Risk and reward: Should US real estate investors shoot for bigger returns by taking on more risk at this stage in the cycle?
To get the right answer, you first have to ask the correct question. Today, investors in the US commercial real estate market are asking whether the market is at peak asset pricing or, more directly, whether asset prices can only go down from here. But shouldn’t we really be asking, “Is now the time in the market cycle to be taking on more risk in the pursuit of short-term gains?” Conventional wisdom today seems to be to prioritise maximising returns at the expense of risk control. We believe, however, that maintaining an equal focus on return potential and risk control will result in more favourable outcomes, especially in the core space. This conclusion is arrived at based on the following factors, one of which includes pricing levels:
• the role of real estate in a multi-asset portfolio
• the current investment environment
• actual returns versus required returns.