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Survey has found diminishing returns are driving trends in property investment diversification

A decade after the global financial crisis, the Royal Institution of Chartered Surveyors (RICS) Investment Risk Forum has found diminishing returns are driving real estate investment diversification. In a report drawing on responses to an extensive survey with follow-up interviews, the forum explores whether lessons from previous cycles have been learnt to mitigate future risk.

The forum comprises more than 40 of the world’s most influential real estate investors. It was established to foster industry leadership and share best practice, with the aim of enhancing the industry’s approach to risk management.

The report highlights trends and perspectives influencing risk management in real estate investment. TC Chetty, RICS country manager in South Africa, says it is designed to stimulate discussion and act as a foundation for ongoing leadership.

“Concerns are raised around the availability and consistency of cross-border property data, a challenge becoming more acute as the industry grows internationally, and as investment volumes grow in emerging markets. Advances in risk management have come at a time when investment has reached new highs, when yields have been compressed and competition for returns is fierce. Investors are observing a growing risk appetite, with moves into alternative, non-traditional assets becoming increasingly widespread.”

One interviewee in the survey said student housing is being recast as traditional, so the definition of alternative is changing. A 2017 McKinsey report reflected this momentum toward non-traditional asset classes such as student housing, data centres, healthcare offices, medical facilities and assisted-living communities.

“This move to alternatives is changing the risk profile of investments as hotels, student accommodation, healthcare and the private rented sector behave differently from traditional core assets such as offices. When understood correctly, these assets create new opportunities for investors.”

The report also highlights a trend towards greater flexibility in the way properties are designed, managed and leased by occupiers. Co-working, flexible space is becoming more prevalent in the office sector. As a result, leases are becoming shorter and more flexible, with covenant strength tested in new ways. For investors the opportunity to acquire assets with long-term tenants in place is less prevalent.

Driverless cars will be a reality, so investors with multi-storey car parks are thinking about the risk and opportunities.

The forum notes in 2017, the sector appeared better placed to manage and mitigate risk. Experiences of the last downturn have prompted material changes in the way investors are set up to weather volatile markets. However, there are areas which the industry must tackle to improve risk management. These include doing more to ensure quality, comparable real estate market data is available across borders.

Based on current market conditions and sentiment, investors noted the top three risks to be:

Changing real estate occupation and use habits.

Unrealistic valuations.

New generations of employees lacking experience of property cycles.

Chetty says the forum concludes there is a need for greater leadership and best practice in risk management systems and processes, drawing on lessons from other investment sectors.

“The industry must improve knowledge-sharing to ensure new generations learn from the experience of previous cycles, and share thinking, insight and best practice.”

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