Real estate: Alternative no more
July 2012
IN BRIEF
Portfolios invested primarily in the “Big Two Traditionals,”
stocks and bonds, have limited levers for reaching required
returns without compromising risk objectives. Global private
real estate offers a potential solution:
• An investment market too big and established to
ignore, offering a wide range of options along the
risk/return spectrum.
• Characteristics reflecting both sides of the typical
60% stock/40% bond portfolio, bridging performance
between the two.
• Payouts that can grow in line with cash flows, unlike
those of fixed coupon bonds, offering the potential for
equity-like upside.
• Significant portfolio diversification benefits.
• Inflation sensitivity—without compromising real returns (as
with TIPs) or volatility (as with equities or commodities).
• Potential to improve absolute and risk-adjusted pension
portfolio performance and the likelihood of closing deficits.
• A wide array of subsectors and geographies that can help
investors design diversified portfolios to address their
specific investment objectives.
Is the current market environment
heralding the realization of a new
normal, a new world of uncertainty,
heightened volatility and slower
growth? Perhaps, but the reality
is that investment portfolios focused
on the “Big Two Traditionals,” bonds
and equities, are forcing investors
to compromise—either by sacrificing
return for lower volatility or enhancing
return at the expense of higher risk.
Real estate may offer a way out. This is
why we believe real estate is increasingly
being viewed, not as an alternative, but
as an essential portfolio component.
FOR INSTITUTIONAL AND PROFESSIONAL INVESTOR USE ONLY | NOT FOR RETAIL USE OR DISTRIBUTION
Real estate: Alternative no more
On one hand, while Treasuries and other investment-grade
bonds still offer lower volatility relative to risk assets, yields
are at or near historic lows, prospective returns are less than
attractive and mark-to-market returns could even turn negative once the specter of rising rates materializes. On the other
hand, while equities may still provide a return premium over
bonds (though at 2.9%, S&P 500 returns for the last ten years
ending December 2011 are less than inspiring) the current
concession in reaching for return is elevated volatility.
The result? Investors are, understandably, actively searching
out and investing in potential opportunities beyond the Big Two
Traditionals that can deliver when bonds and equities may not—
investments that, ideally, do not require the compromises that
investors are facing in their Big Two Traditional portfolios.
Global private real estate offers a potential solution.
Encompassing a wide variety of tangible investment opportunities, real estate can offer investors “optionality” in a world of
uncertainty—that is, the ability to participate in the capital
appreciation associated with strong markets and the downside
protection of a stable source of income in weak markets. This
optionality imbues global real estate with benefits that can
accrue to investors across a wide range of economic scenarios.
The following analysis examines the characteristics of global
private real estate investments and illustrates the beneficial
role these assets can play in addressing pension funding
issues. Additionally, it examines how real estate’s broad range
of investment opportunities can be used to construct diversified real estate allocations to help all types of institutional
investors improve the trade-off between dampening portfolio
volatility and enhancing returns.
Private commercial real estate—a market too big and established
to ignore
EXHIBIT 1: TOTAL U.S. REAL ESTATE MARKET ($8.2 TRILLION)
Equity (62%)
$5.10 trillion
Debt (38%)
$3.10 trillion
Private (57%)
$4.71 trillion
Direct real estate
$2.4 trillion
Mezzanine
$130–$190 billion
Commercial mortgages
$2.1 trillion
Public (43%)
$3.48 trillion
REITs
$413 billion
Corporate-owned
real estate
$2.2 trillion
Commercial
mortgage-backed
securities
$698 billion
Unsecured REIT bonds
$160 billion
Source: U.S. Federal Reserve, Emerging Trends, NCREIF, NAREIT, Miles and
Tolleson, Prudential and J.P. Morgan. Data as of March 2011. Totals may not
add due to rounding.
achieve specific objectives, whether driven by risk targets,
return targets and/or annual income targets.
Exhibit 2 shows a risk/return curve for various real estate
investment strategies. Risk estimates are calculated using
historical annual returns (to “de-smooth,” thus increasing
volatility). Expected returns are based on J.P. Morgan’s
long-term return targets for the strategies shown.
Global real estate provides a range of opportunities along the
risk/return spectrum
EXHIBIT 2: GLOBAL REAL ESTATE—LONG-TERM EXPECTED RETURN
VERSUS HISTORICAL VOLATILITY (AS OF MARCH 2012)
China
real estate
India real estate
Higher
return
The private real estate investment universe is significant; too
significant, one could argue, to ignore. Estimates of the size of
the market differ from source to source, but the analysis in
Exhibit 1 sizes the U.S. total market for real estate equity and
debt at $8.2 trillion. Per DTZ Research, as of December 2011,
the total global stock of commercial property may exceed
$31 trillion, with about $20 trillion investable (i.e., available
for investment by private investors).
Investors have multiple ways to access that investment opportunity, each with its own risk/return profile, allowing for the
assembly of diversified real estate portfolios designed to
2 | Real estate: Alternative no more
U.S. opportunistic
Target return
A significant market with many ways to play
U.S. value-added
U.S. core-plus
Europe value-added
U.S. core
Volatility
Higher risk
Source: Bloomberg, NCREIF, J.P. Morgan Asset Management. Relative returns
and risk based on J.P. Morgan strategy target returns, as of March 2012.
NCREIF, Jones Lang LaSalle, DTZ Research.
The above information is provided for illustrative purposes only. Results
shown are not meant to be representative of actual investment results. Past
performance is not necessarily indicative of the likely future performance of
an investment.
Institutional real estate investors have traditionally
categorized direct investments along a similar risk/return
spectrum, comprised of core, core-plus, value-added and
opportunistic real estate.
Private real estate has generated total returns between those of
fixed income and equity…with significantly lower volatility
than equity
EXHIBIT 3: ANNUALIZED TOTAL RETURN COMPARISON
(DECEMBER 1977—MARCH 2012)
Annualized volatility since 1977
• Core investments are typically limited to higher-quality
property with strong income returns and low (<35%)
leverage in order to minimize risk.
• Value-added investments usually involve acquiring
properties with about 40% to 60% leverage that also offer
an opportunity to improve the quality of the asset (i.e., go
from secondary-level quality to core) through lease up of
vacant space, renovation or repositioning to another use
(e.g., converting from office to hotel space). Yield is
important, but appreciation is emphasized.
• Opportunistic investing, the riskiest flavor, involves either
developing new property or buying existing assets at steep
discounts before repositioning (like value-added) to create
value gains that will significantly outstrip the contribution
of yield.
