Location, location, location. For a long time those words were applied to explain the critical factors driving the performance of real estate focusing on the location of the building in its local market and the performance of the local market but are other dimensions of location that are important? As the world becomes increasingly well connected, horizons have stretched and investors seek diversification opportunities in regions far away from home. However, does this diversification come at a price?

The first event of the ULI UK ‘Research Insights’ series held on September 22^nd in CBRE’s London head office discussed these questions. Piet Eichholtz presented a paper he wrote with Rogier Holtermans, and Erkan Yönder investigating the impact of investor proximity in commercial real estate market. “Proximity Matters – Economic effects of Owner Distance and Local Property Management on Office Markets”. The paper’s findings were discussed and debated by a panel of industry experts – Neil Cable, Head of European Investment at Fidelity, Michael Haddock, Senior Director Global Research CBRE, Paul Cheshire, Professor of Economic Geography at the London School of Economics and Simon Clark, ULI UK Chairman.

Based on 2011 U.S. office market data, the paper finds that investors located close to their office buildings can extract significantly higher effective returns from their assets, especially if buildings are of low quality. The effective rental discount observed in distant ownership is linked with the information disadvantage distant owners have. This effects seems to arise through occupancy rates (the ability to retain and attract tenants) and less so contractual rental levels. The lack of local market knowledge/connectivity can pose a significant impairment in the effective rental income. This distance effect is perhaps not surprisingly greatest in lower quality property. The analysis shows that investors can mitigate this effect through employment of property managers allowing owners to be located further away from their assets without suffering the full consequences of distance on rental incomes.

The discussion explored the challenges of being close enough to markets whilst attempting to achieve a broader spread of investments in the context of the paper but also other findings that distant owners tend to overpay (Ling, et al., 2013). Neil highlighted his “two year rule” – never invest in a market until you have spent two years following it and researching it. The panel agreed that active portfolio managers do need to get close to their assets and their occupiers whether directly or indirectly – through external mangers and that getting a genuine alignment with local partners/managers is critical to avoid the negative effects of distance.

Words by Eleftheria Chatzipanagou