MSCI’s property research boss on a year of rethinking risk

The global head of real estate research at index provider MSCI is predicting a “watershed year” for the ways in which multi-asset investors view property as an asset class – one in which the risks and returns of property investment will come under even greater scrutiny than before. “Real estate used to be quite a small part of the overall investment portfolio,” says Will Robson, speaking to EG as MSCI publishes its 2020 Emerging Real Estate Trends report. “As real estate becomes a bigger part of investment portfolios, it’s becoming a more significant contributor to portfolio risk. Asset allocators want a lot more insight on what is going on in those real estate portfolios and how it sits with the rest of the portfolio.” For evidence of what is front of mind for Robson as this shift gathers pace, look no further than the fact his report includes 45 separate uses of the word “risk” (46 if you include a footnote pointing to another MSCI paper). That’s more than the number of times the paper mentions “real estate” and “property” combined. The future is now If the vocabulary seems a given, the conversations are changing, Robson says – and the analytical challenge of bringing together asset-level risks and bigger, macroeconomic issues such as economic growth and interest rates changes should be in sharp focus. “The way an investment manager buying and selling buildings talks about risk is very practical, around things you do and the risks faced by the building,” he says. “When you’re talking about risk from the top down, from the asset allocation point of view, it tends to be very quantitative and focused on volatility, standard deviation and those kinds of things. The language and the way that risk is analysed has a bit of a gulf there… You need to marry the top-down and bottom-up views.” Climate risk tops the agenda for Robson, as it will for many of his associates across the property industry. What once seemed like “an abstract problem for the future”, he writes in the report, is now an urgent challenge and a risk fast materialising over the holding period of property investments, as owners of buildings facing flood or hurricane risk, for example, face issues of insurability. “It’s not that real estate has been ignoring the risks or not doing anything to try to combat climate change – in the past few years [companies] definitely have done and they recognise that you can do things to buildings to help solve the problem,” Robson says. “What we’re talking about is heavily integrating the quantitative financial analysis of climate risk in all its guises into the investment process, in a way that’s consistent with all other assets classes.” Multi-asset investors are going to be asking more and more detailed questions about real estate He continues: “Whether it’s regulatory of voluntary reporting regimes, the disclosure and reporting quantification of what you are actually doing in these portfolios is going to become much more important. [Companies should also focus on] identifying what you can do where in your portfolio and prioritising where the biggest bang for your buck is in terms of investing in things to improve the carbon position of exposure to physical climate risks.” Dig for the data Data will have to drive investors’ ability to dig more efficiently into the risks and rewards of their property investments, Robson says. The real estate industry has lagged some other sectors in its embrace of data, he believes, but that is now changing. “Real estate markets have become more transparent and there’s more data available,” Robson says. “As you have alternative data, machine learning and new technologies, that’s only going to increase, and the availability of data increases the amount of comparative analysis you can do of real estate investment alongside infrastructure investments or equity investments.” Crucially, he adds, new analytical tools should be used to help investors more easily compare their property investments with other asset classes – as well as ensuring they can make very specific, rather than general, comparisons. “Investors seem to be a lot more interested in the underlying risk-return characteristics of their investment – what it does versus their objectives – and less bothered about what the label is [in terms of asset class],” Robson says. “In that world you’re going to have to be able to demonstrate quantitatively the risk-return characteristics of an investment and compare them on a like-for-like basis with anything else that might be in the portfolio. “Investors are going to be asking more and more detailed questions about real estate. Rather than asking what does real estate do for a general portfolio, they’re going to need to know what it is that [their specific] real estate portfolio is doing to [their] multi-asset class portfolio. For that you need data and analysis.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette