Risk Management as Practiced by International
Real Estate Investors
ERES conference June 2009
Author:
Sascha Donner
EuroFH – University of Applied Sciences, Hamburg
Faculty:
European Business Administration
Supervisor: Prof. Dr. Ottmar Schneck
With support from:
Real Estate Advisory Group Germany
“The Independent Real Estate Advisors“
OBJECTIVE OF THE STUDY
STUDY DESIGN
SURVEY PARTICIPANTS
RESULTS
SUMMARY
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
OBJECTIVE OF THE STUDY
STUDY DESIGN
SURVEY PARTICIPANTS
RESULTS
SUMMARY
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
PURPOSE
Survey of risk management practices as employed by real estate investors at the
international level
PREVIOUS STUDIES
Gibson, V.A./ Louargand, M. (2002)
“Risk Management and the Corporate Real Estate Portfolio”
Hyss, S. (2006)
„Risikomanagementprozesse der Immobilienwirtschaft“
Dr. Peter & Company (2007)
„Interne Studie über Risikomanagement“
Schwenzer, J. (2008)
„Bedeutung und Ausprägung des Risikomanagements von Immobilien in Deutschland“
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
OBJECTIVE OF THE STUDY
STUDY DESIGN
SURVEY PARTICIPANTS
RESULTS
SUMMARY
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DESIGN AND METHODOLOGY
STUDY DESIGN
Hypotheses:
• Risks which are present in larger real estate portfolios can be effectively reduced by
means of diversification or the use of derivatives.
• Systematic and comprehensive risk management tailored to the real estate industry is
lacking to a great extent.
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
STUDY DESIGN
Points of inquiry:
• In what forms is risk management to be found among the various types of real estate
investments?
• What risks garner the greatest share of investor attention?
• What methods and resources are employed in the risk management process?
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
STUDY DESIGN
Survey conducted via web-based questionnaire in English and German languages
The questionnaire comprised 51 questions in 7 areas:
A) General questions concerning participant’s firm
B) Integration of risk management in the firm structure
C) Risk identification at property level
D) Risk analysis and risk assessment
E) Risk management and risk controlling
F) Communication and information flow
G) Risk management methods
Questions posed were predominately of a closed form. Isolated half-closed questions
were used.
In order to ascertain the distinct characteristics of the various aspects of risk
management, scales (range 1 min. – 7 max.) were used, and rankings were performed
by the participants.
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STRUCTURE AND METHODOLOGY
STUDY DESIGN
613 international real estate investors (representing 49 nations) were randomly selected
from a database of 1,836 investors. The database had been compiled from publicly
accessible information sources and with the support of REAG GmbH Frankfurt.
Invitations to participate were sent out (83% of investors were written to by name), and
reminder e-mails were dispatched after 1 and 2 weeks respectively.
Duration of the survey: 3 weeks (12/01/09 – 31/01/09)
Response rate: 8.2 % (50 Investors)
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
OBJECTIVE OF THE STUDY
STUDY DESIGN
SURVEY PARTICIPANTS
RESULTS
SUMMARY
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
SURVEY PARTICIPANTS - Distribution according to investor type
Detailed overview
Corporate
7%
Other
4%
Project developers
7%
Real estate corp.
