Understanding risk and return of real estate investments

Global investment strategies in real estate are getting more complex due to the increasing number of markets and opportunities. A structured approach is needed to evaluate the return and the risk on each market.

TH Real Estate has analysed the real estate markets in 59 cities in 29 countries in Europe, Asia and North America. To evaluate the attractiveness of real estate markets globally, returns must be compared to market specific risks. With the developed model, the risk-return-ratio of every major market is said to be measured. 

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.” 

Overall, the most established real estate markets face the lowest risks. For German cities, very low risk premia have to be paid but lower returns are achieved as well. However, when expected returns are taken into account, other markets, including those in southern Europe, can offer better risk-adjusted returns.

The report identifies for different usage types:

  • Office property is closely related to the stage of development of the economy and the market size.
  • Retail property faces compared to other usage types a relatively low risk premium.
  • Logistics faces, compared to other usage types, the highest risk premium.