Global Real Estate Risk Index

Abstract

1. Jun Chen 1. Head of financial modeling at Property & Portfolio Research, in Boston (MA 02108). (jun{at}ppr.info) 2. Peter Hobbs 1. Director of business management and head of European research at Property & Portfolio Research, in Boston (MA 02108). (peter{at}ppr.info) Despite ongoing political, economic, and financial uncertainties, the long-term trend of financial market “globalization” continues. This trend has been driven by equity and bond investments, but cross-border real estate investment has increased in recent years. Recent disaffection with stock performance means real estate is at the forefront of many investors' thinking and, increasingly, they are considering real estate as a global asset class. This article seeks to help measure and explain the relative risks of global real estate markets by providing a simple, objective measure of real estate risk based on three components: country, structural real estate, and cyclical real estate risks. Together these measures capture the key dimensions of risk and provide important insights for global real estate strategies. An investor's tolerance for various types of risk varies according to investment strategy. The authors conclude by showing how different combinations of types of risk provide different insights according to the perspective of the investor, whether they are “opportunistic,” “core,” or “debt focused.”