How should you be measuring investment risk in global real estate markets?
A wide range of global changes and challenges mean security and scale of income has become a major driver of investor decisions, so the ability of cities to attract people and talent pools will be a key determinant of income security in the coming decade. In our latest publication, 'Impacts: the future of global real estate', we’ve identified which cities are resource rich, young and fast-growing, economic powerhouses or at low risk of natural disasters, and suggested some locations and sectors where investors may want to take a closer look for security of income and potential rental growth.
Whatever your geography, sector or investment strategy, there are five key principles that we think will determine success in the global real estate industry over the coming decades:
1. Risk is the watchword. We are reassessing, recalibrating and redefining what risk is. Locations that used to be considered secondary or even tertiary now rival the old bastions of prime. Workspace that used to be considered Grade A is proving less popular among some occupiers than novel co-working and mixed-use spaces. Whole asset classes are changing as e-commerce alters the face of retail.
2. The risks of today are very different to those in the late 20th century. Today, when disruption confronts even large, well-established institutions, what constitutes a quality covenant? Is a single corporate office tenant in a purpose-built office block on a 25-year lease less risky than an old building let on short leases at low rents to a deep pool of small local businesses? The reliability of the latter income stream may prove greater.
3. It is income streams that matter. Pension funds, insurance companies and other institutions have to pay pensions to ageing populations throughout advanced countries. Such calls on income are new, but won’t go away. If the quality of income is the major consideration, it changes everything.
4. Asset classes formerly considered to be ‘alternative’ have appeared on institutional shopping lists. It is not late-cycle, asset-seeking desperation that’s driving this demand, but something bigger. The questions are: What to build? What to invest in? Which buildings to lease? Mixed-use, fine grain, flexible accommodation for living, working, playing, visiting and making needs to be reassessed. It’s tricky to manage (although new technology should help) but it may provide better long-term, stable, diversified income compared than a big-box, single-use building let on an institutional lease.
5. Real-estate investment risk is about people and where they want to be. To understand the investment performance of the future, we have to understand occupiers, of all types. World yields are at or near their nadir, so there will be no capital growth without rental growth.
Read more: Impacts: the future of global real estate