Joint SPR / IPF Seminar on Understanding Property-Level Risk, Thursday 22nd November 2018, LaSalle Investment Management

Much work to do on property-level risk

Few would dispute that stock selection is a crucial aspect of real estate investment, especially in a lower return environment, said Simon Marx, Investment Strategist at LaSalle Investment Management, who chaired the meeting. But property-level risk is an aspect of real estate research that is still in its early stages of development.

Indeed, the industry still lacks consistent definitions for property-level risk, suggested Chris Arnold, Head of Quants, Data Analytics and Systems, European Real Estate at Fidelity International.  For example, are we concerned about uncertainty or volatility?  Downside risk tends to attract most attention, but comparisons can be difficult, particularly where valuation data needs to be used as a proxy for price.

Still, digital technology is helping extend the range of potential techniques such as a scenario testing, sensitivity analysis and Monte Carlo simulations, making it possible to envisage and explain outcomes based on many different data assumptions.

It also allows for the adoption of a wide range of asset descriptorsthat can be used as ‘factors’ to explain and potentially to forecast performance.  This is the thinking behind the rating system being developed by Olivier Mege, CEO and Founder at Real Quality Rating.  He stressed that any system for measuring property quality needs to be objective but also all-embracing and comparable.  If this sounds like a tall order, for Mege it has meant incorporating more than 150 separate descriptors as a basis for rating, which are weighted dependent on the views of a broad swathe of more than 1000 industry practitioners from across Europe.

Nadja De Jager, Director of CBRE Global Investment Partners proposed that assessing property-level risk is still a challenge, not least due to the lack of development in valuation practices, though this may improve as technology innovations take hold.  Investors are demanding much more information about asset-level risk, but there is a tendency for real estate practitioners to claim it is too heterogeneous for ‘quant’ type analysis.

Any assessment of property-level risk must be grounded in a strong understanding of how markets are evolving, insisted Lu Li, Head of Investment Risk, Aviva Investors. To have any value views of risk need to be forward-looking, for example taking account of structural change in retailing and logistics.

Tim Horsey