OPINION: THE 2020s will be known as the decade of big data. So any company today that’s not seriously looking at how best to embody data into every facet of its decision-making is taking an existential risk.
Mark Twain once said: “History doesn’t repeat itself but it often rhymes.” The same is true of property cycles. There are patterns that can be studied and discerned. And it is no longer good enough to just flirt with data, you have to commit to assiduously following it and studying it. In other words, you have to marry the data.
While average investors tend to follow the counsel of advisers, astute investors are directly guided by data – now more than ever. As KPMG puts it, “the quality, accessibility and analysis of data are taking centre stage, helping funds make better investment choices in today’s fast-moving global environment”. And backing every fund and every deal with leading technological insights has become a need, rather than a nice-to-have, to not only minimise downside risk, but to improve investor returns.
The Covid-19 pandemic has only accelerated the need for timely data. It may look and feel like a normal property cycle, but it’s anything but normal. COVID-19 is a one in 100-year event and it has ushered a raft of unforeseen and unpredictable outcomes. In periods of high uncertainty such at this, timely data provides you with “fog lights” in the mist, giving you much needed visibility to make vital investment decisions.
But don’t throw the old ‘gut feel’ approach out the window just yet. This is still relevant. In the end, real estate is still a very personable business and you can’t do it entirely in front of a screen. You need to go out and see properties, meet people and negotiate deals.
The devil’s in the data
The industry has a history of depending on gut-decisions and untrustworthy spreadsheets – a dangerous pattern that can lead to an ill-advised reading of key risk indicators. A prime example is the Reinhart-Rogoff incident. A major controversy of the 2010s, it found an academic paper was beset with significant errors that came down to misuse of an Excel spreadsheet.
As one of the most widely used applications in the world, the spreadsheet has a low threshold in usability which, in turn, comes with an inherent drawback: It allows for a large margin of human error. It begs the question of “how many errors are there?”, rather than “are there any at all?”
Not only is there massive risk in underpinning complex efforts with such an archaic tool alone, but spreadsheets have nothing to say about the macro view and asking big questions about the future of property is where the big alpha is generated.
Most capital transaction teams have a bias to action, they enjoy doing deals. It’s what they get paid to do. If left to their own devices, the very best of them can typically name only 4-5 risks about a particular asset acquisition. By contrast, data-driven investment platforms like PRISMS® typically generates a list of between 8-12 risks. Technology is more thorough and less likely to skip steps – this is why at EG we insist that all our deals are run through PRISMS.
Data-driven investment platforms
Imagine having the power of not just having all data at your fingertips, but a way of quickly interpreting the information to generate a market risk score. Data-driven investment platform, PRISMS®, was built by EG over more than a decade to do just this; to get a sense of the heat in the kitchen.
PRISMS also runs all of EG’s spreadsheets through a “polygraph test”, by systematically auditing circa 30 key assumptions in financial models and assessing over 50 contextual market data sets to inform those assumptions. Let’s face it – most capital transaction teams have a bias to action and they enjoy doing deals. After all, it’s what they get paid to do. If left to their own devices, the very best of them can typically name only 4-5 risks about a particular asset acquisition. By contrast, technologies like PRISMS® typically generates a list of between 8-12 risks.
Technology never skips a step and prevents the deal team from justifying deals by optimistically tweaking key assumptions to justify an investment.
EG sold over 85% of its property holdings by December 2019, not because we had a crystal ball about an impending pandemic – but because PRISMS® gave us a clear indication that there was a lot more downside than upside in prevailing property valuations. As many as 30 indicators sent the message that it was time to take some chips off the table.
Not everything that’s worth seeing is in front of us
It’s in times like these we need to be cognizant of alternative data – the non-financial information used for investment decision-making processes.
Alternative data is any data that is being used for a different purpose than initially intended. Think pedestrian and vehicular traffic, credit card data, company registrations, electricity consumption, port and airport traffic – even weather forecasts. Alternative data will often yield additional insights that complement the information you receive from traditional sources.
It is different to conventional data – GDP, vacancy rates and unemployment insights, for example – in that it is typically updated on a daily or weekly basis and doesn’t suffer from the normal reporting lag periods of conventional data.
Collecting alternative data, especially in a period of high disruption such as COVID-19, gives significant advantage to a real estate investment platform by providing real-time feedback on how a particular real estate market/sub-market is responding to the shock or the speed of its recovery towards a normal trading position.
How to find an investment edge
Advisers play a critical role in allocating the capital that individuals need to grow their portfolios and keep the lifeblood of economies flowing. Advisers have traditionally backed managers who demonstrate a strong track record in relevant deal flow and strong realised returns. Importantly, also work with asset consultants that have technology embedded in their investment process and big data to supplement human intelligence and intuition.
A win-win for both investors and advisers
Today’s market is treacherous, investors and fund managers are having to navigate several challenges such as increasing rental vacancies, tenant cash flow problems and an anxious retail market. Those who succeed will be the ones who can leverage technology to analyse huge data sets that determine unbiased risk profiles.
Recently, Casey Quirk principal Amanda Walters said, “Continued market uncertainty because of the pandemic and underlying financial trends brings into sharp focus the growing gap between asset managers that are willing to challenge their legacy businesses and those hoping higher market levels will bail them out of current difficulties.”
Think of it a little like chess – go with the asset manager who has the ability to process information quickly and only makes their move after taking into account where all the other pieces are. Also align with those that apply a consistent method to all real estate deals across sectors and geographies. Always look to back smart people with the right data – not genius and intuition.
By Adam Geha, CEO and Co-Founder at EG.*