13%
Real estate investment
trust
6%
Pension fund
4%
Closed fund
15%
Insurance
3%
Bank
7% Privat equity investors
15%
Fund of funds
3%
Investment fund / open
real estate special fund
8%
Investment fund / open
real estate - public fund
8%
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
SURVEY PARTICIPANTS – Distribution according to investor type
Summarized
19 %
16 %
15 %
15 %
14 %
Real estate corporations and REITs
Investment Funds
Private Equity Investors
Closed Funds
Banks, Insurance companies, Pension funds
7%
7%
4%
3%
Corporate
Project developers
Other (advisory, management and leasing companies)
Fund of funds
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
SURVEY PARTICIPANTS – Geographical distribution
16 different nations
Germany
UK
USA
Other countries
28%
Austria
Italy
France
Bermuda
Denmark
Ireland
Georgia
UK
10%
Germany
62%
Japan
Netherlands
Norway
Luxembourg
Australia
Canada
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
DESIGN AND METHODOLOGY
SURVEY PARTICIPANTS
Year of establishment
Number of associates
25
30
20
10
7
5
2
1901-1925
1926-1950
20
15
13
10
8
5
5
2
Number of entries [n]
Number of entries[n]
14
15
24
25
20
5
0
0
before 1901
1951-1975
Founding year of company
1976-2000
after 2000
few er als 11
11-50
51-250
Number of associates
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
greater than 250
OBJECTIVE OF THE STUDY
STUDY DESIGN
SURVEY PARTICIPANTS
RESULTS
SUMMARY
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
A: General Questions Concerning Participant’s Firm - PORTFOLIO
4,0
4,0
3,6
3,5
3,5
3,5
3,0
2,5
Mean (arithm. mean)
Mean (arithm. meanl)
2,8
3,0
2,2
2,0
1,5
1,5
2,5
2,2
2,1
2,0
2,0
1,5
1,0
1,0
0,5
0,5
0,0
0,0
Portfolio properties
Project
development
Element
Portfolio property
Project development
Holding
Other
Holding
Other
Rank
σ
σ²
Range
3,5
2,8
2,2
1,5
0,92
1,05
1,16
1,08
0,85
1,09
1,34
1,17
1-4
1-4
1-4
1-4
Commercial
property
Element
Office property
Residential property
Special property
Industrial property
Residential
property
Special property
Industrial property
Rank
σ
σ²
Range
3,6
2,2
2,1
2,0
0,90
1,28
1,14
1,15
0,81
1,60
1,31
1,32
1-4
1-4
1-4
1-4
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
B: Integration of Risk Management in Company Structure
Integration in company hierarchy
25
22
Number of entries [n]
20
20
15
14
15
Hierarchy level
Level of risk management
10
6
6
6
5
2
2
3
2
1
0
1
3
5
1
7
9
Hierarchy Level / Level of Risk Management
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
B: Integration of Risk Management in Company Structure
Assignment to company function
25
30
25
20
25
20
Number of entires [n]
Number of entries [n]
17
15
12
10
8
6
19
20
15
10
6
5
5
0
0
0
Company
controlling
Real estate
controlling
Other
Compliance Internal audit
department
None
Line function (w ith
discretionary authority)
Staff function (w ithout
discretionary authority)
*other: asset / portfolio management, investment
committee, business management,
purchasing, all areas
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
Don't know
RESULTS
B: Integration of Risk Management in Company Structure
CRO vs. CCO
In 32 % of firms there exists the position of Chief Risk Officers (CRO)
In 44 % of firms there exists the position of Chief Compliance Officers (CCO)
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
B: Integration in Company Structure
Duties of Chief Risk Officers (CRO)
Duties of Chief Compliance Officers (CCO)
16
14
14
14
12
12
12
13
Number of entries [n]
Number of entries [n]
12
10
8
6
4
2
1
10
11
9
8
6
5
6
4
2
0
0
Monitoring
Coordinating
Linked to top
management
Other
Monitoring
Coordinating
Linked to top
management
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
Provides
information
Other
RESULTS
C: Risk Identification at Property Level
92 % of investors carry out regular inspections of property premises.
Thereof:
84 % annually
13 % at least every 2 years
3 % less frequently
70 % have predominately direct contact to tenants.
34 % of investors survey tenant satisfaction.
Thereof:
88 % annually
12 % at least every 2 years
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
C: Risk Identification at Property Level
Who identifies risks at the property level?
40
• Risk identification takes place
predominantly in-house.
