Style drift and COVID-19: Will core investors pay a price for additional risk?
Before the COVID-19 crisis, real estate markets presented core investors with a dilemma. Stick to proven definitions of “core” and accept lower absolute returns — or pursue enhanced performance. There were risks associated with both paths.
A failure to move beyond traditional core could lead to under performance, whereas the pursuit of higher returns might result in enhanced risk. The risk of the first path would be more immediate. But it would require a market correction for the risks associated with the second path to become apparent.
If, as seems likely, COVID-19 leads to a real estate correction, investors who drifted into the second path may have to deal with the consequences of more illiquid, higher beta investments and greater mark-to-market losses than the investors who opted for the first path. That said, the scale of any consequences will depend on the nature of the COVID-19 crisis itself, particularly its duration.
There have been two key driver