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Risk and return

Think Global: Risk and return, the changing context of real estate returns in a globalised world

In its latest research report, TH Real Estate presents a framework to understand relative real estate market risks in a global context.

As real estate has become an increasingly globalised asset class, the traditionally localised industry has had to make a paradigm switch to a global perspective. The model presented in the report provides a method to understand real estate investment opportunities globally.

The report covers markets in Europe, Asia and North America, as locally as possible, usually at city level. It analyses more than 2,000 data points to create a global risk model, looking at 59 cities in 29 countries, across office, retail and industrial sectors, benchmarking real estate risk against expected performance.

The research uses four real estate specific risk factors; liquidity, volatility, income security and transparency. Real estate risk premium feeds into the required return targets for each market. The results highlight stark differences between mature real estate markets with low real estate premium and the nascent markets characterised by much higher real estate risk.

Having mapped the office market based on the four risk model factors, the research finds that the global office sector is highly correlated with the maturity of the economy and the market size. The UK and US clearly lead the liquidity, transparency and income security measures, whilst Germany achieves the best score on volatility, reflecting occupier demand in that market.

Meanwhile the shopping centre risk model results reveal a relatively lower property-related risk premium compared to other sectors. This is based on historic performances through the last crises, in which shopping centres remained more stable and largely more liquid than office properties.

According to the report, the logistic sector in America is the biggest logistic market globally in terms of volume of trade. In recent years, expected total returns have dropped and the forecast for the next five years is relatively low. Europe on the other hand, is looking exceptionally positive on this measure thanks to low bond yield environment. In regards to Asia, Australia is an example of a country where expected returns are still above the required returns.

The report cautions that it is important not to be too prescriptive as the specific risk factors used incorporate value judgements about risk premiums; it suggests that the framework is best conceived as a starting point that highlights market risk relativities. In addition, it highlights that individual investors will differ in their attitudes to risk scores, for example a very long-term investor may consider liquidity and volatility to be a lower importance and would need to recalibrate the risk premium accordingly. 

The research unsurprisingly found risk to be lowest in the most established investment markets. However, when expected returns are taken into account, other markets, including those in southern Europe, can offer better risk-adjusted returns.

Download the report here.

Torsten Steiner, Research Analyst at TH Real Estate, comments: “As the number of investable markets increases, portfolio construction possibilities will rise exponentially, meaning global investment strategies will becoming ever more complex. A structured approach which facilitates the comparability of global markets is therefore key to targeting optimal risk-adjusted returns for investors.

“Our global risk model improves market risk transparency, ensuring consistency across our portfolio worldwide. Our global research capability steers responsible investment decisions, with the global risk model forming an integral part of our global framework.”  

Issued by Henderson Real Estate Asset Management Limited, 201 Bishopsgate, EC2M 3BN. Authorised and regulated by the Financial Conduct Authority. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. COMP201500272.

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