“The basis of optimism is sheer terror.” This drastic quote by Oscar Wilde comes with a ‘core’ of truth. Through the last century’s history of money and financial markets the market players were usually driven by the same factors and financial laws. For once you have to accept more risk if you want higher yields and therefore you have to pay more if you want a higher security of your invested capital. And secondly, capital is shy and driven by fear and only partially rational rather than driven by emotions. No matter which crisis of for example the 20th century is analyzed, usually bubbles were often born slowly but steadily, market mechanisms failed and when too much money was available (often too cheap), prices of certain fields and goods went up drastically, investors became greedy and at the peak everything was bursting and fear was ruling. Afterwards, as for example after the dot.com-bubble, investments into these segments were rare and trust needed to be built up again.
The commercial and professional real estate market theoretically is in this regard not different from other markets. A usual behavior in times of crises is the wish for more security, more stable investments, and meaning significantly less volatile and ideally very liquid and realizable investments on a market. Capital Investments should be “safe havens” and rather bring little or less money than losing heavily or all. In the current time of crisis, after the initialized 2008 Lehman Brothers crash and the following
subprime crises, followed by the global recessions in mostly 2009, some countries 2010 and even today in the days of the European and global sovereign debt crisis real estate investors are as an international phenomenon shifting money into secure real estate and
on the professional site into “core commercial real estate” in A-markets.
Table of Contents
1 Introduction
1.1 Leading-in
1.2 Problem Statement
1.3 Goals of Studies
1.4 Approach
2 Classification of the real estate asset class and strategy “core”
2.1 Current definition of core
2.2 Market for office core investments - putting core into general context
2.3 Requirements to the asset class core
2.4 New definition of “core”
2.5 Potential risks to core investments
2.5.1 Geographical and market risks
2.5.2 Volatility risk
2.5.3 Change of location risks
2.5.4 Illiquidity risk
2.5.5 What is labeled core is not necessarily core risk
2.5.6 Tenant and renting risk
2.5.7 Refurbishment and or sustainability costs risk
2.5.8 Demographic factor risks
2.5.9 Potentially overheated prices risk
2.5.10 Secondary investment risk
2.5.11 Inflation risk
2.5.12 CMBS risk
2.5.13 Last resort risk
3 The two markets and there characteristics and differences as an example
3.1 London office market
3.1.1 Where are the core markets?
3.1.2 Characteristics of this market
3.1.3 Is core potentially overheating?
3.2 Frankfurt office market
3.2.1 Where are the core markets?
3.2.2 Characteristics of this market
3.2.3 Is core potentially overheating?
4 Sovereign and financial crisis’s and their impact on commercial real estate
4.1 The current situation and crisis definitions
4.2 Drivers of crises, is this a normal crisis behavior and situation?
5 What are the alternatives to office core commercial real estate?
5.1 Where are institutional investors currently invested in?
5.2 Potential Alternatives
5.2.1 Core Retail
5.2.2 Core Residential
5.2.3 Core Investment in emerging markets
5.2.4 Core locations but not core markets
5.2.5 Secondary
5.2.6 refurbishments and or management optimizations
5.2.7 Development of core buildings
5.2.8 Blue-Chips
5.2.9 Debt
5.2.10 Holding Cash
6 Conclusion
6.1 Final Statement
Objectives & Core Themes
The main objective of this thesis is to provide a comprehensive understanding of the "core" real estate asset class, particularly concerning commercial office buildings, and to analyze its performance and risks in the context of global financial crises, with a practical focus on the Frankfurt and London office markets.
- Detailed definition and classification of "core" real estate investment strategies.
- Comprehensive analysis of potential risks inherent to core commercial real estate investments.
- Comparative examination of the Frankfurt and London office markets as primary examples of core locations.
- Impact assessment of sovereign and financial crises on institutional real estate investment behavior.
- Exploration of investment alternatives to traditional core commercial real estate in times of market stress.
Excerpt from the Book
2.5 Potential risks to core investments
Derived from the chapters above, literature and research core can be specified as a risk-averse investment, as an investment strategy it categorizing the strategy that accepts the least yields with the highest amount of security. Since there is no risk-free investment, not even government bonds with a triple AAA rating, as the current crisis shows, investors and research have to take a closer look at potential risks to the intended little risk investment strategy of core. The author will in the following chapter make aware of a number of risks, some already generally identified, some less, shortly explain them and bring them into context. The chapter will close with a short overview of potential risks derived from the literature, research and the investor's questionnaire answered for the author.
