The financialisaton of global commercial real estate markets
Back in my day all this was fields….
Over the last 30 years institutional investors have come to dominate the real estate investment markets in North America, Europe, Australasia and much of China and SE Asia. But this was not always the case. Prior to the mid-1980s, most real estate investment liquidity was generated domestically from local investors — usually through syndication networks and major real estate families. Insurance companies and side-arms of local banks also invested but almost always directly into specific properties.
From the early 1990s things changed as the financial industry created and popularized an array of new products designed to increase diversification, specialization, and financial engineering. Products such as publicly-traded real estate investment trusts (REITs), private equity, open-ended investment funds, and various asset-backed securities distanced real estate investors from direct ownership.
The real catalyst for the financialisation of real estate as an institutional asset class can probably be traced back to the US Savings & Loans Crisis of the late 1980’s and early 1990’s. when 1,043 out of the 3,234 savings and loans associations in the US failed.
Unlike the more recent 2008 financial crisis, in the S&L Crisis the federal government took over 747 of these failed banks and ended up with thousands of loans and properties under their control. The solution at the time was to create a government-run entity known as the Resolution Trust Corporation (RTC) to asset manage and eventually sell off all the loans and properties back to the private sector.
Over time the RTC accumulated thousands of real estate assets on its balance sheet. The challenge then became how to unload such an enormous number of buildings. The government could not simply sell each property or loan one at a time. Instead, they had to start selling them en masse by grouping assets into pools.
Because these pools held so many properties, usually spread over a wide geographic area and including all types of buildings (retail, office, industrial, etc.), the sheer scale of the offer meant that anyone wishing to purchase these portfolios from the government would need to raise large-scale investment funds. So, while the logical buyer of a single property would be real estate professional, the natural purchaser of a pool was a financial company. One single building is a place. One hundred buildings pooled together is a financial asset.
In effect, the RTC created by the federal government helped spawn the new industry of asset pooling, in particular "blind pools" of real estate private equity. Not only were private equity funds best suited to purchase these pools of government assets, but they ended up making enormous profits. In retrospect, it turned out the government was selling off these real estate assets at fire sale prices. Often there would be only a few buyers for assets that were returning un-geared yields over 15% on heavily depressed income streams.
After they had exhausted the US market, they turned their focus to international real estate and a new global investment asset class was born.
Financialisation of Real Estate
Once the early private equity funds had successfully proven the model, the trickle of capital turned into a flood. Real estate private equity grew from a few billion dollars in the early 1990s to more than $900bn under management today (Prequin 2019).
In a separate but related consequence of the real estate recession of the late 80s, most major real estate companies took their assets public on the New York Stock Exchange as Real Estate Investment Trusts (REITs). Other countries soon followed and REIT markets grew from a few billion dollars in 1990 to a global industry worth more than US$2.3trn by December 2020 (EPRA Total Markets Table Q4 2020).
The enormous value of property assets controlled by private equity and REITs does not even include Commercial Mortgage Backed Securities (CMBSs) and other asset backed securities pools (e.g., CDOs) that also total in the hundreds of billions.
Today the modern real estate investment industry stands transformed. For the first time it can be genuinely described as a global institutional asset class and in this brave new world it is the financial professional who has become the primary manager and driver of real estate decision-making.
New Challenges for Real Estate Investment Markets
While the market participants and scale of investment has changed global real estate investment markets remain anchored in the past in several key regards. Legal and tax issues have prevented seamless movement of capital and continue to create local market distortions but perhaps the biggest single challenge facing the sector from a professional investors perspective remains the lack of transparency, non-standard reporting and poor data quality.
As regulated asset classes, investors in equity and debt markets benefit from access to a wide range of data services and analytical tools to help them identify opportunities and price risk. Disclosure and reporting is regulated so investors can easily analyse investment performance. In contrast, commercial real estate investors often suffer an “information deficit” and have limited access to the underlying facts and figures when considering a deal.
This is nowhere more apparent than in the analysis of tenant income risk. Despite ample evidence that income return is the primary driver of long term investment performance across most major real estate investment markets (MSCI Indices) very little time and effort is spent on quantifying the probability of rental loss and or tenant failure.
Real estate data veteran Mallinson joins Income Analytics
February 6th 2023, London. Income Analytics (INCANS) announced today that Simon Mallinson has been appointed as its Chief Operating Officer. Established in 2020, INCANS is focused on helping clients quantify tenant income risk and minimise future losses. “We are excited Simon Mallinson has joined us as we enter the next stage of our growth” said Matthew Richardson, co-founder and CEO of INCANS. “Simon has a wealth of global experience delivering real-time, actionable data to real estate professionals and is the right individual to reinforce INCANS growth”.
Retailer health check: who will be next after Joules?
