Real estate investment research needs to be fully placed in today’s challenging environment. This piece will lay out, why quantitative and qualitative research need to go hand-in-hand. It will be the basis for CORESTATE’s PropBlog – The state of the future.
Three months ago, I would have drafted this piece with a much stronger focus on the qualitative aspects of the matter due to the all-encompassing disruptive times that we go through. Now, as COVID-19 has thrown half of the world into a lockdown causing a rare global recession in H1 2020, it becomes evident how important quantitative and cyclical analyses are.
In fact, the two are equally relevant factors for successful investment strategies. While the factual, often history based quantitative analyses, which mostly target cyclical analyses, will identify the best short- to medium-term risk-adjusted performance1, qualitative analyses will look beyond the cycle.
Quality first
As real estate investments are typically held much longer than equity and fixed income, the investment analysis process has to anticipate a likely development of the individual sector and market over the next five to ten years. In fact, when thinking about the exit, today’s investor should anticipate what the then-investor will have to consider in ten years down the line.
Two very recent examples of where quantitative analyses based on historic information was not sufficient is the outperformance of Berlin, which most models underestimated severely five to ten years ago, and the underperformance of retail. For both, structural shifts and disruption have been the decisive factor in this development.
Therefore, research needs to be very broad, think out of the box and analyse trends that go far beyond the very fundamental analysis of supply (stock and vacancy rates / investible product) and demand (take-up and net absorption / liquidity). It has to understand the underlying drivers of those and how they will be impacted by social change, demographic shift and technical transformation.
Important developments to consider here are:
Just to name a few examples.
The quantitative framework – if history is any guidance
While all of the above is true, the real art is to put a price or a risk premium on each of those factors to establish a risk-adjusted fair value for an individual property, a portfolio or a market. This is where the quantitative aspect becomes crucial as the weight and relevance of a variety of factors vary over time and the point in the cycle.
Therefore, we need to look at history to understand cyclical developments. How does fundamental demand for commercial space react to economic shocks or in recoveries? How will interest rates behave in a Baisse or Hausse market? How will supply and demand imbalances impact the future performance of a market?
For these and many more questions, a deep understanding of fundamental economics and real estate data is crucial3. Advanced modelling and forecasting can help identifying mispricing in the market to support investment or disinvestment decisions.
Of course, Black Swans like the COVID-19 pandemic4 is something that neither the best models nor the best analysts can predict. What it tells us though is that there are and will be Black Swans further down the road and markets will remain cyclical. Thinking about risk and return scenarios when analysing future prospects therefore is key. It is also key to remain flexible and adapt strategies when the market environment requires. For all this, quantitative analyses are the backbone.
What is: Corestate PropBlog
Expect this PropBlog to deeply consider both the longer-term and structural trends as well as the cyclical developments. Doing so, we will not only try and entertain you but to deliver timely and opinion driven independent views of the market today and what’s lying ahead. The state of the future.
1 Which is very much dependent on the individual investor’s risk appetite | 2 According to the Canadian economist Dr. David Foot | 3 Therefore, the best data possible is crucial, which is – as we all know – still an issue in the real estate space. Markets are less transparent than other asset classes and often definitions differ among market participants or countries. This needs experience and local knowledge. | 4 Even though Nassim Taleb, who coined the phrase ‘Black Swan’, is adamant that COVID-19 is actually not a Black Swan. See: https://www.bloomberg.com/news/videos/2020-03-31/nassim-taleb-says-white-swan-coronavirus-pandemic-was-preventable-video
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This presentation has been compiled by Corestate Capital Investors (Europe) GmbH, a company of the CORESTATE Capital Group, 19.05.2020.
