Published July 20, 2006

'Extend the universe' in property, says MIT don

New capital inflow will stimulate new real estate devt


GLOBAL investments in direct commercial real estate rose 21 per cent from US$393 billion in 2004 to US$475 billion in 2005, according to David Geltner, director, Center for Real Estate, Massachusetts Institute of Technology (MIT).

But where this should be good news for property owners everywhere, Professor Geltner said: 'The avalanche of financial capital chasing too narrow a field of physical capital will skew prices of physical capital, and this is what we need to guard against.'

In a talk sponsored by the Urban Land Institute South Asia Council as part of the National University of Singapore Department of Real Estate Public Talk Series 2006 yesterday, Prof Geltner warned of some of the consequences of the growing capital markets, globalisation and the effects on real estate.

For instance, he noted that even though commercial real estate investments had grown in the US from US$75 billion in 2001 to US$250 billion in 2005, the compression of capital values has led to a fall in yields. 'This is a real issue,' he said.

Prof Geltner was not, however, turning doomsayer. Instead, he simply had advice - and that is to 'extend the universe' or increase the range and scope of physical capital (real estate).

The inflow of new capital will stimulate the development of new real estate. And to some extent, as Prof Geltner notes, this is happening. He said that in the next 30 years, half of the world's buildings will be built, and with a significant percentage in Asia.

Maintaining a balance, however, is crucial. 'You don't want to have too much new development too fast,' he said.

To keep the 'system' in balance, he suggested four broad mechanisms to 'extend the universe'. These include increasing international real estate investments; extending the definition of real estate to include traditional infrastructure, like roads; using real estate-based indexed derivatives; and to include non-institutional physical properties in real estate developments.

Of the four mechanisms, indexed derivatives based on physical real estate is perhaps the newest concept, and one which Prof Geltner and MIT are most keen to develop by way of fine-tuning existing models of real estate indexes.

Such indexed derivatives would offer the opportunity for investors to 'swop a fixed rate for an indexed return'. He added it was also like a 'hedge' for property owners.