Matthew Effect
The market is wishing itself into action, but seems to be polarised between opportunistic and core strategies
In the 1st?century AD, Levi, a Galilean Jew, distantly employed by Herod Antipas the Roman-appointed tetrarch, went about his day job as a publican, collecting land (and poll) taxes on behalf of the Roman empire. Tax collecting was a reviled job even then and similar sentiments echo strongly today, particularly in light of SDLT rising in the UK from April 1st?and the obscenely high cadastral income tax in Belgium. Levi later became one of the apostles and was canonised as Matthew; perhaps there is hope of restitution for modern-day tax authorities.?
Either way, the transformation from a despised publican to a revered evangelist embodies a powerful social dynamic that now bears his name – the Matthew Effect. Coined in 1968 by distinguished sociologist Robert K. Merton, this concept explains how advantage accumulates over time; those who start with advantages gain disproportionately more, while those who start with less fall further behind.
The Matthew Effect aptly draws its name from the Gospel of Matthew, which states, "to those who have, more will be given." This principle is widely recognised today, influencing significant discussion and research across various social sciences. Its implications reach far beyond theology, shaping contemporary debates about inequality, opportunity, and social policy. Daniel Rigney, the author of ‘The Matthew Effect: How Advantage Begets Further Advantage’ further notes that inherent disadvantages similarly compound. Individuals trapped in cycles of disadvantage, such as spiralling debt, find financial stability increasingly elusive. Similarly, a child who dislikes reading often reads less, limiting their proficiency and academic achievement. Without intervention, these downward spirals can determine challenging futures, often through no fault of the individual's own.?
Moving from social sciences to financial markets, we see the Matthew Effect vividly illustrated by the Global Relative Return Index (RRI), launched by Oxford Economics. Markets and sectors already deemed attractive, such as Europe's industrial and hotel sectors, can effortlessly attract greater investor interest, compounding their appeal. Conversely, sectors or regions offering lower projected returns—like certain North American markets or neutral-rated Asia-Pacific markets—might face dwindling investment interest, illustrating how initial disadvantages can become self-reinforcing. According to the report, the most appealing sector continues to be industrial, followed by hotel, residential and retail. Europe is leading the way with the most excess return opportunities this year, followed by North America and Asia-Pacific.
In private real estate markets, the Matthew Effect is also evident. Recent research shows private real estate is attractively priced relative to equities, offering an enticing entry opportunity given recent declines. As noted in a research note by Clarion Partners, a peak-to-trough decline of ~19% offers a potentially interesting opportunity. However, despite promising fundamentals, market commentary remains inconsistent and uncertain, oscillating between optimism and caution, and leaving investors unclear about whether opportunistic or core strategies represent the best path forward.?
Davidson Kempner’s October 2024 report, "Dislocation Drives Opportunity: The Case for Opportunistic Real Estate," highlights how current market volatility and economic instability have created fertile ground for opportunistic?real estate investments. Historically, distressed and special situation real estate assets have provided superior returns during crises, with non-core real estate funds initiated after downturns often outperforming. This suggests investors ready to navigate complexity could significantly benefit from these opportunities.
Yet, despite enthusiasm for opportunistic strategies, there is a clear institutional preference emerging for core real estate. Preqin reports that 65% of private-sector pension funds increasingly favour core real estate, attracted by the promise of stability amid ongoing uncertainty.?
Jeffrey King at AEW commented that core doesn't mean buy and ignore; it requires active portfolio management and an ongoing investment to maintain an assets core profile. An asset can outlive its risk profile, and a core asset can turn into opportunistic one as its characteristics evolve. The difference occurs in recognising when in the cycle upside risks outweigh downside risk; but both ideas can’t be right simultaneously. Institutional investors are attracted to core assets because they exhibit strong income characteristics, but the requirement for opportunistic real estate is driven by the nature of the asset, but primarily because external market influences dictate it’s the right point in the cycle to take advantage - not just because of the assets profile, but external market factors including interests rates, inflation, cost of debt, consumer demand and much else.?
Abrdn’s recent analysis presents five compelling reasons why core real estate, central to many portfolios, is at a turning point. First, a notable capital value reset occurred, with European and UK markets declining significantly from their peaks, creating space for recovery. Second, core real estate currently offers attractive yields compared to interest rates and bonds. Third, core sectors continue to experience strong income growth despite economic headwinds. Fourth, performance increasingly aligns with sustainability, rewarding environmentally responsible assets. Finally, improved debt pricing and availability enhance the appeal of core investments. Together, these factors position core real estate favourably, exemplifying the Matthew Effect’s principle of compounding advantages.
Indeed, Principal Asset Management further highlights core real estate’s foundational role in institutional portfolios, focusing on high-quality, stabilized assets with occupancy rates around 90%. Citing the lack of underlying economic stress, Principal attributes recent real estate value corrections solely to capital market stress created by higher interest rates, but with sustained economic growth and more accommodative interest rates forecasted, “real estate is poised to enter another period of positive returns, which will benefit both core and core-plus strategies.”
In real estate, the Matthew Effect explains why the rich seemingly become richer – existing property owners leverage appreciation, financing, and investment opportunities to expand wealth, while others struggle to enter the market. Over time, this cycle perpetuates economic inequalities. Analysis by Hines Research found that as of Q3 2024, just over 66% of global markets were in some phase of the “buy” cycle, the highest level since 2016 and akin to the early years of the post-global financial crisis recovery yet we haven’t seen this come to fruition yet. Real estate debt strategies too, what seemed like the darling of investor allocations and the topic of nearly every conversation over the last few years seems to bode less well. Real estate debt funds experienced the third consecutive annual drop in fundraising, even as a bottoming commercial real estate market and cautious banking sector improved the outlook for lending, reflecting an enduring gap between market discussions and concrete actions.
The story of Purim, celebrated this weekend, took place a few hundred years after the contemporaneous events of Levi/Matthew and is a harbinger for good fortune. The Book of Esther recounts an inspiring narrative of reversal. Queen Esther and her cousin Mordechai saved the Jewish people from annihilation in ancient Persia, dramatically overturning their destiny. Wicked royal advisor Haman plotted destruction, but Esther courageously revealed her Jewish identity and exposed Haman's plot to King Ahasuerus (Xerxes I). The king reversed the decree, Haman faced execution, and the Jews triumphed. Purim celebrates this dramatic turnaround with joy, feasting, and charity, symbolizing courage, faith, and hidden miracles.
Just as Esther’s courageous actions transformed the fate of her people, strategic positioning and decisive action in today's real estate markets can also create remarkable opportunities. Recognising the cycles, embracing timely decisions, and acting boldly can dramatically alter investment trajectories, reflecting the timeless lesson of Purim – success often comes to those prepared to seize the moment. The current confusion between core and opportunistic strategies reflects a market still waiting for clear signs of activity. As the story of Purim reminds us, fortunes can shift quickly, offering hope that proactive investors today might soon witness their own moment of dramatic reversal.