37 35 38 35
Number of entries [n]
35
30
25
20
15
8
10
5
8
9
6
3
1
3
4
3
4
6
0
0
EXTERNAL property
manager
EXTERNAL asset
manager
INTERNAL asset /
portfolio
management
Other INTERNAL
department
Rental and vacancy risk
Maintenance and operating risk
Risk of changing market rents and prices
Macro and micro-location risk
• Property managers carry
practically no significance
although they generally stand in
the closest position to the
property and tenants.
• Problematic interface
configurations.
• 90 % of investors work with
external property managers. 34 %
have a compatible IT System.
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
D: Risk Analysis and Risk Assessment
Property risks according to significance
Element
Rental and vacancy risk
Risk of changing market rents and prices
Maintenance and operating risks
Valuation risk
Economic activity risks
Risks arising from changing micro-location
Interest and currency exchange rate risks
Rank
σ
σ²
Range
5,3
4,9
3,9
3,8
3,8
3,3
3,0
1,72
1,89
1,86
1,98
2,01
1,80
1,66
2,95
3,55
3,45
3,93
4,05
3,23
2,74
1-7
1-7
1-7
1-7
1-7
1-7
1-7
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
D: Risk Analysis and Risk Assessment
Who assesses risks?
45
41
3536 36
35
30
27
26
23
25
20
14
5
11 9
9
6
7
4
3
1
2
3
2
5
4
Controlling
department
4 5
4
1 1 1 1
0
Internal asset
/ portfolio
management
9
7
Risiko
management
department
10
11
• Risk assessment takes place
predominately within the scope of
duties of the internal asset /
portfolio management.
• Interest and exchange rate risks
are predominantly assessed by the
finance department.
1 0 01
Finance
department
15
External
service
provider
Number of entries [n]
40
Maintenance and operating risk
Rental and vacancy risk
Risk of changing micro-location
Risks of changing market rents and prices
Valuation risk
Economic activity risks
• Other internal departments are
rarely involved (assessment / risk
management).
• Risk management department?
Interest and currency exchange rate risks
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
D: Risk Analysis and Risk Assessment
Methods of risk assessment
45
• There are three clearly dominant
methods.
39
36
35
35
• Methods involving probabilities are
little used.
30
25
21
13
11
10
9
5
4
3
Other
15
Monte Carlo Simulation
16
Time series analysis
20
Correction method (risk
premium)
Scoring model
Value at Risk
Ratings
Gut feeling
Scenario analysis
0
Sensitivity analysis
5
DCF Model
Number of entries [n]
40
• Gut feeling is given an important
place after the “Big 3”.
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
E: Risk Management and Risk Controlling
37
• 64 % of investors indicated that
risk management guidelines in
their firms are established.
36
30
24
22
• At 36 % of firms there are risk
managers for individual business
areas.
None
Risks of changing microlocataion
Economic activity risk
Interest and currency
exchange rate risks
1
Valuation risk
40
35
30
25
20
15
10
5
0
Maintenance and operating
risks
Number of entries [n]
Regularly and systematically monitored risks
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
F: Communication and Information Flow
Direct recipient of information
gathered at property level
45
Type of information conveyance
45
41
42
40
40
Number of entries [n]
30
25
19
20
34
35
32
13
15
10
30
23
25
20
15
10
3
5
7
5
Other
Risk
management
department
Controlling
department
Top
management
1
0
Asset /
property
management
Number of entries [n]
35
0
Fixed reports
Written reports as
needed
Oral
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
Special purpose
softw are
Other
RESULTS
G: Methods of Risk Management
sorted according to significance
45
40
36
35
33
• Early warning systems are little
employed in risk management.
30
25
20
20
• “Gut feeling” is given an important
place.
8
6
5
4
1
Delphi methode
9
Flow chart analyse
9
10
Brainstorming
13
15
5
Technical literature
Special software
Early warning system
Workshops and training
Survey of associates
Gut feeling
Market research
Check lists
0
Risk reporting
Number of entries [n]
• Three methods are dominant.
41
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Risk reduction
• Diversification is the most
important method, followed by
derivatives.
