Thursday, December 17, 2020 9:00 AM
- Expert advice does not always provide expert forecasts
- Forecasting can benefit from diversity of skills and thinking
- REIT (Real Estate Investment Trusts) investors should think beyond their strategies for the next 12 months.
There is always a lot of interest in forecasting the future, especially at this time of the year when experts tell us what to expect in the next 12 months. In general, the quality and results of the predictions are not impressive. 2020 is a good example of this. Some predicted the devastating toll of the COVID epidemic on markets and economies. In addition, some have expected an impressive recovery in the financial markets that has been seen since March.
This is why we have taken a different approach to our 2021 approach, inspired by the work of the Good Judgment Project (GJP), which was established in 2011 when US intelligence agencies used public knowledge to evaluate incidents Started doing the world.[i]
We invited our group of “experts” to think about adding imagery that could shape the future of real estate investment and to look beyond the world of epidemics over the next five years. It was not scientific, but it avoids. The standard “this is our vision” approach. This highlights the serious challenges of forecasting social, political and economic issues affecting our investment class.
There are two categories of prophets: those who do not know and those who do not know[ii]
In the past, this column has attempted to anticipate both the Rugby World Cup results and the real estate market expectations, with modest results, to put it well. Sometimes it helps to get back to basics.
Market participants show increasing interest in so-called super forecasters. The Good Judgment Project employs a group of non-expert experts who specialize in predicting multiple disciplines, where they often have limited expertise. They come from a wide variety of backgrounds.
Nevertheless, he has an impressive track record. This has fueled the interest of UK and US governments. Researchers found that a small percentage of the prognosis population has significant skills. Therefore, inspired by their work, we decided to recruit “talented” non-experts, looking at the potential for a handful of events that could shape the real estate markets.
A talented ‘bank’ with non-experts
I have asked BNP colleagues about events that may or may not happen in the coming years. The BNP group was not as broad as GJP, but it was no less talented.
Questions related to the probability of these events occurring in the next five years are:
- A global economic downturn
- An epidemic revival or similar global virus outbreak
- Countries around the world are meeting their carbon emission reduction targets
- In major economies, employees work an average of 1 to 2 days a week from home
- Smartphone usage is decreasing rather than increasing in major economies
- Another big European country is leaving the European Union
- Donald Trump wins second term as US President
- Retail Real Estate Improves Global Real Estate Benchmark
- The largest publicly traded real estate company in the world will be located in a country other than the US
- The largest global public company will be based outside the US.
The responses were interesting, with fairly pessimistic views on the global economy, optimism about working from home, and – interestingly – some confidence Next Big Thing In equality outside the US. It is correct to see these predictions, but the answer is shown in Figure 1.
Figure 1: Average probability score for questions about possible events over the next five years – minimum, maximum and average probability (probability in%)
Bron: BNP Paribas Asset Management
They can say that I’m a dreamer, John Lennon …
The GJP’s motivational work and our own, small-scale, research highlight some of the challenges inherent in strict and disciplined forecasting and accuracy improvement.
Many questions arise.
- In the future, REIT analysts should encourage greater diversity of thinking when setting price targets behavioral finance And suggest faster GJP work?
- What questions should we ask about asset class?
- Most importantly, whom should we ask?
- Are industry experts the right people like me to ask about the future growth in society and the economy that supports the demand for real estate?
- Are we guilty of confirmation bias in our thinking?
- Do we need a longer horizon than predicting 12-month price targets?
… but I’m not alone
Very few commentators predicted the devastating epidemic results earlier this year. Similarly, very few experts said in 2010 that Britain would have left the European Union by the end of this decade. At the height of the financial crisis in early 2009, many investors closed real estate because it was a leveraged asset class. Yet over the next three years, global real estate has significantly outperformed global equities.[iii]
Perhaps this confirms that we need more day dreamers, glass globe viewers and lateral thinkers to imagine the future. Certainly, after this practice, market participants like me have to recognize that we are members of JK Galbraith’s group who “know they don’t know”.
Written on 11 December 2020
This column is for informational purposes only and is not intended to serve as a basis for making specific investment, business, or commercial decisions. Economic and market trends, forecasts, estimates or forecasts are not necessarily indicative of the future or potential performance of wealth.
For more articles by Sean Stevens in the real estate market and investing in real estate, visit Investors Corner at https://investors-corner.bnpparibas-am.com/author/shaun-stevens/. The blog
[i] Phillip E. Tetlock, Barbara Mellors and Don Moore, University of Pennsylvania Professors
[ii] Quotes from JK Galbraith, Source: Equities.com
[iii] Source: Bloomberg, December 2020; The FTSE EPRA Narendra Development Index gave 17.3% higher returns between 31.3.2008 and 31.12.2011 as compared to MSCI World Index.