Real estate investors are pouring into property assets around the world but do not properly understand the risks of doing so, according to new research

February 11, 2014 3:05 pm

Investors warned over real estate risks

By Kate Allen

Real estate investors are pouring into property assets around the world but do not properly understand the risks of doing so, according to new research.

Investors in North America, Europe, Asia and Australia do not have sufficiently strongrisk management procedures and have not integrated their real estate teams into their wider asset allocation systems, the report by property data specialists IPD/MSCI found.

Investors do not appreciate the complexity of real estate as an asset class or the limitations of available performance benchmarking data, while many of those who do attempt to measure the performance of theirproperty investments are using the wrong benchmarking comparisons, according to the report.

In particular, many investors do not fully understand the diversity of real estate assets and the changing nature of risk in the sector through the property cycle.

Peter Hobbs, IPD managing director, said: “The risk people don’t understand real estate and the real estate people don’t understand quantitative [risk] models. At the multi-asset level, real estate needs to be linked up on a par with other asset classes.”

The problem is escalating as real estate becomes increasingly popular among investors searching for higher yields than bonds and less volatility than equities. “Money is pouring in, [investors] are allocating more of their portfolio to real estate, and [risk] is becoming a big issue,” Mr Hobbs said.

The demand for property assets is pushing investors into riskier behaviour, he added – particularly by putting money into development because of a shortage of already-built assets to buy.

Roger Urwin, global head of investment content at risk management consultancy Towers Watson, said: “The investment world has begun to take up investment into real estate, but hasn’t yet got the governance processes in place to do it well. At the board level there isn’t sufficient clarity about real estate assets’ contribution to the overall risk mix.”

The investment world has begun to take up investment into real estate, but hasn’t yet got the governance processes in place to do it well

– Roger Urwin, Towers Watson

Two groups of investors in particular are running greater risks than they realise, Mr Hobbs said. The first are new entrants to the property market from Asia and the Middle East who are eager to spend and do not have a sufficiently sophisticated understanding of property markets around the world.

The second group of investors at risk are large, sophisticated companies that believe they are correctly assessing risk but are using the wrong models and comparisons to do so, Mr Hobbs said. In particular, US-based investors are using domestically focused benchmarking data to assess their performance, despite a substantial proportion of their investments now being overseas. Canadian and Nordic investors are making the same mistake, the report found.

In total about 80 per cent of those surveyed by IPD/MSCI are using misaligned benchmarks.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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