Data, if you can get hold of it, needs to be meaningful; information, in turn, necessitates cooperation, as Charles Follows explains
Property investment is about making judgments about uncertainty or risk assessment. The investment performance depends on the uncertainties around future events, not least yields movements and rental growth. Will there be an oversupply of competing buildings? How will the economy change? The list is almost endless.
With good due diligence, the investor will form a comprehensive and certain view about the characteristics of the particular investment - lease terms, building fabric, tenant covenant and so on. They will take a view of the financial markets and economic
outlook using the wealth of published financial and economic data.
However, the property market context of the property is often fogged by unnecessary uncertainty. The world outside the building is viewed through the dark lens of an imperfect looking glass to give glimpses of patchy market information.
Why is the property market undermining its attractiveness as an asset class by inefficient information and reduced market transparency? Simply, it seems that many holders of market property data are confusing ‘data' with ‘information'.
For many investors data are just basic raw facts. These can include some simple questions: which buildings are empty, how big they are, what is under construction, what is the stock, who owns what and what it last sold for. Although some of these data have wriggle room or can be restricted by client confidentiality, most are inconvertible, with no room for doubt.
Real estate advisers and investors often persist in jealously guarding these facts. If their domestic legal system constrains them from disclosing this essentially innocuous but important data, they should lobby for improved transparency. Financial theory tells us that the risk-averse investor requires additional return for risk. If the risk is information uncertainty then this is non-essential - and solvable - market inefficiency.
As market transparency improves it generally follows that market efficiency improves
and investors make better decisions.
A lot of basic market information can be measured with a high degree of certainty. An investor needs accurate, timely and comprehensive raw data. This must be to the advantage of all market participants.
With modern GIS systems and information technology, property data should be a commodity. Google Earth gives access to aerial photographs of virtually every building. Assuming we use the same arithmetic, all market participants should be able to agree on these facts. What investors are willing to pay for is advice and ‘added value' to the data. This turns it into ‘information' - analysis, interpretation and expert judgments of future changes - which investors can then use to make informed judgments.
The past 20 years has seen a transformation in the transparency, but further improvement is desirable. IPD has been a force for more transparency in the markets it operates in. The IPD hegemony in many markets means that its definitions and geographical boundaries are de facto standards. IPD does not make up its market definitions, but rather refines them to reflect local practices and data availability, so they have market grounding. It tries to balance that with the cross-market comparability essential for cross-border investors. For the global investor, market comparisons are important for asset allocation and stock decisions.
However, for the public face of property research and property investment, many researchers insist on publishing market reports that use slightly different geographical definitions and different market stock sizes. Clients and their other advisers do not understand the precise nuances of this. They just see two different headline vacancy rates, for example. By all means use particular definitions and analysis for client-facing work but let's not do the property asset class a disservice by disagreeing about basic information. With modern databases it is trivial to reanalyse data in 101 tailored ways for specific advice to your clients.
In the UK, we are seeing initiatives from financial data providers such as Reuters and Bloomberg, standing alongside established property data sources such as FOCUS, Property Data, and Propex. In the US, there are competing services for much of this basic data. Their real advisers differentiate their services by analysis and transformation of that data into information.
Cooperation is key. The leading firms of property advisers have initially begun cooperation in emerging markets where they did not want to build duplicate research infrastructure. In the UK, investors are hopeful that a more meaningful cooperation will emerge from the discussion among four of the largest firms of advisers about pooling basic data about the occupational markets.
We hope there will be more cooperation across many more markets. The leading real estate advisers have the network to spread, and enforce, this cooperation globally. We believe it is in their interest to do so. It will reduce cost duplication. It will enable them to differentiate their services to build competitive advantage from intellectual capital and quality of service, rather than just having better data. Investors will pay for this added value.
Of course, investors want to have it both ways when it comes to transparency. We want to know how much our neighbours paid for their house - but I suspect we do not want them to know how much we paid for ours. Similarly, investors want to know how competitors' funds have performed but when questioned about their own performance, they often cite client confidentiality - with justification in some cases. It is intriguing how client confidentially constraints relax when fund performance is upper quartile and tighten when it is lower quartile. Around IPD results time the wine bars are full of whispers about last year's fund performance. However, many investment colleagues live in the full glare of public transparency - listed companies, REITs, funds within the AREF universe.
Investment advisers can lead the way. The IPF/EG investment performance awards have lifted some veils but investment fund performance is still opaque and rumour-ridden. Does the public gaze make these colleagues worse managers and does it cramp their investment style? I believe not. Perhaps if investment advisers lead the way by cooperating and improving the elements of market transparency in their control, investors will be drawn towards disclosure.
Charles Follows is director and head of UK research at ING Real Estate