We highlight these three “step ups” in return and risk as we
believe it is more appropriate to think about risk/return characteristics within ranges. Those ranges—denoted by the area
of the shaded ovals in Exhibit 2—increase as you go from core
to core plus to value-added to opportunistic.
Side 1 of the debt/equity coin: A stable,
bond-like yield
In terms of total return, real estate has historically delivered
performance that falls between equity and bonds (Exhibit 3),
a return that is, however, underpinned by stable, bond-like
yields. Exhibit 4 compares the actual or targeted long-term
yields for stabilized U.S. private real estate to yields for other
investments, including investment-grade bonds and equities.
The yields offered by real estate are attractive, particularly
relative to those of investments with lower levels of risk
(investment-grade bonds). It is only by moving aggressively up
the risk curve to, for example, high-yield bonds, that investors
will find higher absolute yield levels.
11.4
10
16.4%
8.1%
6.8%
9.1
8.2
Percent
8
6
4
2
0
S&P 500
Private real estate
U.S. bonds
Source: NCREIF, Barclays Capital, Standard & Poor’s, J.P. Morgan
Asset Management.
S&P 500 Index for U.S. equities, Lehman Aggregate Bond Index for U.S. bonds
and the NCREIF Property Index (unlevered) for U.S. private real estate.
Quarterly returns are used to calculate annualized volatility for the S&P 500
and Lehman Agg. Since annual returns are used for real estate to de-smooth,
volatility is calculated for the period from December 1977 through December
2011 for all three sectors.
Real estate offers a spectrum of yields that are attractive versus
many fixed income and equity investments
EXHIBIT 4: INCOME YIELD COMPARISON (AS OF MARCH 2012)
8
7
6.9
7.2
6.0
6
Percent
• Core plus generally implies a core mandate with between
40% and 60% leverage to amplify return on equity.
However, we should acknowledge that a core plus fund can
mean a fund with a mix of stabilized properties and projects
that offer value-added opportunities.
12
S&P 500
Private real estate
U.S. bonds
5
4.0
4
3
2
2.2
2.2
2.7
1
0
U.S.
bonds
Global
agg.
Global
equities
BBB
corporate
High
Core
Private
yield
plus
core
real estate real estate corporate
Source: Barclays Capital, MSCI, NCREIF, Bloomberg, J.P. Morgan
Asset Management.
Yield to worst as of March 2012: Lehman Aggregate Bond Index for U.S.
bonds, Global Aggregate Bond Index for global bonds. Barclays Corporate
Bond Index-8221 for BBB bonds, and Barclays Corporate High Yield Bond
Index-12 for high yield bonds. Current yield for the MSCI World Index (MXWO)
for global equities. For core and core plus, levered income yields are
calculated from the NPI cap-weighted current value capitalization rate
(5.53%), assuming LTV of 25% for core and 50% for core plus, and assuming
a spot whole loan mortgage cost calculated by adding spreads surveyed from
our third party lenders to the current 10-year Treasury on a monthly
periodicity (use quarter average of 200 bps).
J.P. Morgan Asset Management | 3
Real estate: Alternative no more
Real estate’s low volatility cash flow offers support for stable
total returns
EXHIBIT 5: REAL ESTATE APPRECIATION AND INCOME RETURN
COMPONENTS (5-YEAR ROLLING, ANNUALIZED, THROUGH MARCH 2012)
Rolling 5-year appreciation
(annualized)
Rolling 5-year income
(annualized)
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Percent
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
Source: NCREIF, J.P. Morgan Asset Management. NFI-ODCE index
gross returns.
Furthermore, investors can have confidence that these yields
are reliably stable. Exhibit 5 depicts the yield from core real
estate over time. There are two key takeaways: First, the real
estate yield for stabilized property has remained remarkably
strong over time with no significant declines, even over periods
of market stress. Many aspects of the property business lend
themselves to yield generation. Tenants often lease space with
multi-year contracts that lock in rates and may even allow for
periodic increases in the rent over the life of the contract. While
there is idiosyncratic risk associated with a single property
investment—e.g., a large tenant suddenly goes bankrupt or a
persistent decline in the attractiveness of a property’s
neighborhood results in secular declines in market rental
rates—a multi-property portfolio can largely diversify away such
risk. A diversified portfolio will span property types and
geographies. This serves to stagger lease renewals
(i.e., thousands of leases across a portfolio will come up for
renewal at different times, ensuring that at no time is an
exceedingly large percentage of the portfolio space at risk of
going vacant) and diversify the sources of rental income across
tenants employed in a variety of industry sectors. The result is a
portfolio that can be relied on to generate a relatively defensive
income return across multiple economic backdrops.
The second takeaway is that appreciation is also relatively
stable, with only two periods over 34 years in which negative
appreciation was sufficient to overcome the current yield, thus
resulting in negative total returns.
In fact, as with bonds, it is real estate’s yield that helps offset
price declines. Exhibits 6A and 6B demonstrate that, on
average, over periods when annualized five-year price returns
for private real estate have been negative, income returns
have been strong enough to offset those losses and generate
positive returns. We have shown two examples, one of which
compares U.S. real estate to U.S. stocks and bonds, and
Real estate’s bond-like yields underpin stable, positive total returns, even when price returns are negative. This is not so for equities.
EXHIBIT 6A: U.S. MARKETS—TOTAL AND INCOME RETURNS BY SECTOR
FOR 5-YEAR PERIODS WHEN SECTOR PRICE RETURN WAS NEGATIVE
(DECEMBER 1989–MARCH 2012)
U.S. bonds
Private real estate
S&P 500
8
7
7
6
6
5
5
4
4
Percent
Percent
8
EXHIBIT 6B: GLOBAL MARKETS—TOTAL AND INCOME RETURNS BY SECTOR
FOR FIVE-YEAR PERIODS WHEN SECTOR PRICE RETURN WAS NEGATIVE
(DECEMBER 1989–MARCH 2012)
3
2
1
0
-1
-1
-2
-2
Source: NCREIF, Barclays Capital, Standard & Poor’s, J.P. Morgan
Asset Management.
Period covered is from December 31, 1977 (inception of real estate indices)
through to March 2012. Rolling 5-year trailing price and income returns,
annualized from quarterly data. S&P 500 Index for U.S. equities, Barclays
Aggregate Bond Index for U.S. bonds and the NFI-ODCE Index (levered) for private
real estate. The U.S. bond income return includes the impact of pay down.
