In a recent meeting that I attended, a sophisticated investor lamented the fact that real estate has increasingly become commoditised and institutionalised as a financial product. In his view, the typical investor in recent times has begun to allow short-term financial dynamics to affect long-term investment decisions and outcomes, and that fundamentally alters the capacity to ride through cycles and generate favourable risk-adjusted returns. Especially in mature markets where the proliferation of financial engineering and the chase for yield have led to kaleidoscopic strategies, he added that most investors seem to have forgotten the basic purpose and drivers of real estate in any economy. Post meeting, as I bade farewell to this investor who gave us much food for thought, there was a nagging sense of relevance to reflect on the approach towards real estate investing. With core yields in most Asia Pacific (APAC) markets at or below historical lows, investors are increasingly basing their investment decisions on the absolute achievable returns. The chase for yield inadvertently distorts the perceived rationality in risk-adjusted returns and capital starts to move up the risk spectrum.

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