The Restructuring of the Institutional Real Estate Portfolio in the UK

1. The Restructuring of the Institutional Real Estate Portfolio in the UK Neil Dunse, Colin Jones and Nicola Livingstone

2. Introduction • Focus = 30 years of change in real estate portfolios of UK financial institutions • Research based on IPD data • Examine temporal patterns of transactions • Assess to what these changes reflect adaptations to risk and return OR changes to urban fabric

3. Constructing a Real Estate Portfolio • Heart of investment portfolio building is the balance between risk and return • Fundamental question is how to optimally diversify portfolio to reduce non systematic risk • Much research has been applied to achieve optimum portfolio of shares/gilts/property • Real estate allocation in a mixed-asset portfolio 15-20%

4. A Diversified Real Estate Portfolio • Greatinterest in diversification by dichotomous choice of real estate sector versus spatial location/region • Studies use different basic areal units and techniques but all divide the real estate into three sectors – industrial, offices and retail • General conclusion is that the principal route to diversification is based on sectors

5. Problems with Markowitz Mean Variance Concept • Approaches examine returns while risk is calculated by examining standard deviations and covariance of the assets • Approach is not necessarily relevant to many institutional investors that are increasingly viewing risk as a downside phenomenon or within a liability-driven investment • Ignores role of investment horizons, predictability of returns, and can misleading

6. Investment Horizons • Precise horizon is open to debate • Rehring (2010) argues property returns, risk and return are best measured over longer time horizons • He notes a rolling five year horizon is shortest time period for risk and return measurement • Expected future returns based on uncertain forecasts/sentiment partly based on (recent) economic and real estate trends and cycles

7. Active Property Investment • Active portfolio management involves the selection of individual properties with specific risk • Add value by controlling the asset and working to improve its cash flow for example through refurbishment or re- development

8. Urban Change • Stock of real estate investments is dynamic and nature of opportunities change over time • But not simply consequence of investors trying to improve cash flow • Wider investment =context of occupation demand set within urban economies but also information and transport technologies • Fundamental changes in urban real estate markets/decentralisation/new property forms such as office parks and retail warehouses

9. Institutional Portfolio Changes

10. Institutional Portfolio Returns and Risks 1985-2010 (5 year horizon)

11. Empirical Analysis of Restructuring • Isolate trends in transactions activity • HodrickPrescott (HP) filter is applied • HP Fiiter is an established statistical procedure used to separate the cyclical component from the long term trend in a time series of raw data

12. Trends in Net Transactions for Offices

13. Trends in Net Transactions for Retail

14. Trends in Net Transactions for Retail

15. Trends in Net Transactions in Industrial Property

16. Office Transactions: Deviations from Trend

17. Conclusions • Substantial changes to institutional portfolio over 30 years • Limitations of optimal portfolio theory is exposed • Risk and return figures dominated by macroeconomy (five year horizon) • Active institutional portfolio restructuring • Driven by urban change