netherlands and Switzerland.
The Netherlands
By Joaquim Montezuma (Imoeconometrics, Portugal) and Kenneth Gibb (Univ. of Glasgow, UK)
Housing is the most important institutional property asset type in Switzerland and Netherlands, comprising over 52% and 50% of the Swiss and Dutch institutional property portfolios respectively (Wuest & Partner 2003 and Institutional Property Investors in the Netherlands, 2003).
In Sweden and the US, residential property plays an important but not dominant role in the domestic institutional property portfolios, representing about 21% and 25% of the institutional property holdings respectively. (Brzeski et al., 1993).
In UK, an extreme case, the institutional allocation to residential property is virtually nonexistent. (Jones Lang LaSalle,2000).
1. The size of the private rented stock potentially available for institutional investors must be sufficiently large in order to provide significant diversification benefits.
2. In terms of risk and return, housing must offer good mean-variance performance.Direct residential property is compared with other asset groups: shares, government bonds, and indirect non-residential property.
Swiss and Dutch housing systems have a large rental sector, which is related to historical government intervention in the form of subsidies and allowances to both the social and private rented sectors and restrained encouragement of owner-occupation tenure.
The mixed provision within the rental sector is, however, significantly different in those two countries. Netherlands has predominance of social renting, i.e. 40% of Dutch housing stock, while, Switzerland has a clear preponderance of private renting, i.e. 60% of Swiss housing stock. (Balchin, 1996 and Kleinman et.al., 1998).
There have been numerous empirical studies to understand the risk-return characteristics of housing property and its contribution to risk diversification within a mixed-asset portfolio according to the Modern Portfolio Theory (Markowitz, 1952).
In 1984, a study compared the US property returns (commercial, farm, residential) witho those of shares, corporate and government bonds, short-term bills and inflation over the 1947-1982 period. The later studies confirmed that returns on direct residential property have been between those of shares and bonds, and that residential returns are lowly correlated with the returns on financial assets. Furthermore, the studies also indicated that direct residential property offers attractive diversification opportunities for share and bond portfolios.
Empirical studies report that residential property is weakly correlated with non-residential property. thus, housing investment should provide property diversification opportunity. Housing investment could play a potential role within portfolios of different property types. However, since other property segments can offer diversification benefits to financial assets, and since diversification across property segments involves high cost and the administrative burden of selecting and managing the investment, the former conclusion is not certain.
Europe Housing Policy and Private Rented Sector
European private rental markets tend to have experienced secular decline in size both in absolute and relative terms (Balchin, 1996). European rented markets have relied heavily on various forms of rent controls in the belief that such measures protect tenants and redistribute income. Such regulation remains widely in place in Europe, but not in the UK.
Key question for rental market policy concern, on the supply side, the composition and objectives of private landlords, as well as the fiscal and other forms of financial support that may be open to investors. Regulatory measures are also important through the monitoring of landlord behaviour and the achievement and enforcement of minimum standards.
On the demand side, policies are concerned typically with the affordability of rental housing and the use of housing allowances, rent controls and such measures to achieve reasonable housing costs.
Many countries also impose anti-discrimination regulation to enable access for minority groups seeking rented housing.
Analysis of the rental market in different national housing systems has identified a number of tensions that undermine the coherence of rental housing policy.
1. Policy often failed to distinguish between the different motivations of the main types of supply actors in rental markets. Individual landlords with small portfolios of property, relatively unresponsive to economic signals, often constitute the largest landlord interest group by size of stock. Their stock is typically older than the average. Institutional investment in private renting, on the other hand, consisting pension funds, banks and insurance companies tend to be economically rational and focused on diversifying risk. Housing policy (not just fiscal policy) has to reconcile these wholly different interests.
2. Policies aimed at the owner-occupied sector at one extreme and at social housing on the other, may not take sufficient account of their consequent impact on private renting. This is despite the fact that rental markets play a key role as housing of the last resort or easy access housing (in relation to social housing) and as a means to assist would-be home owners set up home and save towards a downpayment. From a housing system point of view, changes in one part of the market directed at the other sectors can all too easily spill over into the rental market. Rental markets are often therefore the pressure point of the entire housing system.
3. Policies aimed at protecting tenants continue to be based around rent controls despite the extensive international evidence about their negative effects, albeit that one has to examine the design of individual policies before assessing the impact of controls on non-controlled tenants, on investment and housing quality disincentives and on housing shortages.
It is in this challenging environment that one needs to consider residential investment within a mixed asset portfolio.
Housing policies and the market environment for private rented housing in The Netherlands and Switzerland.
The Netherlands
About one in ten households rent privately (Ball, 2003). There have been particularly large declines in urban centers in recent years. In 1993, about 40% private housing rent was institutionally owned rental housing, predominantly apartments, which consequently, smaller properties than the Dutch average. New investment is institutionally sourced, good quality housing, and is targeted at higher income groups and the elderly. Institutions received subsidies to promote such investment but these were reduced in 1990s. Small-scale landlords are selling up to other tenures when the opportunities arise and that growth or the re-composition of the tenure is occurring through institutional growth and gradual quality improvement in the sector overall, albeit at a smaller scale. Vesteda, AZL, Vermogensbeheer BV, Fortis Vastgoed, Delta Lloyd Vastgoed, Altera Vastgoed, Amvest, ING Real Estate, among others, are Dutch institutional investors who have residential property in their portfolios.
Switzerland
More than three in five Swiss households are private tenants, setting the country's housing system apart from the rest of Europe. The small size of the home ownership sector also means that the housing market is less liquid so it is harder for the sector to grow and this process is cumulatively causative. Although market dominated, this does not mean that Swiss housing is unregulated. It has, in fact, operated within a host of price, quantity and quality restrictions, and with political reversals over policy to move, respectively, closer to or further away from the market over time. (Lawrence 1996). Half of the rental stock is owned by individuals and around 30% by institutions (Ball, 2003).. Warteck Invest AG, Prevista Anlagestiftung, Swiss Life, Bassellandschaftliche, Teachers Pension Fund of Beune, CIA, Caisee de Prevoyance, Allreal Holding AG, Baloise Insurance Company, Swiss Re, Zurich Insurance Company, IntegralStiftung, BAV Pensionskasse, Pensionskasse Post, Personalvorsorgekasse, among others, are Swiss institutional investors who have residential property in their portfolios.
Comments
Post a Comment