4 | Real estate: Alternative no more
U.S. real estate
Global equities
2
0
Average annualized
5-year INCOME return
U.K. real estate
3
1
Average annualized
5-year TOTAL return
Global bonds
Average annualized
5-year TOTAL return
Average annualized
5-year INCOME return
Source: NCREIF, IPD, Barclays Capital, MSCI, J.P. Morgan Asset Management.
Period covered is from December 31, 1989 (inception of U.K. real estate index)
through to 1Q12. Rolling 5-year trailing price and income returns, annualized.
MSCI World Total Return Index for global equities, Barclays Global Aggregate
Bond Index for global bonds, NFI-ODCE Index (levered) for U.S. private real
estate and IPD U.K. All-Property Index for U.K. private real estate. All series are
in USD except the IPD index (Great British Pound). Note the bond income return
includes the impact of pay down.
Bond yields respond negatively to rising 10-year Treasuries…but real estate capitalization rates show no consistent relationship
5
4
3
2
1
0
-1
-2
-3
-4
-5
EXHIBIT 7B: YEAR-ON-YEAR CHANGE IN 10-YEAR TREASURY YIELD
VERSUS NCREIF PROPERTY INDEX CAPITALIZATION RATES
3
R² = 0.83
-6
-4
YoY change in 10-yr Treasury (%)
YoY change in 10-yr Treasury (%)
EXHIBIT 7A: YEAR-ON-YEAR CHANGE IN 10-YEAR TREASURY YIELD
VERSUS BARCLAYS GLOBAL AGGREGATE BOND YIELD (YTW)
-2
0
2
Barcap Agg yield (YTW) (%)
4
R² = 0.02
2
1
0
-1
-2
-3
6
-6
-4
-2
0
NPI cap rates (%)
2
4
6
Source: U.S. Federal Reserve, NCREIF (NPI), Barclays Capital. Quarterly data 4Q 1980–1Q 2012.
Side 2 of the Coin: Ability to capture
equity-like upside
Real estate returns are underpinned by stable, bond-like
yields. However, while bonds pay out a fixed coupon over the
duration of the bond itself, real estate payouts can grow in
line with cash flow growth. What this means is that during
times of trend or above-trend economic growth, the expectations (and reality) of higher inflation and interest rates can put
downward pressure on bond and real estate prices, but expectations of cash flow growth can help counteract the impact on
real estate valuations.
Credit instruments do, of course, have one tool for resisting
price declines in a growth environment—tightening spreads over
the risk-free rate—but that’s where the toolkit ends. Real estate
valuations can benefit, not only from spread tightening, but also
from cash flow growth that can offset inflation-induced
increases in the cost of debt and thus in capitalization rates and
discount rates. Exhibits 7A and 7B provide direct evidence that
Once again, one of the reasons for this weak relationship is
that even when interest rates go up, if investors anticipate
growth in real estate cash flows, spreads are more likely to
compress, limiting the impact on values. In Exhibit 8 we find
evidence that core real estate cash flow is indeed correlated
to GDP growth with a four-quarter lag over the last 20 years.
As GDP improves, property cash flows will also generally
improve. While the response is lagged, it is likely that investors ultimately start to price in the probability of accelerated
cash flow growth, meaning that value growth, thus total
returns, may turn up more quickly than the actual cash flow.
Real estate cash flows at the property level respond to GDP growth
EXHIBIT 8: CORE REAL ESTATE NOI VERSUS REAL GDP GROWTH
15
NOI growth year-on-year
10
5
0
-5
-10
Real GDP quarter-on-quarter annualized
Jun-92
Feb-93
Oct-93
Jun-94
Feb-95
Oct-95
Jun-96
Feb-97
Oct-97
Jun-98
Feb-99
Oct-99
Jun-00
Feb-01
Oct-01
Jun-02
Feb-03
Oct-03
Jun-04
Feb-05
Oct-05
Jun-06
Feb-07
Oct-07
Jun-08
Feb-09
Oct-09
Jun-10
Feb-11
Oct-11
While the amounts do not seem large, note that $100 invested
in U.S. direct real estate (Exhibit 6A) over its down periods
would have grown, on average, to $110 over a five-year hold;
those investing $100 in the S&P 500 over its down periods
would have ended up with $94. In a low-return world, that
difference, particularly in down markets, is significant.
bonds will react more directly to interest rate movements, while
“growth” assets may not. Exhibit 7A shows a linear relationship
between 10-year Treasury and bond yields (i.e., if Treasury
yields go up, so do bond yields); this relationship is almost nonexistent between Treasury yields and real estate cap rates (7B).
Percent
another that compares, over a shorter time frame, U.S. and
U.K. real estate to global equities and global bonds. In both
cases, in periods of negative price return for the respective
asset class, bonds performed best, as would be expected, but
equities fared the worst, given their low dividends. Equity
investors would have suffered value losses in aggregate.
Source: MacData, NCREIF, J.P. Morgan Asset Management. As of March 2012.
Data is last 20 years. NOI is lagged four quarters. GDP is smoothed using a
two-quarter average.
J.P. Morgan Asset Management | 5
Real estate: Alternative no more
This is actually borne out by a simple but noteworthy analysis in
Exhibit 9. This study shows that the ability of real estate to
grow its cash flow translates into actual results; real estate, on
average, delivers better returns than bonds in higher-growth
environments. Since 1978, in years where U.S. real GDP growth
exceeded 4%, a proxy for higher growth years, real estate
sectors do well, often trailing equities, but in all cases exceeding
average returns for those years for U.S. bonds. (Note: While 4%
may be a fair cut-off for “high growth” over the period used
here, given the continued decline in the U.S. growth rate, trend
growth and thus the cut-off for “high growth” may actually be
declining.) Opportunistic and Europe value-added strategies did
particularly well in up markets, but this should be expected,
given their use of leverage. This is a clear manifestation of the
“optionality” of real estate investment in all its “flavors,”
providing investors—particularly in diversified real estate
portfolios—not only a stable yield when growth disappoints, but
also the ability to benefit from higher-growth environments.
Real estate returns respond, like equity returns, to
economic growth
EXHIBIT 9: AVERAGE ANNUAL RETURNS FOR PERIODS WHEN REAL GDP
GROWTH EXCEEDED 4%
25
often than not act differently enough to offer ongoing
diversification benefits. Real estate delivers that diversification
over most periods through two avenues: (1) differentiated
return and risk inputs, and (2) differentiated return behavior
particularly in down markets, a significant contributor to low
correlations, and thus, to diversification benefits over time.
