GLOBAL - Geography will cease to be the main factor of real estate funds in the future, and managers will increasingly define their products based on their risk-return profile, an online audience was told during IP Real Estate's latest webcast.
Matthew Richardson, director of research for European real estate at Fidelity Investments, said that, over the next decade, investors will probably see funds that will "define themselves very clearly by the risk profile, and geography will not necessarily be a major determinant".
Richardson was speaking on the topic of risk management alongside fellow panellists Colin Lizieri, Grosvenor professor of real estate finance at Cambridge University, and Greg MacKinnon, director of research at the Pension Real Estate Association in the US.
Richardson said: "If you look at the specific risk-return profiles of buildings, you'll find it's far better to cluster across geographies.
"You'll probably find that buildings in Singapore, London and New York share far more common characteristics in terms of their risk-return profiles than other buildings in the same country's jurisdiction."
He added: "While geography may have an input, it won't be the key determinant. The key determinant will be - what return for the risk I'm taking?"
Lizieri said there was growing evidence that investing across major financial centres like London, New York and Singapore did not offer much in the way of diversification, and that investors needed to look at economic drivers behind the cash flows of individual real estate deals.
Despite this, he referred to data that showed the majority of global transactions over the past four years had taken place in the major office markets, leading to a heavy concentration of risk.
"You have a whole series of office markets where the ownership is a global one," he said.
"Typically, the ownership comes out of firms that are based in global financial centres.
The capital is being provided by financial companies in those global financial centres, and the occupiers of the offices that are generating the cash flows are, by and large, global financial services companies.
"You've actually locked all these markets in together. So, in terms diversification, you are actually getting almost no diversification even if you are in four different continents and 20 different cities."
Lizieri said this had implications for large investors, such as sovereign wealth funds, that were looking to own portfolios of prime real estate assets directly.
