Real estate is getting risky, says RICS Trillion Dollar Risk Forum

Ten years on from the global financial crisis, industry practices must improve as market dynamics create a growing appetite for risk, according to the Royal Institution of Chartered Surveyors’ Trillion Dollar Risk Forum. The forum, made up of more than 40 of the world’s most influential real estate investors, representing over $1tn in real estate assets, is calling for an increased focus on risk management, greater sharing of real estate data across borders, and more attention to be paid to training younger staff. Since the last downturn, material changes in the way that risk is managed have ensured the sector is better placed to weather complex and volatile markets, the report found. However, the new research highlights there is yet more to be done, with: 57% of investors cite style drift away from traditional investment strategy The same proportion, 57%, say their risk management processes are primarily driven by performance, but 24% are driven by compliance 90% of respondents believe the industry’s approach to risk management has improved since the GFC With changes to occupier habits, technology, and some major markets now trading on yields well below historic averages and, in some cases, close to all-time lows, respondents to a May survey saw investment moving away from traditional portfolios. More broadly, the sector is faced with automation. Investors have been working hard to build resilience in the face of these new developments and disruptive change. With some investors believing that we’re nearing the top of the cycle, several are moving further up the risk chain. Concerns about lower returns for many retail, residential and office portfolios are motivating investors to request diversification away from the traditional and into secondary locations and alternative assets (such as hotels, student accommodation and PRS), in a move that is fundamentally changing the risk profile of investments. Alternative assets require further investment in risk management. Although 90% of respondents believed that the financial crisis has acted as a catalyst for positive change when considering risk management – which in practical terms has manifested in businesses growing their risk management teams, greater integration of research within the risk management process and the introduction of new quantitative modelling techniques – challenges remain. In response, the report suggests three solutions to enable the industry to address these challenges and act as a broader catalyst for wider industry collaboration: Establish a mechanism for cross-border sharing of quality, comparable real estate market data. Learn from other investment sectors to ensure greater leadership, and best practice in risk management systems and processes, drawing on lessons from other investment sectors. Improve institutional knowledge sharing to ensure each new generation learns from the experience of previous cycles. Philip Barrett, global chief investment risk officer at PGIM Real Estate, said: “A robust risk management framework does not just look backwards but, also, to the future. The real estate investment management business has been accused of making long term investments with short term memories. “The increased focus on risk management we are championing will hopefully be the start of addressing this criticism.” To send feedback, e-mail Louisa.Clarence-Smith@egi.co.uk or tweet @LouisaClarence or @estatesgazette