First, the private real estate equity investment universe offers
multiple ways to access the real estate investment opportunity.
These various investment opportunities come with equity-like
total return targets ranging from a competitive 7% to 11% for
core/core plus property (gross of fees), to those that are clearly
attractive at 14% to 20% for value-added/opportunistic
strategies (net of fees). Exhibit 10 attempts to present best
estimates of expected returns for bonds, equities and property.
Return estimates are based on public sources for bonds and
J.P. Morgan proprietary research for equities and U.S. property.
(Note: Property returns use appraisal-based internal rates of
return levered using current secured debt costs; these are not
meant to be indicative of fund performance but of expected
Real estate offers investors a range of competitive and often
clearly attractive potential returns
EXHIBIT 10: POTENTIAL RETURN COMPARISON (SPOT OR AVERAGE OF
LONG-TERM TARGET RETURN RANGE, AS OF MARCH 2012)
22.2
20
20
18
14.0
15
16
12.4
8.1
5
0
18.0
= Spot or average
(of range if provided)
16.0
14
10
Percent
Percent
15.9
12
10.8
10
8.4
8
9.0
8.6
6
U.S.
opportunistic
S&P
Europe
value-added
NPI
Bonds
Source: Barclays Capital, Standard & Poor’s, NCREIF, Townsend, DTZ,
J.P. Morgan Asset Management.
Unlevered NCREIF Property Index for private real estate, Lehman Aggregate
Bond Index for U.S. bonds, S&P 500 Total Return Index for large-cap equities,
Townsend Opportunistic Real Estate series with added leverage for U.S.
Opportunistic and DTZ Research for Europe prime (core) real estate. Annual
return history from 1978 through 2011.
Diversifying agent: More different than
the same
After watching correlations “go to 1.00” during the Great
Recession, investors are even more keenly aware that there is
no perfect diversifier, particularly during conditions as unusual
as those experienced in 2008–2009. However, outside of those
rare, if damaging, periods, there are asset classes that will more
6 | Real estate: Alternative no more
4
2
2.8
0
Lehman
agg.
Global
equities
U.S.
RE @ 35% RE @ 50%
equities leverage leverage
U.S. China/India
RE (net)
opportunistic
RE (net)
Source: Barclays Capital, MSCI, Standard & Poor’s, Bloomberg, J.P. Morgan
Asset Management.
For core and core plus, levered real estate discount rates come from actual
acquisition appraisal IRRs (7.47%) and are levered at both 25% and 50% LTV
using whole loan mortgages calculated by adding spreads surveyed from our
third-party lenders to the current 10-year Treasury on a monthly periodicity
(use quarter average of 200 bps). Note: The formula of Bond OAS + 10-year
Treasury yield (USGG 10YR Bloomberg ticker) is treated as the discount rate
for each bond index, but actual discount rates, especially for high yield and
BBB bonds (8221) may be lower due to expected defaults. U.S. stock discount
rates are derived from dividend discount rate models of J.P. Morgan Asset
Management buy side stock analysts. Other real assets yields are target
ranges and averages for those ranges set and updated by J.P. Morgan
investment teams for the representative strategies. Note that J.P. Morgan
return targets for core and core plus strategies may differ from the estimates
of “current” expected returns shown here.
returns given market pricing of unlevered property and
commercial mortgage debt). J.P. Morgan strategy-specific longterm return targets (net of fees) are used where necessary. The
various real estate investment strategies allow investors a
flexible palette from which to construct a real estate allocation
that does not require a significant compromise on returns
whether sourcing the allocation from existing bond or equity
holdings from the typical Big Two Traditionals portfolio.
Additionally, volatility of total returns for most real estate
investment strategies is significantly lower than for equities.
Utilizing quarterly return series, our analysis in Exhibit 11
demonstrates the relatively stable nature of total returns for a
diversified real estate portfolio versus a 60/40 global stock/
bond portfolio. Not only are the returns less volatile, but
downside volatility is muted with the real estate portfolio
suffering negative quarterly returns only 12% of the time, or
approximately a third as often as the 60/40 portfolio, which
clearly has its tail pulled around by the volatile equity portion
of the allocation.
Real estate dances to its own tune…
While investors were disappointed in the performance of their
investments during the Great Recession when most, if not all,
of the various pieces of their portfolios joined together in an
ungraceful (black) swan dive, there is evidence that real estate,
more often than not, dances to its own beat, providing a
foundation for low correlations and diversification. This appears
to be particularly true in weaker markets, including the Great
Recession. In Exhibit 12, we show the performance for the
20 worst quarters for a 60/40 U.S. stock/bond portfolio paired
with the corresponding performance of private real estate over
the same quarters. In 17 of those 20 quarters, while the 60/40
portfolio is down, private real estate generated positive returns,
and in only two was the performance worse than -5%. This
complements and helps explain Exhibit 11’s conclusion.
Real estate’s low correlation with financial assets, particularly in
weaker markets, provides diversification
EXHIBIT 12: TWENTY WORST QUARTERS FOR 60% STOCK/40% BOND
PORTFOLIO RETURNS (1Q 1978–1Q 2012)
60% Wilshire 5000/40% U.S. Aggregate Bonds
A global private real estate portfolio exhibits stability and
diversification potential
5
EXHIBIT 11: COMPARISON OF RETURNS OVER TIME (4Q 2001–4Q 2011)
Percent
MSCI global equities
Equally weighted global private real estate portfolio*
0
-5
-10
3-1990
3-1994
6-1984
9-1986
3-1982
9-1999
3-2008
12-2000
9-1998
9-2008
3-2001
6-2002
3-1980
3-2009
9-2001
9-2002
9-1981
9-1990
12-1987
12-2008
-15
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Source: NCREIF, Barclays Capital, Wilshire, J.P. Morgan Asset Management.
Dec-01
Total returns ( %, quarterly)
Global 60% stock/40% bond portfolio
25
20
15
10
5
0
5
10
15
20
25
NCREIF ODCE Index
10
% OF TIME WITH A NEGATIVE RETURN
MSCI global equities
and 60/40
global equity/bond
4Q 2001–4Q 2011
34%
Equally weighted
global private
real estate*
12%
NFI ODCE is NCREIF index of total return for open-ended U.S. diversified core
funds. Wilshire 5000 Index for stock portfolio return, Barclays Capital
Aggregate Bond Index for bond portfolio return. Dates represent the ending
date of the 20 weakest four quarter periods of the last two decades in the U.S.
equity and debt markets through March 2012. Past performance is not
indicative of future results. Diversification does not guarantee investment
returns and does not eliminate the risk of loss.
