Zeno Adams, professor at the Swiss Institute of Banking and Finance at the University of St. Gallen, joined REIT.com for a video interview in Chicago during REITWeek 2013: NAREIT’s Investor Forum.
Adams discussed his recent research on sources of risk spillovers on REITs with similar assets in the same region within the United States. He said that there’s a need for geographic diversification among REITs.
“Let’s say you invest in REITs. Because you care about geographic diversification you make sure that all properties of REITs are spread out all over the map,” he said. “There may be a situation where each REIT appears to be geographically diversified but the portfolio’s not. This may be because some of the REITs have similar locations, so they are subject to similar economic shock.”
Adams said that in this case the portfolio is subject to risk spillovers.
“The tricky thing with risk spillovers is that you may not observe them most of the time. If we are in a tranquil market period, there are no shocks and no spillovers,” he said. “Once a crisis hits then there are spillovers and the risk in one REIT is transmitted to others in the portfolio.”
When it comes to recent real estate trends, Adams said he has been surprised at how quickly investor risk appetite has returned.
“I had expected that the burst of the housing bubble in the U.S. and elsewhere would have been such a shocking experience to investors that they would be very alert and reluctant to invest in markets with unusual high house price growth rates,” he said.
As a professor, Adams said that a lot of his students have the view that commercial real estate is a type of specialty career within the larger finance industry.
“I’m trying to tell them that’s not the case. In order to understand real estate markets you actually need a very broad economics education,” he said. “If you only focus on real estate you may miss some bigger view of the topic.”
He said he tells his students that it’s important to have some knowledge about the macro-economy, finance and econometrics.