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| From the Editor: Worthy Notions |
The Opportunity of Land
Dwight Cass
06/01/2004
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Most of us are inured by experience to the idea that our investment
portfolios will occasionally be a source more of dread than of comfort. We
realize that our equity, fixed income and credit investments can and will suffer
occasional setbacks, some of which may take years to mend. But when we soberly
consider these “expected losses,” as financial statisticians call them, we take
comfort from the fact that the markets price our investments to compensate us
for enduring these hazards. And, although we are often loathe to consider them,
we can and do manage the impact of potentially more devastating unexpected
losses (a hedge fund manager’s fraud, a terrorist attack, a national financial
crisis) by diversifying our portfolios where possible, and hedging our larger,
concentrated exposures to particular assets.
 This almost organic balance of
risk and return, mediated by the capital markets, is not perfect, but it is
comprehensible and, for the most part, it works. Unfortunately, it bears almost
no relevance to what may be our most financially—and emotionally—important
asset: land.
Land is illiquid (that is, difficult to price and requiring time
to buy and sell) and almost impossible to hedge. Land exposures are notoriously
complicated to diversify, unless we can assemble a very large portfolio, and
they are highly correlated to regional geographic fortunes. (Remember the toxic
effect the New England recession of the late 1980s and early 1990s had on real
estate values in the region.) Instruments designed to overcome these problems,
like real estate investment trusts, often behave more like equity investments
than real estate.
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