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Impact Investing

IPE special report May 2018

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Property is a long-term investment. You can’t go wrong in the long term with bricks and mortar. It was with phrases such as this that, for many years, the case for property investment was presented. Selling prices for tenanted offices slipping a bit this year? Don’t worry. It’ll come right in the long run.
And what about property in competition with other forms of investment? Stock markets zoom up and down – buy shares at the wrong time and you can lose a lot of money. Bonds may be a bit more stable much of the time, but you’ve got constant erosion of your real value through inflation. Property values are by and large less volatile. And they’ll grow in the long term to compensate for the inflation effect.
It all has the flavour of a less sophisticated age. Today’s investor in property has to justify his choice against the many alternatives: shares, bonds, cash, overseas assets, even derivatives. And he has to justify it with figures, not platitudes. Once invested, he has to subject the performance of his property to comparison with that of other property investors. He has to stand up to comparison with other asset classes. He has to pin down the elements – selection of properties, active management, redevelopment – that contributed to his performance.
In pre-computer days, this would have been difficult if not impossible. But the coming of affordable computer capacity has allowed the collection, manipulation and analysis of massive amounts of data. Nowhere has this been more important than in the field of property. Unlike shares, property has no central marketplace. Information has to be collected from many different sources. The bringing together of this information may not create a central market but it has created a central source of data available to those who operate in the market. And it has created yardsticks against which property performance can be measured.
Investment Property Databank (IPD) takes the credit for bringing this information together. It was not the first to attempt to develop yardsticks for commercial property. In the late 1970s the launch of the Investors Chronicle Hillier Parker rent index – a measure of rental values across the UK was greeted with some scepticism but within a fairly short period was being widely quoted and used. It was followed by measures of returns and capital values. Individual estate agents developed their own performance measures based on the relatively small portfolios they managed for clients. Where IPD was different was in attempting to bring together performance details of all commercial property held by institutional investors and property companies in the UK. Its indexes were thus based on actual experience and on data that was truly representative. The same approach, as detailed here, has now been successfully exported to other national property markets.
Information is the lifeblood of markets. Many overseas (and particularly transatlantic) investors would be unlikely to venture into European property markets until they had valid yardsticks against which they could measure their performance. Europe’s growing funded pension schemes will increasingly need performance data to justify investment in property. And, at a more esoteric level, generally accepted and trusted performance yardsticks are needed for the creation of the property-linked derivative instruments that the investment bankers love so much.
It may well prove that IPD’s initiative in assembling reliable property data will have been the biggest force for development and change in European property investment markets since the Second World War. Proof of the need for performance yardsticks lies in the growing willingness of property investors to contribute details of their own performance to the central databanks. In return, their own performance can be analysed and evaluated against that of competitors, highlighting strengths and weaknesses and contributing to investment strategy.

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