1. The Restructuring of the Institutional Real Estate Portfolio in the UK Neil Dunse, Colin Jones and Nicola Livingstone

2. Introduction  Focus = 30 years of change in real estate portfolios of UK financial institutions  Research based on IPD data  Examine temporal patterns of transactions  Assess to what these changes reflect adaptations to risk and return OR changes to urban fabric

3. Constructing a Real Estate Portfolio  Heart of investment portfolio building is the balance between risk and return  Fundamental question is how to optimally diversify portfolio to reduce non systematic risk  Much research has been applied to achieve optimum portfolio of shares/gilts/property  Real estate allocation in a mixed-asset portfolio 15-20%

4. A Diversified Real Estate Portfolio  Great interest in diversification by dichotomous choice of real estate sector versus spatial location/region  Studies use different basic areal units and techniques but all divide the real estate into three sectors – industrial, offices and retail  General conclusion is that the principal route to diversification is based on sectors

5. Problems with Markowitz Mean Variance Concept  Approaches examine returns while risk is calculated by examining standard deviations and covariance of the assets  Approach is not necessarily relevant to many institutional investors that are increasingly viewing risk as a downside phenomenon or within a liability-driven investment  Ignores role of investment horizons, predictability of returns, and can misleading

6. Investment Horizons  Precise horizon is open to debate  Rehring (2010) argues property returns, risk and return are best measured over longer time horizons  He notes a rolling five year horizon is shortest time period for risk and return measurement  Expected future returns based on uncertain forecasts/sentiment partly based on (recent) economic and real estate trends and cycles

7. Active Property Investment  Active portfolio management involves the selection of individual properties with specific risk  Add value by controlling the asset and working to improve its cash flow for example through refurbishment or re- development

8. Urban Change  Stock of real estate investments is dynamic and nature of opportunities change over time  But not simply consequence of investors trying to improve cash flow  Wider investment = context of occupation demand set within urban economies but also information and transport technologies  Fundamental changes in urban real estate markets/decentralisation/new property forms such as office parks and retail warehouses

9. Institutional Portfolio Changes Property Segment1981198519901995200020052010 Std Shop15.218.716.8 13.810.910.3 Shopping Centre9.412.112.717.318.419.617.9 Retail Warehouse0.60.92.97.812.418.119.4 Dept / Variety Store1.91.81.92.21.81.51.3 Supermarket0.70.90.52.11.51.43.8 Other Retail0.30.40.50.7 0.60.8 Std Office56.252.250.536.833.628.527.8 Office Park0.00.52.22.94.64.13.4 Std Industrial15.011.911.1 10.412.311.9 Distribution Warehouse0.5 1.02.42.83.03.3

10. Institutional Portfolio Returns and Risks 1985- 2010 (5 year horizon) Portfolio ReturnsPortfolio Standard Deviation 81-853.90%0.019 86-909.04%0.169 91-953.82%0.107 96-0010.24%0.029 01-0510.42%0.047 06-10-0.9%0.165

11. Empirical Analysis of Restructuring  Isolate trends in transactions activity  Hodrick Prescott (HP) filter is applied  HP Fiiter is an established statistical procedure used to separate the cyclical component from the long term trend in a time series of raw data

12. Trends in Net Transactions for Offices

13. Trends in Net Transactions for Retail

15. Trends in Net Transactions in Industrial Property

16. Office Transactions: Deviations from Trend

17. Conclusions  Substantial changes to institutional portfolio over 30 years  Limitations of optimal portfolio theory is exposed  Risk and return figures dominated by macroeconomy (five year horizon)  Active institutional portfolio restructuring  Driven by urban change