Prime versus Secondary No Guts No Glory

The decision making behaviour of institutional investors usually target prime commercial real estate. The rationale for this investment strategy is to maximise the risk adjusted returns and the diversification potential as well as quality buildings, tenant covenant strength and the subsequent revenue stream. However, in the current economic downturn, the opportunities for institutional investment in prime properties have been curtailed by the lack of stock within an investment portfolio. The UK real estate recovery has been divergent across the sectors. There is evidence to suggest that secondary locations are increasing in importance as prime stock is becoming more difficult to source and investors are being forced up the risk curve. Therefore tension exists in the decision making process for the buying and selling of prime and secondary product. In the current recovery phase of this UK real estate cycle, the paper investigates the divergent performance play amongst the commercial sectors (office, retail and industrial) and sub sectors (business parks, retail warehousing, rest of UK offices). The paper will undertake a quantitative analysis of total return on an annual and quarterly basis including high and low quartile total returns across the different sectors and sub sectors. The analysis will further consider the rolling four quarters total return to illustrate the shift in prime and secondary performance for the different sub sectors. The performance differential between the highest and lowest quartile of the different UK property segments will provide an indication of when to buy and sell secondary real estate. The significant of this analysis is to demonstrate how to optimise property performance through stock selection.