Visualising is halfway to understanding.
It’s hard to visualise risk, but MSCI produced a mesmerising graphic of the variation in individual UK property returns for 2020 and 2021 split by sector, which neatly differentiates between the market and individual property risks.
The wide divergence in market returns between the retail, office and industrial sectors in the past two years is shown by the sector average arrows. This variation reached a crescendo in 2021, with the sixth consecutive year of superior industrial performance culminating in the widest margin of out-performance yet.
Despite the superiority of industrial sector returns, a proportion of office and retail assets out-performed the lowest returning industrial assets, as visualised by the overlapping distribution of individual property returns in each sector. This illustrates that specific property risks are much greater than market risks in individual years.
The range in individual property returns could have been grouped by factors other than sector, which may have allocated more risk to structural rather than property specific factors. Such additional categorical variables include region, quality and income security, or more detailed property subtypes could have been employed, such as cold storage within industrial or retail warehouses within retail. Although differentiating returns using a more granular segmentation will have shown more variation in mean returns across sectors, I expect that the range of individual property returns would have remained just as wide.
