UK - Investors need fewer assets than they think to diversify their property portfolios, according to research by PRUPIM and Paul Mitchell Real Estate Consultancy.
The findings were presented by independent consultant Paul Mitchell at the Nick Tyrell memorial seminar held at JP Morgan in London.
The report authored by Mitchell and Paul McNamara, head of research at PRUPIM, suggested that the market, rather than specific risks, determine asset risk-weightings.
As a result, investors need fewer assets to diversify their portfolios or to track a benchmark - but asset-specific risks may have a disproportionate impact on portfolio risk, even though assets affected represent only a small percentage of the UK market.
Mitchell pointed out that investment researchers have tended to focus on market portfolios rather than assets. Much of the "received wisdom" on asset-critical factors - such as lease events, covenants, locations and functions - had not been examined, let alone weighted, because the industry did not have the metrics for the task, he said.
"There's a lack of a framework by which insights on assets can be applied," he added.
By deducting alpha to derive specific risk over a period of 10 years, the researchers found that the market had a dominant influence in around 70% of assets, with little evidence of other factors such as size and the yield. Asset-specific risk was therefore low, at between 2% and 10%.
This compares with a 40% market influence in previous cycles in the mid-1980s and mid-1990s.
"Assets typically have become less idiosyncratic and more like the market," Mitchell said, citing as one possible reason the fact that valuers now reflect market conditions more quickly.
When the research found high specific risk, it was associated with the run-up to lease events, such as shifts in expectations in the run-up to lease expiries, and favourable or unfavourable new lettings. Such deviations are most likely - and extreme - during periods of our economic stress, or where the market or valuers make assumptions that subsequently change.
In another presentation, Mark Callendar, head of research at Schroders, showed how a growing bias among institutional investors against smaller properties was actually causing portfolios to become more concentrated.
Multi-let properties, such as shopping centres, are often perceived to be less risky due to the underlying tenant diversity, but in reality they carry a lot of specific risks, Callendar said.
He added that the data suggested that these multi-tenant properties held more specific risks than single retail units.
Callendar said this raised the question as to whether investors should revise their strategic bias against smaller properties.
The event was held in memory of Nick Tyrrell, the former head of research and strategy at JP Morgan, who died in August 2010.