Institutional Real Estate Investment in Ireland and Great Britain: Returns, Risks and Opportunities

By McGreal, Stanley; Adair, Alastair et al. | Journal of Real Estate Portfolio Management, May-August 2004 | Go to article overview

Institutional Real Estate Investment in Ireland and Great Britain: Returns, Risks and Opportunities


McGreal, Stanley, Adair, Alastair, Berry, James N., Webb, James R., Journal of Real Estate Portfolio Management


Executive Summary. This study examines the returns and risks of private real estate investment in the major regional centers of Ireland and Great Britain for the 1981 through 2000 period. Returns for office and retail properties are analyzed at the disaggregate level (income returns and appreciation returns separately), as well as the aggregate level (total returns). Real estate returns are also compared with common stocks, gilts, T-bills and inflation. The results show that real estate in several U.K. regions, but especially in Ireland, offer very competitive returns with compelling risk I return ratios. The analysis indicates that real estate investments in several regions could supply significant diversification in a mixed-asset portfolio context as well as real estate only portfolios.

Introduction

There are only a few areas throughout the world that have sufficiently long and detailed returns data to permit sophisticated analysis, and therefore, consideration for inclusion in institutional investment portfolios. This is even more true for private real estate investments, where such data may exist for fewer than ten countries. However, the British Isles, Great Britain (England, Scotland and Wales) and Ireland (Northern Ireland and the Republic of Ireland) may have the most comprehensive real estate returns information available in the world, after the United States.

This study examines the returns and risks of private real estate investment in the major regional centers of Ireland (Northern Ireland: Belfast and the Republic of Ireland: Dublin) and Great Britain (Scotland: Edinburgh and Glasgow; Wales: Cardiff; and England: Bristol, Leeds, Liverpool, Manchester and Newcastle) for the 1981 through 2000 period. Hence, the emphasis of the study is on regional centers. London, with its status as a world financial center, is excluded due to its large number of submarkets, which would require a separate study. The returns data used are from the Investment Property Databank (IPD) with long-term time series information available for both Ireland and Great Britain. Returns for office and retail properties are analyzed at the disaggregate level (income returns and appreciation returns separately), as well as the aggregate level (total returns). Real estate returns are also compared with returns for common stocks (all share index), gilts (government bonds), T-bills and inflation (retail price index). Skewness and kurtosis are discussed for riskiness considerations, as well as the coefficients of variation for the risk/return tradeoff. Finally, correlation coefficients for total returns are also examined to identify where duplication can perhaps be avoided in diversifying an institutional real estate investment portfolio.

Literature Review

Real estate investment is a key component of global capital flows and international business. As markets around the world become more sophisticated, investors are looking to diversify their portfolios on a global scale (Hoesli and MacGregor, 2000; and Lim, Adair and McGreal, 2002a). The principal reasons in favor of international diversification emphasize the potential to reduce the risk of the portfolio through foreign investments and/ or the achievement of higher yields (Worzala, 1994). Other factors promoting international investment include the lack of opportunities in the local market, illiquidity and liability matching (Investment Property Forum, 1993). In relation to the corporate sector, international investments may be for operational or strategic reasons. Short-term traders may be seeking higher returns than are available in their domestic markets, either due to local market conditions or currency factors. Longer-term investors may seek portfolio diversification and higher risk-adjusted returns. Wealthy individuals may be seeking politically or economically more stable environments for their capital Lim, Adair and McGreal, 2002b). Furthermore, deregulation and liberalization of global markets, with erosion of currency controls and regulations that limit foreign ownership of assets, have led to the rapid expansion of international real estate investment during the 1990s (Ball, Lizieri and MacGregor, 1998). …

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