Citation
Brown, G.R. (2000), "Editorial", Journal of Property Investment & Finance, Vol. 18 No. 6. https://doi.org/10.1108/jpif.2000.11218faa.001
Publisher
:Emerald Group Publishing Limited
Copyright © 2000, MCB UP Limited
Editorial
Although we are surrounded by risk the real estate profession still largely approaches this in an ad hoc manner. Developers and investors know that risk exists but happily seek comfort in the adjustment of yields. The situation has improved over the years and although it is now possible to hedge real estate risks in a financial sense the market for these products is still relatively small.
Lack of data is often blamed for our poor understanding of some of the issues surrounding risk. This, however, is a shortsighted view. We should be more concerned with how we manage the risks associated with what will happen in the future, not the past. History provides some guidance on estimating risk but only up to a point. If you read the development of the classic risk models in portfolio theory you soon become aware that they are drafted in terms of expectations. This of course is how it should be. Investors want to know how to manage their funds in relation to future expected events. Responding to what has happened in the past is a bit like shutting the stable door after the horse has bolted. Lack of data should not, therefore, be a hindrance to the acceptance of risk models in real estate.
What this means of course is that we should be focusing a lot of our attention on developing models that forecast both the distribution of future returns as well as the direction of those returns. If we are succesful in doing this then this research could have an important impact on the way decisions are made.
The current issue of the journal contains a number of articles that address some of these topics. They significantlky advance our understanding of areas such as cyclical relationships, predictability, prepayment risk and decision making. At the portoflio level the paper by Byrne and Lee provides a number of useful insights that are of direct relevance to institutional investors. They are all well worth reading.
The big challenge in the future is to bring together many of the separate strands of research that are being developed internationally. What we have at present is a very big jigsaw that is getting bigger every day. We need some way of bringing all this information together to form a comprehensive theory of real estate investment.
Gerald R. Brown