Commercial property investors have enjoyed a golden age during the past five years, with double-digit price appreciation in many markets a near guarantee and risk seemingly suspended — conditions were never better and capital flowed into the asset class at unprecedented rates. Demand was so great, in fact, that several countries, including Germany and the United Kingdom, opened new property securities markets to satisfy clamouring investors.

In 2006, when Gensler published the Faulty Towersreport, we were anticipating the introduction of Energy Performance Certificates (EPCs). They were a requirement of the European Union (under the Energy Performance for Buildings Directive) and were expected to be introduced in the United Kingdom early that year. The Gensler report surveyed the opinions of 100 property professionals, half of whom were property developers, the others investment managers of large portfolios.

It is commonly presumed that the trade-off between risk and return provided by both direct real estate investments and real estate funds is approximately linear — in other words, that the marginal return per unit of risk is broadly stable at all levels of risk. This concept is illustrated in the chart below. Fund marketing documents often use this approach to illustrate the risk and return choices available to real estate investors.