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Private Equity Firm Comes Up With Own Index To Cut Through 'Broker Bullshit'


Everyone in real estate is constantly asking where we are in the cycle, and London-based Tristan Capital is attempting a new way to answer the question.

The private equity firm came up with its own index to try and counter what it said is backward-looking information provided by real estate brokers.

“This index is designed to help us cut through the bias, noise, data deficiencies and headline-grabbing hype that surrounds real estate,” Tristan Capital Head of Research Simon Martin said in a note emailed to clients. “Given it was designed to cut through the bias, we originally thought of it as a ‘Broker Bias Index’ but some of my more colourful colleagues have subsequently nicknamed it ‘Broker Bullshit Index’ (sorry to our friends in the broker community)!”

Tristan, which invests across Europe, came up with one index of leasing and investment performance created using traditional metrics of real estate performance like rents, yields and vacancy, taken from traditional sources like brokers.

It then created a second index, which it described as constructed using real-time economic and sentiment indicators, real estate data and capital markets feeds to construct an index that serves as a leading indicator for the real estate cycle.

“There is no ‘filter’ for this data and it changes constantly,” Martin wrote. “Although it is, of course, more volatile, we believe that by directly comparing the two series directly and focussing on the differences, we can enhance our capacity to manage risk in real time.”

So how do the two indices differ, and what does this tell us about where the cycle is now? 

Martin said Tristan’s index shows the market is a lot slower than the index created using information from brokers.

“We observe a patterns of mini-cycles emerging from our data, reflecting the reality we see in all other asset classes,” Martin said. “This contrasts with the broker data that describes the market as having been on a smooth and linear march to stronger conditions.

“The ‘gap’ between perception and reality comes to life when you speak to our investments and asset management teams about these shifts. They describe experiencing much the same thing when they are buying, leasing and selling: The market has been busy but depth and demand has ebbed and flowed a lot over the last three or four years.”

Martin said there are few signs in European markets of the high leverage or overdevelopment that typically cause real estate crashes. But real estate cycles typically move slower than business cycles, so he said it is important not to get complacent.

“Even if we think that excessive risk seeking in our sector is absent, we have to continue to be watchful,” he said. “Real estate cycles are glacial but, as we discussed, people in our business like to forget or assume away the risk of making the same mistakes twice and leverage can easily creep back into the system, particularly if growth surprises on the upside for consecutive years.

“We should also reflect on the reality that a modest economic slowdown every one to two years serves a useful purpose as it helps regulate animal spirits that build up when the economy outperforms on a sustained basis.”

Tristan clearly thinks there is opportunity in the UK market. In January it has been linked to deals to buy a £245M office portfolio in Holborn, Central London, and a £140M business park in Reading, about 40 miles to the west.