This integrated approach offers a handy way to tailor risk/return solutions in the current market.
Back in 2003, Susan Hudson-Wilson, Frank Fabozzi and Jacques Gordon wrote an influential academic paper entitled “Why Real Estate?”, which articulated the idea that the universe for real estate investors should be expanded from the traditional realms of private equity and private debt to include the ‘new’ public equity and public debt markets. Thus the concept of the quadrant model was born.
It is often referred to as ‘the four quadrants’, but the tautologically astute might reasonably enquire how many quadrants there should be if not four, so we will refer to it merely as the quadrant model. The idea is straightforward: to divide the real estate investment opportunity set into public and private options, as well as debt and equity options.
Given that the US is the largest and most liquid real estate market globally, and that Wall Street practitioners are never shy of repacking assets into ever more complex products, it is not surprising that this approach has most relevance – and indeed most components (particularly on the public debt side) – in that market. Nonetheless the quadrant model is also applicable to the UK, Europe and the Asia-Pacific, with slight variations.
As well as looking at the available opportunities, we can also use the quadrant model to understand the risk/expected return framework for each of the components. The table below shows how this segmentation operates in practice.