Great to see our tenant default analysis feature in a recent piece by React News.
How NewRiver is stress-testing its portfolio
In a recent article run by EG, Pui-Guan Man looks at how real estate investors and owners are using INCANS® scores to help quantify the future cashflow at risk caused by potential tenant defaults.
UK CRE investment markets go "income only" as yield gap over bonds disappear
Since 2008, commercial real estate has enjoyed an unprecedented bull run in terms of capital value growth. That charge is now over. Today’s economic realities mean that the returns from real estate investments are likely to be “income only” for the foreseeable future. Under such conditions investors need to shift their attention to the quality and duration of their rental cashflows.
Logistics tenants are under pressure while retail woes continue
Businesses in the logistics sector are the highest risk tenants, while those in healthcare and education present the lowest risk. These are the findings of the INCANS Top 200 Averages for Q2 2022. The ratings, created by Income Analytics, give real estate professionals a likelihood of tenant failure by using advanced statistical modelling. The lower the score, the higher the risk of default. The following are most challenged sectors using data to the end of Q2 2022:
Driving with the rearview mirror: CRE needs a new roadmap for recession risks
Navigating the post-pandemic economy is turning out to be hard. Ahead are hidden hazards, sharp corners and unpredictable oncoming traffic. UK inflation rose to 9.1% in May, according to data released today. In the U.S. it is 8.5%, both at 40 year highs and both expected to grow. Energy prices are soaring, and growth on both sides of the Atlantic is doubtful: U.S. first-quarter growth was 0.1% whilst UK GDP fell by 0.3% in April.
Risk of tenant default higher in logistics than retail or leisure
New data on tenant default risk from Income Analytics has underscored the vulnerability of many logistics occupiers.
Income Analytics partners with EG Radius to supply tenant and asset risk solution for the UK real estate industry
Matthew Richardson, Founder and CEO of Income Analytics, said: “We very much welcome the opportunity to work with EG in providing a “best in class” tenant risk solution to their clients. It is an area of the market that has been neglected for far too long, and recent events have only confirmed the need for landlords to better understand their tenants and the challenges they face.” "The INCANS® Scoring system was set up to answer a simple question – “What is the % probability that a tenant will default during the term of their lease?” We are delighted to be able to offer this capability alongside EG’s extensive data sharing platform.”
Income Analytics releases industry market averages to the platform
We are pleased to announce the product release of our Top 200 Industry and Property Sector Averages. This is the result of months of analysis by our research team, bringing this data to life for the first time.
New PDF report release
We are delighted to announce that we have released a new set of tenant, asset and portfolio level PDF reports. These will be available on the INCANS platform from Monday 7th February 2022 and have been developed in response to client feedback over the last 12 months.
MSCI on calculating the risk to real estate income
In this month's PERE publication René Veerman from MSCI Real Estate writes about how Covid has shown the need for data tools that enable investors to understand the risk that tenant defaults pose to cashflows and hence why MSCI Inc. has invested in Income Analytics and is providing access to the INCANS tenant income risk dashboard to its global client base.
MSCI: "Understanding Tenant Default Risk with Income Analytics"
Check out this fantastic new video by MSCI Real Estate MSCI Inc. on our partnership and 'how and why 'this is such an exciting and important partnership for the global commercial real estate industry.
Welcome to new starter Lucy Baker
We are excited to announce that Lucy Baker has joined Income Analytics as our new Account Manager, she will be working closely with all clients as well as our Sales team.
"Why The UK's Supply Chain Crisis Could Be A Mega-Headache For Landlords"
Exclusive data provided to Bisnow by Income Analytics shows it likely means more bad news for landlords, some of whose tenants may now fail to make it through the vital pre-Christmas trading period.
Real estate’s income risk in the wake of COVID-19
In this blog by MSCI, the relationship between the MSCI UK Indices and the INCANS scores is analysed delivering some fascinating insights
Power of Data Podcast
Matt Richardson, CEO Income Analytics, is interviewed for the Dun & Bradstreet Power of Data podcast series by Nick White, Head of D&B Accelerate.
"Why We Need To Talk About Your Risky Tenants"
The founders of a new proptech venture that has just won backing from MSCI and Savills said UK commercial real estate needs to rethink its approach to cashflow.
MSCI and Savills lead funding round into Income Analytics
MSCI and Savills have led a funding round into Income Analytics, a data technology firm that provides investors with proprietary global rental default risk measures on commercial real estate income (the INCANS Scores) at tenant, asset, fund and portfolio levels
"Less Subjectivity Please! Issues With Framing & Subjectivity in Global Real Estate Markets"
Real estate investments vehicles are categorised in risk terms according to familiar yet subjective style labels such “core”, “core +”, “value add” or “opportunistic”. What empirical evidence supports the use of these labels?