45
41
40
32
Number of entries [n]
35
30
25
20
15
8
10
5
0
Diversification
Use of derivatives
• Other:
“high EK-Quote”
“reaction to abnormalities”
“insurance”
“supervision”
“limit system”
“recognition and rectification”
Other
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Diversification and modern portfolio theory
40
37
Across:
34
• Geographical regions
29
30
24
25
22
20
19
• Use types
• Tenant types
15
10
5
Location: mix
of A and B
Locations
Property:
various sizes
Tenant: multitenant /
single-tenant
Tenant: mix
of types
Property:
various uses
0
Location:
geographical
Number of entries [n]
35
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Diversification and Modern Portfolio Theory
ACQUISITION OF PROPERTIES
• 56 % take into consideration the influence of newly acquired properties on the risks of the
entire portfolio.
• 26 % calculate the influence.
• 18 % do not consider such influence at all.
PROPERTY ASSETS
• 60 % take into consider the influence of changes in the risk profiles of individual property assets
on the entire portfolio.
• 18 % calculate the influence.
• 22 % do not consider such influence at all.
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Diversification and Modern Portfolio Theory
• For and against - 50 : 50
Very difficult
8%
Rather difficult
42%
Excellent
6%
• Naive portfolio selection
Rather good
44%
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Derivatives
35
• Almost exclusively classical
hedging against interest and
currency risks.
32
Number of entires [n]
30
25
21
• Real estate derivatives are “still”
hardly used.
20
15
10
4
3
Property risks
Inflation risks
5
0
Interest risks
Currency risks
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Excel vs. special purpose software
• Excel is dominant.
45
41
40
• 44% of investors use special
purpose software.
Number of entries [n]
35
30
25
• Other:
MS Access
22
20
15
10
5
2
0
Excel
Special purpose software
Other
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Ratings – use of ratings in the risk management process
30
28
25
Number of entries [n]
25
19
20
• External ratings:
- high effort
- high costs
14
10
8
6
5
5
0
External ratings
For portfolio properties
• Ratings are predominately not
applied; if such are in fact used,
then internal ratings.
• Scoring vs. rating
17
15
28
Internal ratings
For project developments
None
• Internal ratings:
- better data records
- fewer costs
- better control
For holdings
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
RESULTS
G: Methods of Risk Management
Ratings – quality of rating agencies
Rating agencies
Don't know
24%
Real estate rating agencies
Excellent
2%
Rather good
26%
Don't know
32%
Excellent
0%
Very poor
10%
Rather poor
38%
„Very poor“ and „rather poor“ = 48 %
Very poor
16%
„Very poor“ and „rather poor“ = 44 %
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
´Rather good
24%
Rather poor
28%
OBJECTIVE OF THE STUDY
STUDY DESIGN
SURVEY PARTICIPANTS
RESULTS
SUMMERY
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
SUMMARY
Actual state of
risik management
Possible future
developments
Aim
- Fulfilment of legal obligations
- Protection of company existence
- Reduction of risk premiums
- Risk management as a component
of company steering
- Render risks more transparent
(internal / external)
- Gain of competitve advantage
Realisation
- Deficiencies in risk identification,
risk assessment and steering
- Interfacing between departments
and external providers not clearly
defined
- Lack of committment to risk reporting
- Fixation on the short term period
- Adaption of risk management
methods to real estate industry
- Strengthened application of
special software in risk mangement
- Application of findings from
behavioral finance research
- Future oriented
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
SUMMARY
Adaptation of Risk Management due to the Credit /
Real Estate Crisis?
22 % no answer
48 % no adjustment
30 % wish to adapt their risk management
Following adjustments were named:
• Focusing on finance and credit risks
• Focusing on strategic risks
• Increasing real estate know-how
• Increasing reporting requirements
• Standardization
• IT-supported analysis
• Persistence
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey
Thank you for your attention!
REAG EUROPE: Germany, Greece, France, UK, Italy, Czech Republic, Poland, Portugal, Romania, Russia, Spain, Turkey