There is always a lot of interest in predicting the future, especially at this time of year when experts telling us what to expect over the next 12 months inundate us. In general, the quality and results of predictions are unimpressive. 2020 has been a case in point. Very few predicted the COVID pandemic’s destructive toll on markets and economies. In addition, very few expected the impressive recovery in financial markets witnessed since March.
For this reason, we decided on a different approach for our look-ahead to 2021. It was inspired by the work of the Good Judgement Project (GJP), which was established in 2011 as US Intelligence harnessed the wisdom of the crowds to forecast world events.[i]
We invited our own crowd of ‘experts’ to add imagination to thinking about what might shape the fortunes of real estate investing and to look beyond the post-pandemic world over the next five years. It was not a scientific exercise, but it avoids the standard “this is our outlook”, while highlighting the serious challenges of forecasting the social, political, and economic issues that affect our asset class.
There are two classes of forecasters: those who don’t know and those who know they don’t know[ii]
In the past, this column has tried to forecast world cup rugby results as well as real estate market expectations, with, putting it kindly, modest results. Sometimes it helps to go back to basics.
Market participants have begun to show growing interest in so-called Super-forecasters. The Good Judgement project uses a collective of non-expert experts who are adept at predicting across a range of subjects where they often have limited expertise. They come from diverse backgrounds.
Nonetheless, they boast an impressive record. This has interested the UK and US governments. Researchers found that a small percentage of the forecasting population have considerable skills. So, taking inspiration from their work, we decided to recruit ‘talented’ non-experts to consider the probability of a handful of events that could shape real estate markets.
A talented bench of non-experts
I asked BNP colleagues questions about events that may or may not take place over the next few years. The BNP bench was not as deep as the GJP’s, but it was no less talented.
The questions concern the likelihood of these events happening over the next five years:
- A global economic recession
- A resurgence of the pandemic or a similar global virus outbreak
- Globally, countries meet targets for reducing carbon emissions
- Employees in major economies work from home an average of 1 to 2 days per week
- Smart phone usage in major economies falls rather than rises
- A second major European country leaves the EU
- Donald Trump wins a second term as US President
- Retail real estate outperforms the global real estate benchmark
- The largest global listed real estate company will be in a country other than the US
- The largest global public company will be outside of the US.
The range of responses was interesting, with quite pessimistic views about the global economy, optimism about working from home and – interestingly – some confidence that the next big thing in equities may happen outside of the US. How accurate these forecasts are remains to be seen, but the range of answers is pronounced as exhibit 1 illustrates.
Exhibit 1: Average probability scores for questions on a range of potential events over the next five years – minimum, maximum and mean probability (probability in %)
Source: BNP Paribas Asset Management
They may say that I’m a dreamer, John Lennon…
The thought-provoking work of the Good Judgement Project and our own, albeit small-scale, survey highlight some of the challenges inherent in bringing rigour and discipline to forecasting and improving accuracy.
A number of questions emerge.
- In future, should REIT analysts encourage more diversity of thinking in pulling together price targets as behavioural finance and the work of the Good Judgement Project increasingly suggest?
- What questions should we be asking about the asset class?
- Most importantly, whom should we ask?
- Are industry experts such as myself the right people to ask about future developments in society and the economy that will underpin real estate demand?
- Are we guilty of confirmatory bias in our thinking?
- Do we need to have a longer view besides forecasting 12-month price targets?
…but I’m not the only one
Very few commentators predicted the consequences of the devastating pandemic at the beginning of this year. Likewise, very few experts were saying in 2010 that the UK would have left the EU by the end of the decade. Looking back further, to the start of 2009 at the peak of the Financial Crisis, many investors had written off real estate because it was a levered asset class. Yet over the next three years, global real estate significantly outperformed global equities.[iii]
Perhaps this confirms that we do need more daydreamers, crystal ball gazers and lateral thinkers to navigate the future. Certainly, after this exercise, market participants such as myself need to acknowledge that we are members of JK Galbraith’s group of those who “know they do not know.”
[i] Philip E. Tetlock, Barbara Mellers, and Don Moore professors at the University of Pennsylvania
[ii] Quote from JK Galbraith, Source: Equities.com
[iii] Source: Bloomberg, December 2020; the FTSE EPRA Nareit Developed index returned 17.3% more than the MSCI World index between 31.12.2008 and 31.12.2011