Prime versus secondary real estate: when to buy and sell

Purpose - The paper aims to assess property returns using yield differentials for prime and secondary properties as a real estate decision-making tool. It seeks to demonstrate how property portfolios can be optimized through rational stock selection within the respective sectors identified in the IPD Index. Design/methodology/approach - The paper utilises IPD data over the period Q1 2001 to Q4 2011 to investigate the performance returns on an annual and quarterly basis across key market sectors. It measures the rolling four quarters total return to illustrate the shift in prime and secondary performance for the different sectors to analyse the buy and sell decisions of institutional investors. Findings - This paper indicates that investors can optimise property performance through rational stock selection and that secondary commercial property values display greater volatility compared to prime stocks. Investors need to take calculated risk in anticipation of higher total returns based on a buy/sell strategy when secondary stock outperforms prime. Research limitations/implications - These findings can have a number of implications for real estate decision making. Firstly, capital growth is still the main factor that influences return and these returns are sensitive to wider economic and market conditions. Secondly, rational stock selection is likely to have major benefits in a difficult and an illiquid market. Thirdly, the choice of prime or secondary does matter and strong heterogeneity exists in each of the sectors and therefore offers potential for sector diversification. Originality/value - This paper contributes to an understanding of property investment decision making by evaluating the differential spread/gap between low and high yield properties to determine the opportunities to sell/buy prime/secondary property.