* An equally weighted real estate portfolio is a naïve portfolio of U.S. core real
estate, European real estate (prime) and emerging market real estate (China).
Source: Bloomberg, NCREIF, J.P. Morgan Asset Management, Jones Lang
LaSalle, DTZ Research. 60%/40% portfolio reflects 60% MSCI World and
40% Barclays Global Aggregate Bond Index.
The above information is provided for illustrative purposes only.
Results shown are not meant to be representative of actual investment
results. Past performance is not necessarily indicative of the likely future
performance of an investment.
J.P. Morgan Asset Management | 7
Real estate: Alternative no more
8 | Real estate: Alternative no more
Exhibit 9 has already demonstrated the ability of real estate to
respond positively, like equity, to economic growth, thus allowing it to offset some of the negative side effects of “growthinduced” inflation and interest rate increases. Exhibit 14 charts
historical annual private real estate returns versus CPI over
Real estate proved itself through the economy’s last period of
“real” elevated inflation
EXHIBIT 14: NOMINAL RETURNS AND INFLATION INDICES, 1970–1985
4.5
Corporate debt
S&P 500
U.S. CPI
U.S. real estate
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Source: Standard & Poor’s, Barclays Capital (8221), NCREIF, J.P. Morgan
Asset Management.
1985
1984
1982
1983
0.0
1981
The reality is that diversification may not work in extreme (and
thankfully rare) conditions, but it does generally work outside of
those truly unusual markets. In more normalized periods, diversification is simply the fall-out from the, hopefully, lowly correlated zig-zags of the various investments held in a diversified
portfolio. The challenge for fund managers is to find those
asset classes that demonstrate a relatively persistent tendency to zig when other investments zag, particularly in
weaker market environments. The evidence is that private
real estate is one of those asset classes that, more often than
not, is more different than the same. This is the indispensable
foundation for low correlations and, thus, diversification
benefits over time. Even in an age of cynicism regarding the
benefits of asset diversification, real estate deserves serious
consideration as a successful diversifying agent.
The inflation sensitivity of real estate should also be relatively
persistent, as that capability is generally supported by structural elements. These elements include clauses in leases and
contracts that require annual rent (property) increases linked
to inflation and the sensitivity of values to the increases in
prices of inputs (e.g., commodities) for the assets themselves,
which, over time, supports value appreciation.
1979
Additionally, Exhibit 13 takes a look at how core real estate
responded to the market conditions of the Great Recession.
While it is true that most, if not all, assets fell together in late
2008 and early 2009, core real estate lagged the rest of the
market dramatically due to a lag in mark-to-market pricing. This,
in turn, offered investor portfolios a supportive pillar (like
Treasuries in this instance) just at the point where other publicly
traded assets were plummeting in unison. Real estate ultimately
corrected at a time when the typical investor’s stock/bond allocation was rebounding; the effect was to assist in smoothing out
returns (and AUM) during the downturn and eventual rebound.
Furthermore, the real estate rebound began in early 2010 and
has only recently really gotten underway per the NCREIF ODCE
index. The potential benefit moving forward for investors is that
if their stock and bond allocations take a breather from an
already dramatic rebound from the bottom, real estate may continue to contribute positively to portfolio returns.
1980
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Source: Standard & Poor’s, Barclays (8221), NCREIF, J.P. Morgan Asset
Management. As of March 2012.
1977
13-month lag
40
1978
50
1975
60
S&P 500
High yield
ODCE
7–10 year Treasury
1976
70
1974
80
1973
Index
90
1971
110
100
1972
120
Before entering into any conversation on inflation hedging, it
is important to acknowledge: (1) this is a complex topic with
many “ifs, ands and buts,” and (2) there are few, if any, investments that can serve as a perfect inflation hedge while, at the
same time, delivering attractive risk-adjusted returns. In fact,
while TIPS and specific sectors of the commodities markets
have proven inflation-hedging capability, the former suffer
from expected real returns close to 0%, and the latter (commodities) are often highly volatile. A powerful supportive
argument for a private real estate allocation is that property
cash flow and valuation offer a heightened level of inflation
sensitivity that can contribute meaningfully to a portfolio’s
ability to generate returns that meet or beat inflation in most
regimes, while exhibiting lower volatility than equities and
offering the potential of real returns, unlike TIPs.
1970
130
1969
EXHIBIT 13: PRICE RETURNS INDEXED FROM DECEMBER 2006
…and all this is delivered with proven
inflation sensitivity
Index
Even during the downturn of 2008–2009, real estate took its
own path
1970–1985, the only period since the early 1900s of sustained,
elevated inflation. This period, it could be argued, is the ultimate testing ground for a sector’s inflation-hedging capability.
Real estate did very well, while equities (S&P 500) did not.
Investment-grade corporate bond returns managed to exceed
inflation by the end of the period, driven by yields that were
elevated at the time, a result that is not likely this time around
given current yields. It should be noted that for property, the
real estate supply and demand cycle does matter: In the period
shown, particularly the late 1970s, there was little construction,
and landlords were able to raise rents, increase property cash
flow, and support total returns that beat inflation. However, in
the early 1990s, with exceedingly high levels of supply undermining landlord pricing power, private real estate failed to
match inflation.
Currently, supply remains remarkably low and should be supportive of real estate performance and, therefore, inflation
sensitivity moving forward. Exhibit 15 shows new supply for
the U.S. market as a percentage of the underlying stock (total
constructed space) for four property types. The analysis covers three periods of stress, including the three-year periods
before and after 1989, 1999 and 2007. The real estate market
was clearly overbuilding prior to the bear markets of the early
1990s and the 2000s, but not before the recent downturn.
Additionally, new supply has been comparably muted following the crisis in 2008 compared to the other two periods.
Finally, additions over 2011 have been even more constrained.
All this helps to shore up landlord pricing power even in the
face of only incremental demand growth/net absorption.
