Policies, events and innovations intend to deliver predefined goals or solve existing problems, but unintended consequences often determine the outcome. Hence traders thrive on spotting unintended consequences and taking positions before the general public does and policymakers react. For example, when the unintended consequence of stellar Chinese growth was an increase in corruption, traders loaded up on luxury goods stocks and sold them down once the government announced its crackdown.
As a long-term investment class, it typically takes longer in the real estate industry for consequences to filter through. Maybe that is the reason the acceleration of Amazon’s growth following the introduction of the iPhone in 2007 was judged a threat to just retailers. The prevalent “location, location, location” mantra would mean that struggling retailers would be forced to reduce their store portfolios and retreat to prime locations which were seen as resilient to upheaval: the saved rents from the secondary locations would help to prop up rents in the prime ones.
The market took its time, but in 2015 traders started shorting retail landlords having shorted the retail sector for a good three years. Today the real estate industry acknowledges that there is a retail crisis, which has also created a winner in the logistics sector. As a result, the typical trade has been short retail and long logistics, but maybe there is another unintended consequence which has so far been overlooked: regional real estate liquidity.
The offices sector is dominant accounting for about half of annual investment volume in Europe, as gateway cities account for most of the investment. For investors, this creates concentration of risk, which is even more acute for domestic portfolios. Investment in regional assets mitigates this risk, but there arises a problem: asset sizes are smaller which adds unwanted liquidity risk.
As a result, large retail became the favourite strategy for regional diversification. Large shopping centres bundle smaller stores together into sizable dominant regional assets, which would provide the required liquidity, diversified tenant risk and economies of scale on the operational side. And it showed: retail accounted for over half of regional real estate investment up until 2015.