GLOBAL – MSCI and IPD have come a step closer to bringing real estate into the burgeoning area of multi-asset risk modelling.
The Barra Private Real Estate Model (PRE2), launched this week, promises to enable investors to compare global property risks with those of other asset classes and integrate real estate into their risk management.
Institutional investors are increasingly managing multi-asset portfolios by focusing on the risk of individual investments rather than those associated with specific asset classes.
Multi-asset risk models have typically used public-market proxies for real estate, but MSCI claims it has created the "first global private real estate multi-factor risk model".
The new model incorporates IPD data on direct property markets in 31 countries, as well as farmland and forestry in the US and UK, including granular property type-by-region factors for each country.
Such an approach will be preferable to models that rely on public-market proxies, such as financial stocks as a proxy for New York property, or energy stocks as a proxy for Houston property.
According to MSCI, IPD's data shows that the relationships between these proxies and the markets they are substituting "all have very low statistical significance".
Peter Hobbs, managing director of research at IPD, said it would provide "fund managers unprecedented insight into global real estate risks".
A recent research paper, 'Private Real Estate: From asset class to asset', written by Greg Mansell, head of applied research at IPD, states: "Asset owners are moving towards a division of their investment criteria into a more practical framework – one that focuses on sources of risk and return. Investors are becoming less interested in allocating class by class, but more interested in identifying the sources of volatility in the portfolio."
The paper highlights the heterogeneous nature of the real estate market, which "causes difficulties when using market-level data to form asset-level, or even portfolio-level, investment strategies".
It also explains how "an adjustment to real estate's appraisal-based data is needed" if private real estate and public assets classes are to be compared "like-for-like".
The PRE2 model combines IPD's market coverage with a "Bayesian desmoothing methodology" that, according to the report, "improves upon the traditional techniques to desmooth private real estate appraisals, resulting in less noisy estimates, and the removal of significant distortions".
The launch highlights the motivation behind MSCI's acquisition of IPD last year, which has enabled it to gain a presence in the private property sector.
MSCI already covers the listed real estate markets – the MSCI World Real Estate Index tracks real estate investment trusts across 23 markets – but the company has seen growing demand from investors to bring real estate in line with other asset classes when managing portfolio risks.