Case in point: Pension fund models
have spoken
Many pension plans struggling to improve funded status find
themselves confronted by the compromise discussed previously: Maintain low portfolio volatility (to protect assets) or
stretch for return (to grow assets). In the current environment
of historically low yields on government credit debt and elevated equity volatility, a pension fund manager with investments in only the Big Two Traditionals would have little choice
but to increase equities in order to grow assets and narrow
the funding gap. This shift, of course, would increase both
expected portfolio volatility and, consequently, value at risk.
Regardless of funded status, suffering asset declines is devastating, but it may be most damaging for an underfunded pension plan. Such losses are likely to exacerbate the underfunded pension manager’s natural risk aversion—at a time when,
facing the uphill challenge of increasing assets, the plan can
least afford to be too risk averse.
However, as the following analysis demonstrates, real estate
investments, particularly lower-risk core strategies, may offer
an attractive solution as a bridge between stocks and bonds,
generating income and equity-like returns, but with lower volatility. In fact, our analysis, which looks at several measures of
risk of particular importance to pension managers, provides
clear support for pension fund allocations to real estate.
Supply was constrained prior to the 2008 crisis—and continues to be so
EXHIBIT 15A: ADDITIONS TO SUPPLY IN PRECEDING THREE YEARS
THROUGH END OF…
18
1989
1999
EXHIBIT 15B: ADDITIONS TO SUPPLY IN LAST THREE YEARS SINCE
END OF…*
10
2007
16
9
14
8
1999
2007
2011*
7
Percent
12
Percent
1989
10
8
6
6
5
4
3
4
2
2
1
0
0
Office
Warehouse
Apartment
Source: TortoWheaton, Reis, J.P. Morgan Asset Management.
Retail
Office
Warehouse
Apartment
Retail
Source: TortoWheaton, Reis, J.P. Morgan Asset Management.
* Data for 2011 is solely for the calendar year.
J.P. Morgan Asset Management | 9
Real estate: Alternative no more
Sample pension plan analysis
Our theoretical case study focuses on a pension fund with
funded status of 80%: $800 of assets with a duration of 13
years compared to $1,000 of liabilities with a duration of 12
years. The current pension portfolio is allocated 60% to large
cap U.S. equities (S&P 500 index) and 40% to long duration
government/credit bonds (Barclays U.S. Long Government/
Credit bond index).
Using a J.P. Morgan model for analyzing pension fund performance, the analysis compares expected portfolio return/risk
measures across four allocation scenarios:
1. Base case: 60% equity/40% bonds
2. 10% unlevered private U.S. core real estate, funded
from equity
3. 10% unlevered private U.S. core real estate, funded
from bonds
4.10% unlevered private U.S. core real estate, funded
from 50% equity/50% bonds
This last scenario gives a nod to our “optionality” theory of
real estate as a beneficial blend of debt and equity performance characteristics.
Measuring pension plan performance
In evaluating the impact of adding a real estate allocation to
pension plan portfolios, our analysis looks at both standard
risk/return measures (returns, volatility, value at risk, Sharpe
ratio), as well as those specific to the management of pension
portfolios (surplus volatility and surplus value at risk).
Generating returns to support asset growth while managing
volatility to protect asset values is a universal portfolio management objective. Maintaining low portfolio volatility is the
key to managing asset value at risk (VaR)—a risk measure used
to estimate the probability and scale of potential portfolio
losses, based on historical data. Sharpe ratio (the ratio of
average portfolio returns in excess of the risk-free rate divided
by the standard deviation of portfolio returns) is a well-known
metric for assessing risk-adjusted performance.
Pension plans, in addition to managing asset volatility, are
also concerned with managing the volatility of funded status—
a function of liabilities as well as assets. As readers are no
doubt aware, over the past five years, more stringent accounting standards and funding regulations have intensified this
concern. Thus, along with portfolio volatility and VaR, our
analysis incorporates two additional risk measures of importance to pension managers: “surplus volatility”—the variation
(standard deviation) in the absolute value of the pension
funds’ surplus (deficit), which can be stated as a percentage of
overall assets, and “surplus value at risk” (Pension VaR)—the
maximum negative change in the pension surplus that can be
expected to occur over one year at a given probability level
(e.g., 95%). This calculation considers the expected returns
and volatilities of both assets and liabilities.
Risk and return assumptions
Our analysis uses J.P. Morgan long-term capital market
assumptions for unlevered core real estate, large-capitalization equities (S&P 500), long-duration government/credit
bonds (Barclays U.S. Long Government/Credit bond index)
and, for liabilities, long corporate bonds (Barclays Long
Corporate A or Higher index). These returns are exclusive of
alpha potential, thus are meant to represent only market beta.
Additionally, our cash rate assumption is used in computing
Sharpe ratios. Volatility measures are based on historical
returns (15 years); specifically, core real estate uses a monthly
series of delevered REIT returns to estimate annualized volatility in order to avoid understating real estate volatility. REIT
returns are delevered with a weighted-average cost of capital
methodology employing the leveraged REIT market returns
and returns for unsecured debt.
So, what do pension fund models say about
real estate?
Our analysis shows that adding a standard 10% allocation to
real estate, funded equally from equity and debt, can enhance
portfolio returns on both an absolute and risk-adjusted basis,
thus improving the likelihood of shrinking the pension funding
gap without significantly increasing asset volatility.
Interestingly, in comparison to the traditional 60% equity/40%
bond portfolio, using a standard 10% allocation to unlevered
private real estate improves the Sharpe ratio in all three
10 | Real estate: Alternative no more
EXHIBIT 16: RISK/RETURN PERFORMANCE FOR TRADITIONAL
60% STOCK/40% BOND PORTFOLIO VERSUS PORTFOLIO WITH
10% ALLOCATION TO REAL ESTATE (FUNDED FROM EQUITIES, BONDS
OR 50%/50% SPLIT)
Compound return
12.2
12
Volatility
10.9
11
10
Percent
Sharpe ratio (rhs)
12.4
0.48
0.47 11.6
0.46
0.44
7
6.7
0.45
6.6
7.0
6.8
6
0.44
0.43
5
4
0.47
0.46
9
8
0.48
Sharpe ratio
13
60/40
portfolio
Assets
Value at risk (VaR95)
Surplus volatility
(as % of assets)
Surplus value at risk
...with 10%
real estate
from equities
60/40
$800
$102
12.8%
$169
...with 10%
real estate
from bonds
...with 10%
real estate from
equity/bond split
0.42
With 10% real estate allocation…
from
from
from
equities
bonds
both
$800
$800
$800
$86
$102
$94
11.7%
$155
13.6%
$179
12.6%
$167
Source: Barclays, NAREIT, J.P. Morgan Asset Management.
