Top investors warn of danger of repeating past mistakes

Ten years on from the global financial crisis, a group of the world’s biggest real estate investors has challenged the industry to learn the lessons of the past, as market dynamics create growing appetite for risk.

The RICS’ Real Estate Investment Risk Forum (IRF), which comprises 40 of the world’s top investors representing more than $1tn (£758bn) of real estate assets, has warned in its first report that compressed yields are enticing investors to take more risks in search of higher returns.

Martin Brühl, chair of the IRF and chief investment officer at Union Investment Real Estate, told Property Week: “There is an awareness that because returns have been below long-term trends, investors are being driven to secondary and tertiary markets, which may lead to a mispricing of risk.

“There have been improvements, but there is an awareness the real estate sector needs to do more. People who say things are different now compared with the period before the GFC [Global Financial Crisis] are in danger of getting it wrong.”

The report found that since the last downturn, changes in the way that risk is managed have ensured the sector is better placed to weather volatile markets.

Rise of alternatives

However, the research highlighted several areas of concern. More than half (57%) of investors said they were worried about ‘style drift’ away from their disclosed investment strategy.

Other issues cited include the increased popularity of alternatives, which the report argued have a different risk profile to traditional sectors and require further investment in risk management, and increased prevalence of shorter and more flexible leases.

To improve risk management, the report called on the industry to learn from other investment sectors, impart the lessons learned to each new generation and establish a mechanism for the sharing of quality and comparable market data across borders.

“The real estate investment management business has been accused of making long-term investments with short-term memories,” said Philip Barrett, global chief investment risk officer at PGIM Real Estate.

“[An] increased focus on risk management will hopefully be the start of addressing this criticism.”

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