We often hear how “location, location, location” is the key to successful property investment. There is no doubt that location plays a crucial role in the success of an investment and that the decision as to which markets to target is an important aspect, but to say that it is “all about location” is very short-sighted.
Compared to other asset classes, real estate is highly heterogeneous. Every property is unique, and no two real estate portfolios will generate the same returns. Investing in real estate can therefore be a challenging process for investors. That is why we spend so much time researching the best markets to invest in.
Challenge 1: Measurement of CRE Market Values
Using a single indicator to track the value of multiple assets is called indexing. The index can be created simply by taking the average value of underlying assets in situations where the assets are similar and traded frequently. Unfortunately, CRE deals are not homogeneous in nature and infrequent. Due to these issues, index construction is highly complicated, and the industry has typically tracked market values by combining appraised or self-reported asset values. This creates an overly naturalistic and lagged picture of market prices.
Challenge 2: Market’s Regulatory Framework
Laws and regulations may exist in some jurisdictions, but their implementation may differ over time and across sub-markets. Certain regulatory discrepancies could lead to riskier investments and should be avoided. Taking Vietnam as an example, as of 2015, its law allowed foreign ownership of property. Yet, depending on the location, some buyers have been unable to obtain their property titles up to now. Although we may employ the best lawyers to draft the tightest legal documents, how the courts interpret them is another matter.
Challenge 3: Market Profiling
While index creation creates representations of many assets with a single series, representing a market requires the development of a concrete description for it in conjunction with multiple data series. With more relevant data obtained, market descriptions become more comprehensive and powerful. There is, however, some information not readily accessible. Therefore, not every property market is suitable for real estate investing.
RealVantage’s Approach to Market Selection
When it comes to selecting markets for real estate investment, RealVantage has three primary criteria.
Firstly, RealVantage considers the market’s regulatory framework. Being active in developed and emerging markets, they have gained an acute understanding of risks associated with markets with weak regulatory structures. Therefore, they have added the strength of a market’s regulatory framework to the list of threshold factors in institutional investors’ selection process. By doing so, they will avoid investing in markets that may be unstable or unregulated.
Secondly, RealVantage considers the depth of a market. Market depth corresponds to how rich opportunities are in a particular market, and how liquid the market is. Therefore, it makes more sense to prioritise markets with meaningful size and depth over shallower ones. In this way, investors can determine whether a market is viable for investment based on a measurement of its supply and demand. Additionally, depth is an excellent indicator of liquidity. To realise paper gains, an investor has to be able to sell when he or she needs to exit. Since RealVantage has specific investment timelines, this factor is of particular importance.
Thirdly, RealVantage considers the transparency of a market. It is vital to have transparency in real estate investments so that the asymmetry of information is reduced. Furthermore, transparent markets provide us with the opportunity to acquire high-quality data for our artificial intelligence operations. An indicator of transparency is The Global Real Estate Transparency Index, which illustrates how transparent global real estate markets are. Market selection becomes more accurate with this information.
A successful commercial real estate investment strategy begins with the selection of the right market. For investors to stay ahead in today’s market conditions, their market selection methodology needs to be immune from human bias and free from arbitrary data limitations. Additionally, their methodology should also be robust enough to assess any market’s current state and future trajectory.
January 15, 2021
January 15, 2021
January 16, 2021