Unit Size and Value

Size has two aspects, the physical size and the value of that property. Nearly all secondary investments can be acquired in lot sizes to suit the precise requirements of an investor. In the case of equities an investor is not buying the assets of a company directly, but the right to participate in the profits of a company. While shareholders in law also have the right to involve themselves in the management of a company, in practice this task usually devolves upon a board of directors. By contrast, a primary investment in real estate obtains entitlement to the use of the asset itself, which involves its management. In addition, as direct investment in real estate is 'lumpy', requiring substantial elements of capital, investors often have problems in maintaining balanced portfolios. The scale of expenditure required prevents many small institutional funds - see section 2.3.3 - and practically all private investors from holding diversified real estate portfolios. Indeed, the increase in both the physical scale and general levels of real estate values, especially in the early to mid-1980s, has increased this problem. This has had the effect of further reducing the number of investors able to buy institutional-grade real estate, particularly in the City of London. 

The progressive increase in lot size has also created disposal problems for those institutional investors wishing to restructure their portfolios. This has further increased market illiquidity, with fewer market players capable of the purchase and long-term retention of real estate as an investment. Furthermore, due to indivisibility, funds may hold a portfolio which has an unequal distribution of lot sizes. According to Morrell [1993], this has important implications for the ability to diversify risk. Morrell showed that the perceived reduction in risk, by holding a large number of assets, may be illusory if a portfolio has an uneven distribution of asset values. 

However, while this may reduce real estate's attractions for small-to medium-size institutions, the above arguments should not deter large institutions from investing in real estate.