Ten years on from the global financial crisis, RICS’ Real Estate
Investment Risk Forum (IRF) challenges the industry to learn from the lessons
of the past, as market dynamics create growing appetite for risk.
The report comes as compressed yields and new all-time highs for
real estate investment volumes,
entice investors up the risk curve in a bid for greater returns.
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. However, new research released today by the IRF highlights
there is yet more to be done, with:
· Over half (57%) of investors citing
style drift away from traditional investment strategy
· The same proportion, (over half -
57%), saying that their risk management processes are primarily driven by
performance, but that nearly a quarter (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 see 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. The 2007/8 Global Financial Crisis
remains in the minds of investment managers, prompting an increased focus on
risk management over the last ten years. However, investors are balancing this
with a need to achieve returns. With some investors believing that we’re
nearing the top of the cycle, several are moving further up the risk curve to
achieve them. The results show that 90% of respondents believe the industry’s approach to
risk management has improved since the Global Financial Crisis, 33% believe it
has improved markedly, while 57% believe it has improved somewhat.
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 which is fundamentally
changing the risk profile of investments. Alternative assets require further
investment in risk management.
Although 90% of respondents believe 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 offers solutions to improve risk
management and support global stability through the greater use, and
consistency, of data and enhanced levels of transparency.
RICS’ IRF, has identified three tangible solutions which will
enable the industry to address these challenges and act as a broader catalyst
for wider industry collaboration:
1. Establish a mechanism for
cross-border sharing of quality, comparable real estate market data.
2. 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.
3. The industry needs to improve
institutional knowledge sharing to ensure each new generation learns from the
experience of previous cycles.
Commenting on the report, Martin J Bruhl FRICS, CIO Union
Investment Real Estate said: “The primary objective for investors
is to generate satisfactory risk-adjusted returns. We, as an industry, bear a
heavy duty to support responsible and sustainable markets. We must ensure a
sophisticated and professional approach to risk management to ensure the
lessons from the past are learnt sufficiently.”
Philip Barrett, Global Chief Investment Risk Officer, 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.”
Richard Stokes, Head
of Global Corporate Affairs, RICS, added: Risk is, and always will be
an essential part of any investment. But that must never come at the expense of
responsible practice, which is vital to ensuring global stability. Ten years on
from the global financial crisis, it is incumbent on us all to ensure the
lessons of the past cannot be forgotten. Much progress has been made to enhance
risk management approaches and, whilst there is more to be done, RICS
Investment Risk Forum demonstrates genuine, global leadership and a desire to
foster best practice in this area.
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