Use Barclays long duration government bonds and delevered REIT returns for
a monthly real estate return proxy (also for calculating volatility). Analysis
utilizes J.P. Morgan’s Long-term Capital Market Return Assumptions—
estimates as of October 2011.
scenarios; return per unit of risk increases, whether the
allocation is funded from equity, debt or a 50/50 split (Exhibit
16). However, the appropriate funding approach depends on the
characteristics and funded status of the individual pension plan.
For example, the improvement in Sharpe ratio when allocating
from equity to real estate is the result of a significant decline
in volatility along with a decline (though less pronounced) in
modeled future returns (long-term assumptions are comparing
equity returns to unlevered real estate). However, surplus
value at risk and surplus volatility improve impressively. This
allocation shift may work for a funded plan, but not necessarily
for an underfunded plan stretching for return.
On the other hand, the improved Sharpe ratio when allocating
from fixed income to real estate reflects a dramatic increase
in portfolio return but a less significant rise in risk at the
portfolio level. Both surplus volatility and surplus value at risk
also increase (due in part to a lower level of asset-liability
matching, given the decline in fixed income). Notwithstanding,
this may be the preferred option for a plan that is significantly
underfunded, as the plan may be more willing to take on a
modicum of additional downside risk to its absolute deficit in
return for a higher potential growth rate for its assets.
Finally, the results from the third scenario, allocating to real
estate from both fixed income and equity, are noteworthy in
that they support our belief that real estate provides a
unique hybrid between equities and bonds. Here, Sharpe
ratio improves since the estimated future return for the
theoretical fund increases slightly, while volatility comes down
strongly. Surplus volatility decreases, though marginally (the
decrease muted somewhat by the decline in fixed income/
asset-liability matching), value at risk improves and surplus
value at risk stays steady. Thus, with no added volatility to
funded status, the prospective performance of the portfolio
is improved on both an absolute and risk-adjusted basis,
consequently increasing the chances of closing the deficit.
It is also worth noting that while we used a consensus 10%
allocation to real estate for the analysis shown in Exhibit 16,
adding more real estate results in steadily improving Sharpe
ratios across all three scenarios considered (Exhibit 17).
It appears that adding real estate for its unique blend of
lower volatility and equity-like, but stable, returns does
indeed allow investors to reduce portfolio risk without
compromising return.
The more real estate, the better
EXHIBIT 17: COMPARISON OF SHARPE RATIOS FOR INCREASING
ALLOCATIONS TO PRIVATE REAL ESTATE, FUNDED FROM EQUITIES,
BONDS OR 50%/50% SPLIT
0.52
Allocate from equity
0.51
50/50 from equity/bonds
0.50
Allocate from bonds
0.49
Sharpe ratio
Adding real estate to an underfunded pension plan can strengthen
absolute and risk-adjusted returns while either reducing or
maintaining volatility levels
0.48
0.47
0.46
0.45
0.44
0.43
0.42
0%
5%
10%
15%
Allocation to unlevered private real estate
20%
Source: Barclays, NAREIT, J.P. Morgan Asset Management.
Uses Barclays long duration government bonds and delevered REIT returns
for a monthly real estate return proxy (also for calculating volatility). Analysis
utilizes J.P. Morgan’s Long-term Capital Market Return Assumptions—
estimates as of October 2011.
J.P. Morgan Asset Management | 11
Real estate: Alternative no more
Building a diversified real estate portfolio
Historically, institutional investors have turned to real estate
for diversification of their traditional financial assets. As in our
pension example, for many investors, the first step in this
search for diversification has been to invest in U.S. core real
estate. Yet increasingly, the sheer variety of well-defined real
estate strategies allows access to a more global, diversified
set of investment opportunities.
In bringing together multiple real estate strategies within one
allocation, the investor can realize diversification benefits
within diversification benefits, as the overarching real estate
allocation is intended not only to diversify a fixed income and
equity portfolio, but also to encompass a group of complementary, but different, real estate strategies. Given the long
list of alternatives now available, this diversification of the real
estate allocation can be achieved along multiple lines, including style and geography, as well as major investment themes
such as income, value and growth.
For example, just as they have long done with their equity allocations, investors can gain exposure to real estate strategies
offering different investment styles, including value-added and
opportunistic. Strategies can also be selected to deliver global
diversification, perhaps by adding a European value-added allocation or a global real estate securities mandate. An allocation
to emerging markets through housing, office and infrastructure
developments supporting the enormous growth and mass
urbanization of developing Asian economies provides exposure
to both global diversification and economic growth. While
growth is slowing in the developed economies, the emerging
markets enjoy more attractive prospects for growth-induced
cash flow and price appreciation that should exceed that of
developed economies over the mid and long term.
There is no one-size-fits-all real estate allocation
These real estate strategies will generally act differently over
time, delivering on different themes. Investors can use these
degrees of non-correlation to their advantage in building
more diversified allocations to meet their specific objectives.
As Exhibit 18 demonstrates, there is a wide range of real
estate categories, each with a unique set of risk/return characteristics. For example, while U.S. core/core plus real estate
generates income-driven returns and sensitivity, an allocation
to European value-added real estate delivers complementary
style diversification (focus on finding upside, i.e., value) and
global diversification. As mentioned above, an allocation to
strategies focused on, for example, China and India, inject a
combination of growth and global diversification that is sorely
lacking from the traditional U.S. real estate allocation, even if
diversified across different styles. Finally, while U.S. REITs
have generated a blend of income and appreciation over time
that is in line with a U.S. core real estate investment, an allocation to international real estate securities currently offers
value, growth (in Asia) and global diversification.
Real estate subsectors can help investors design thematic solutions for their real estate allocations
EXHIBIT 18: REAL ASSET DIVERSIFICATION CHECKLIST
Income-driven
returns
Value
Growth
Inflation
sensitivity
√
√
√
√
√
√
√
√√
√√
√
√
√
√
√
√
√
√√
√√
Relative liquidity
Global
diversification
U.S. REAL ESTATE
Core/core plus
√√
√√
√√
Value-added
Opportunistic
INTERNATIONAL REAL ESTATE
√√
√√
Europe value-added
Europe opportunistic
Greater China real estate
India real estate
√
√
√
√
REITs
U.S. REITs
International REITs
Source: J.P. Morgan Asset Management.
