Classifying Investment Quality

The categorisation of commercial real estate by investment quality currently uses ambiguous terms, such as ‘prime’, ‘secondary’ and ‘tertiary’, and adopts subjective criteria for this purpose. Property specific (i.e. location, building specification and income/tenant-related) features need to be separated from market specific characteristics in order to produce a risk profile for an asset that may be used to ascribe its investment quality, whilst a better understanding of the association between asset quality and risk should produce a more effective investment management framework.

As investment quality is a systematic influence on asset returns, this research argues that it should be integral to the investment process as a determinant of asset allocation, alongside current references to property type and location.

What are the practical implications of this research and what more needs to be done to establish a credible framework for the industry to adopt?


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