The restructuring of the institutional real estate portfolio in the UK

Abstract

Real estate investment portfolios of financial institutions have seen dramatic changes over the last three decades or more. Historically such property investment decisions have been seen within a portfolio diversification paradigm that has sought to balance risk and return. This paper considers the role of the supply of assets in the determining and constraining the UK institutional portfolio. The supply of real estate assets not only expands during property booms but has also been transformed by a long term urban development cycle as cities adapt to cars and the ICT revolution that has brought new property forms. The research examines long term trends in investment change by disaggregating into ten property forms rather than the usual three land use sectors. It then assesses to what extent investment patterns can be explained in terms of portfolio theory, short term net returns of individual sectors or driven by the supply of real estate assets. It concludes that the supply of real assets is an overlooked explanation.

The Impact of Green Premium on the Development of Green-labeled Offices in the U.K.

“…Indeed, many researchers have concluded that there is a premium for green-labeled buildings both in terms of rent and sales price (e.g., Dermisi, 2009;Wiley, Benefield, and Johnson, 2010;Das, Tidwell, and Ziobrowski, 2011;Gripne, Martel, and Lewandowski, 2012;Chegut, Eichholtz, and Kok, 2014;Das and Wiley, 2014;Fuerst and van de Wetering, 2015). In accordance with the workings and dynamics of the real estate market (see DiPasquale and Wheaton, 1992;Ball, Lizieri, and MacGregor, 1998;Dunse, Leishman, and Watkins, 2002;Roxana and Vasile, 2012;Jones, 2013), the existence of a green premium could potentially drive the investment and development of new green-labeled buildings, as well as the green-refurbishment of the existing uncertified buildings.…”

“…At the beginning of the process, the greenness of offices is a secondary demand characteristic subservient to location and the suitability/functionality of space (Jones, 2013). If and when the benefits of green offices to tenants become widely accepted, and such offices become the norm, then there could be a negative impact on the values of non-green stock.…”

“…This process can be seen as a combination of functional, aesthetic, legal, social, physical, and environmental obsolescence (Crosby, Devaney, and Law, 2012). The process also implies that a decrease in demand in one sector of the office market (the obsolete non-labeled stock) can potentially lead to an increase in demand for another sector (the newly-formed, preferred green offices) (Roxana and Vaile, 2012;Jones, 2013).…”

“…This could lead to a rent premium if there is excess demand. Invariably, the emergence of a new green submarket implies that the existing submarket structure must undergo a transition, resulting in its expansion, shrinkage, upgrade or destruction (Jones, 2013). This process has a close link with the concept of ''creative destruction,'' which relates to the emergence, disappearance, and reconfiguration of the various sectors of a market or economy (Roxana and Vasile, 2012).…”

“…The real estate market is very imperfect (Keogh and D'Arcy, 1999). The development of green offices like any other property (sub)sector can be influenced by prevailing lease structures, the state of the local property market, the local urban morphology restricting development, planning and conservation regulations, and (expectations about) the local economy (Cheshire, Leunig, Nathan, and Overman, 2012;Jones, 2013;Fuerst, Kontokosta, and McAllister, 2014;Lambiri and Rovolis, 2014). In addition, even if there is a widely-accepted demand for more green offices, there are time lags to any development response, and the supply process can be negatively distorted by national economic downturns.…”