12 | Real estate: Alternative no more
√
√
√
√
Diversifying a core-oriented real asset allocation can improve risk/return characteristics
EXHIBIT 19: COMPARISON OF A SAMPLE CORE-ORIENTED U.S. REAL ESTATE PORTFOLIO VERSUS A CORE-ORIENTED REAL ESTATE PORTFOLIO
WITH GLOBAL EXPOSURE
U.S. real estate portfolio
Globally diversified real estate portfolio
U.S.
opportunistic RE
15%
U.S.
value-added RE
25%
U.S.
opportunistic RE
10%
U.S. core RE
60%
Europe
value-added RE
10%
Emerging markets RE
10%
U.S. core RE
50%
U.S.
value-added RE
20%
RISK/RETURN CHARACTERISTICS
U.S. real estate portfolio
Globally diversified real estate portfolio
Target total return range
8%–9%
9%–10%
Target income range
4%–5%
3.5%–4.5%
Historical volatility (annual)
15%–17%
13%–15%
Sharpe ratio
~ 0.4
~ 0.6
% Core/Non-core
75%/25%
62%/38%
% U.S./Non-U.S.
100%/0%
80%/20%
Higher
Medium
DIVERSIFICATION
LIQUIDITY
Relative liquidity
Source: NCREIF ODCE, NCREIF Townsend, DTZ, Jones Lang LaSalle, JP Morgan GRA Research. Past performance is not indicative of future results. Diversification
does not guarantee investment returns and does not eliminate the risk of loss. J.P. Morgan seeks to achieve the stated objectives, but there can be no guarantee
the objectives will be met. For illustrative purposes only.
Notes: (1) The return ranges are derived from JPMAM-GRA internal estimates, are net of fees, gross of taxes and inclusive of the strategy-level alpha targets.
(2) The historical asset class characteristics are derived from historical annual return series (1992–2011) constructed for each of the respective asset classes.
(3) Sharpe ratio assumes a risk-free rate of 2%. (4) 60% of U.S. value-added real estate is assumed to comprise stabilized core properties. (5) The risk/return
characteristics are estimates within ranges.
The proof is in the putting
A strategic guidepost, not a finish line
Finally, Exhibit 19 demonstrates that there are concrete benefits to be earned by “putting” other real estate sectors into a
real estate portfolio with the objective of building out a diversified allocation. Compared to the typical, diversified real estate
portfolio of U.S. core, value-added and opportunistic, a globally
diversified portfolio looks better on a number of risk/return
metrics, including a significant increase in the Sharpe ratio supported by an increase in target return and decrease in volatility.
It is important to keep in mind that any real assets allocation
should be viewed as a strategic guidepost, not a finish line. To
be truly effective for the long term, a well-balanced, holistic
approach to real estate allocation must be flexible, allowing
the allocation to evolve over time based on changing needs,
tactical considerations and expanding opportunities.
J.P. Morgan Asset Management | 13
Real estate: Alternative no more
Conclusion
In a world where the Big Two Traditionals of bonds and
equities are forcing upon investors the uncomfortable
compromise of accepting historically low returns or elevated
portfolio volatility and, thus, increasing value at risk, investors
are actively searching out and investing in alternatives that
can deliver when bonds and equities may not. Global private
real estate investment potentially offers investors “optionality”
in a world of uncertainty, an optionality that imbues global
real estate with benefits that can accrue to investors across
various economic scenarios, avoiding the need to compromise. In summary, real estate total return performance has
historically fallen between equity and bonds, while generating
14 | Real estate: Alternative no more
yields that are competitive with other fixed income alternatives.
However, while bonds pay out a fixed coupon over the duration of the bond itself, real asset payouts can grow in line with
cash flow growth, offering the potential for equity-like upside.
These attributes result in unique, if not perfect, diversification
benefits. And real estate provides a heightened inflation
sensitivity—without requiring compromise on real returns
(as with TIPs) or volatility (as with equities or commodities).
It is not surprising that increasingly investors are coming to
the realization that real estate is no longer an “alternative”; it is
now an essential consideration for any investor looking for
solutions to the challenges posed by a portfolio invested solely
in the Big Two Traditionals—stocks and bonds.
AUTHOR
CONTRIBUTORS
Bernie McNamara, Product Manager, Global Real Assets Omni
Pulkit Sharma, Associate, Global Real Assets Omni
Alicia Barrett, Analyst, Strategy Group
Michael C. Hudgins
Global Real Estate Strategist
[email protected]
J.P. Morgan Asset Management | 15
Real estate: Alternative no more
All plan examples are shown for illustrative purposes only and are not meant to be plan construction recommendations.
Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject
to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies
described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not
intended to be, and should not be interpreted as, recommendations. Indices do not include fees or operating expenses and are not available for actual investment.
The information contained herein employs proprietary projections of expected return as well as estimates of their future volatility. The relative relationships and
forecasts contained herein are based upon proprietary research and are developed through analysis of historical data and capital markets theory. These estimates
have certain inherent limitations, and unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees or other costs. References
to future net returns are not promises or even estimates of actual returns a client portfolio may achieve. The forecasts contained herein are for illustrative purposes
only and are not to be relied upon as advice or interpreted as a recommendation.
Real estate investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate
investing may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general or economic conditions, changes in the
value of the underlying property owned by the trust and defaults by borrower.
Diversification does not guarantee investment returns and does not eliminate risk of loss.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued
by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is regulated by the Financial Services Authority; in other EU
jurisdictions by JPMorgan Asset Management (Europe) S.à r.l., Issued in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market
Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia)
Limited, all of which are regulated by the Securities and Futures Commission; in Singapore by JPMorgan Asset Management (Singapore) Limited, which is regulated
by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited, which is regulated by the Financial Services Agency; in Australia by
JPMorgan Asset Management (Australia) Limited, which is regulated by the Australian Securities and Investments Commission; and in the United States by
J.P. Morgan Investment Management Inc., which is regulated by the Securities and Exchange Commission. Accordingly this document should not be circulated or
presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the
income from them may fall as well as rise and investors may not get back the full amount invested.
Target returns: Target returns shown are not meant to represent actual returns of the strategy. The target return is provided for illustrative purposes only and is
subject to significant limitations. An investor should not expect to achieve actual returns similar to the target return shown herein. The target return is the manager’s
goal based on the manager’s calculations using available data, assumptions based on past and current market conditions and available investment opportunities,
each of which are subject to change. The target return cannot account for the impact that economic, market and other factors may have on the implementation of an
actual investment program
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