Maarten van der Spek: Time to ban vague real estate terms

September 17, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Maarten van der Spek

The real estate world is saturated with jargon that is not only confusing, but also undermines transparency and professionalism in the sector. It's time for change.

In conversations about real estate buzzwords are often thrown around. Discussions about investing in a 'core asset' in a 'prime location', or finding 'value add' opportunities in 'secondary locations' where 'active management' would add value, are very common. These terms give the appearance of expertise, but are often meaningless and not supported by concrete figures. This vagueness not only harms investors, but also undermines confidence in the real estate sector as a whole.

Instead of getting lost in vague terms, let's shift the focus to concrete and measurable concepts such as risk and return. After all, they form the foundation of every investment decision. Assessing real estate based on recognizable metrics ensures that investors gain better insight into the performance of their portfolios. Data plays a crucial role in this. Without hard figures it is impossible to objectively measure returns or properly identify risks.

Furthermore, research shows that for larger real estate portfolios, the majority of the return is determined by the strategy and not by the individual assets. Yet many investors still seem to attach disproportionate importance to the selection of so-called 'prime' assets in 'top locations', without paying sufficient attention to the optimal strategy.

The role of data and performance attribution

In the era of AI and big data, it is now possible to break through the vagueness in real estate terms. By using modern technologies, data analysis and performance attribution, we can replace vague terms with hard facts and figures. For example, a term such as 'top location' can be excellently substantiated with data to indicate what it means. There is also sufficient market data available to demonstrate how its risk-return profile compares to other locations.

Another powerful tool that can help is performance attribution analysis, which allows detailed analysis of the performance of real estate portfolios. Let's take as an example a fund that focuses on 'value add' real estate investments through 'active management'. This type of fund is usually riskier and therefore promises a higher return. Yet it is rarely if ever fully analyzed where the returns of such a fund come from. Is the higher return achieved by the market, by smart financing or by the rental or redevelopment team?

It should go without saying that managers make this transparent, so that investors know exactly what value add they are getting. Unfortunately, practice shows that many managers provide insufficient transparency about the actual sources of their returns. The fact that an average value-add fund in Europe and the US has historically not returned much more or even less than the market has unfortunately not been sufficient to achieve this.

Don't accept vague real estate terms anymore

The change will mainly have to come from the capital, the investor. So, investor, stop being satisfied with vague promises. Demand transparency and data-driven insights to make informed decisions. The future of real estate is transparent and data-driven. There are sufficient tools and data available to substantiate every decision and strategy. Investors who are able to implement this will also see that this benefits their own risk-return profile. Whether it's a prime location or value-add opportunity, let the data tell the story. That is the future of real estate.