Risk can come from numerous sides and can bring tensions to the investment strategy and investor in a different kind of heaviness. The first theoretical question that can be asked is, if accepting a lower yield does automatically mean having less risk? Or as Prof. Dr. Wellner from the Bauhaus University in Weimar, Germany asked in a recent presentation: "What is core and are investments in these assets really less risky?" As seen in appendix 8, yields and risk are usually defined in a linear way putting them into direct connection; meaning fewer yields implicates lower risks, derived from a rational thinking that someone who is willing to accept lower yields will want a higher amount of security and vice versa. This neo-liberal thinking has been questions by economists such as Prof. Wellner, representing a "New Institutional economics" position and bringing it up in her presentation.
There is undoubted a connection between risk and return but they do not always run as smoothly as publications due to the not perfect market conditions that are assumed in neo-classic teachings. That can be due to asymmetric information, transaction costs, inefficient markets, non transparent markets, external effects, moral hazards or just a non rational behavior of market participants. When looking at investments, prices and risk information should be taking into account.
Summary of Chapters
1 Introduction: This chapter introduces the core concept of the thesis, establishes the problem statement regarding core investments during crises, outlines the research goals, and describes the methodical approach.
2 Classification of the real estate asset class and strategy “core”: This section provides a thorough definition and classification of core real estate, details its market context, requirements, and systematically identifies a wide range of potential risks associated with these investments.
3 The two markets and there characteristics and differences as an example: This chapter applies the previously developed framework to analyze the specific core office markets of London and Frankfurt, comparing their characteristics and evaluating their susceptibility to overheating.
4 Sovereign and financial crisis’s and their impact on commercial real estate: This part examines the impact of global crises on real estate, defines different crisis types, and identifies the macro-economic drivers that influence investor behavior in times of instability.
5 What are the alternatives to office core commercial real estate?: This chapter investigates where institutional investors are currently allocating their capital and explores potential alternative investment strategies to traditional core office real estate.
6 Conclusion: This final chapter synthesizes the findings, provides a concluding statement on the suitability of core investments during crises, and summarizes the author's final recommendations.
Keywords
Core Real Estate, Commercial Office Market, Frankfurt, London, Financial Crisis, Investment Strategy, Risk Management, Institutional Investors, Asset Allocation, Real Estate Yields, Overheating, Market Volatility, Sovereign Debt, Property Economics, Market Transparency.
Frequently Asked Questions
What is the fundamental focus of this thesis?
The thesis fundamentally investigates the "core" real estate investment strategy, focusing on its definition, risk profile, and performance within the context of commercial office markets during times of global financial and sovereign crises.
What are the primary thematic areas covered?
Key areas include the definition and classification of core real estate, a detailed risk assessment for core assets, a comparative analysis of the London and Frankfurt office markets, the impact of macroeconomic crises on real estate, and an overview of alternative investment options.
What is the primary research goal?
The primary goal is to establish a clearer understanding of the "core" asset class and to analyze whether this investment strategy remains a viable, secure option for investors under the pressure of current global market crises.
Which scientific methodology is applied?
The author uses a combination of literature review, analysis of existing market research, and a primary research component consisting of a questionnaire addressed to various real estate experts to gain professional insights into current market perceptions.
What does the main body of the work address?
The main body addresses the theoretical framework of core investments, conducts an in-depth risk analysis, applies these concepts to the example markets of London and Frankfurt, assesses the influence of crises on these markets, and discusses investment alternatives.
Which keywords characterize this work?
Core Real Estate, Office Markets, Financial Crisis, Risk Assessment, Investment Strategy, Institutional Investors, Frankfurt, London, Yields, and Asset Allocation are central to the work.
How are the London and Frankfurt office markets compared in this thesis?
The thesis compares them based on their transparency, international attractiveness, current yield levels relative to government bonds, and the assessment of market experts regarding the risk of price overheating.
What role do "alternatives" play in this study?
Alternatives are examined in the final section to offer institutional investors strategies beyond traditional core office space, such as debt investments, retail or residential core, and value-add approaches, in order to mitigate risk in challenging times.
- Quote paper
- David Pieper (Author), 2012, Core-Real Estate Investments in times of crisis: Exemplified by the Frankfurt and London office market, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/192385
