1. real estate

8
SHARED RISK MANAGEMENT
CONCEPTIONS EXIST FOR REAL
ESTATE FUNDS
20
ANNUAL REPORTS
+40% OF IVBN MEMBERS
100% OF LISTED FUNDS*
*Dutch listing and significant investment focus NL
4
SHARED RISK MANAGEMENT
CONCEPTIONS EXIST FOR BOTH
LISTED AND NON-LISTED
FUNDS
6
14
LISTED REAL
ESTATE
FUNDS
NON-LISTED
REAL ESTATE
FUNDS
TALKING AND THINKING RISK MANAGEMENT
R.B. VAN DER LECQ MSc.
APRIL, 2015
INTRODUCTION
Risk management means different things to different decision
makers. Such interpretation differences could impact board
discussions and eventual decision making. Therefore a better
understanding of the meaning of risk management is essential for
making conscious decisions.
The study provides insight in the dominant conceptions of risk
management within real estate investment management. It clearly
shows the concepts that matter most. It also looks into the building
blocks of these conceptions. This provides a detailed image of the
content that is involved in managerial actions to cope with risk.
At CONSCIOUS we examined plausible conceptions of risk
Our results provide the literature with a conceptual and contextspecific framework of risk management. Simultaneously giving
practitioners exchangeable conceptions that helps the board
discussion forward. Further, providing handles to focus managerial
attention where it is needed most.
management within the context of real estate investment
management. Using data that expresses the collective meaning
decision makers attach to risk management, we extracted conceptions
of risk management that are recognized by majority. Annual reports
of listed and non-listed real estate funds were our primary data source
in this. Our sample contained +40% of IVBN members and 100% of
listed real estate funds1.
Our findings show that some conceptions of risk management are
recognized by a majority while others are more company-specific.
Furthermore, our study indicates differences in the risk management
challenges of listed and non-listed real estate funds. In some cases
with very differing conceptions. Other cases show subtle differences
in the use of words that refer more or less to the same challenge, but
are conceptualized differently.
1
Dutch listing and significant investment focus NL
Focus where it is needed most. That is why this paper is a short and
comprehensive version of my graduation research. May it lead to
more conscious decision making. Enjoy!
Ruben van der Lecq
CONSCIOUS Risk Services B.V.
DISENTAGLING RISK MANAGEMENT
Various annual reports were fragmented into textual extractions
mentioning specific elements of risk management. These fragments
were categorized and labeled as particular phenomena. From there on
phenomena were bundled and regrouped at the higher conceptual
level of themes. Eventually, the frequency of mentioning provided
the information needed to speak of risk management conceptions.
Funding
Risk profile
Valuation
An indication of the analytical process on textual fragments is
displayed below. “Funding composition” is one of the phenomena
that has been extracted from these fragments.
“In addition, Wereldhave applies a diversity of financing instruments,
accessing money markets and capital markets.”
(Annual report 2013, Wereldhave)
Organization
RISK
MANAGEMENT
Distribution
“Altera aims at a low risk profile [..] by not using leverage [..].”
(Annual report 2013, Altera)
“ Funding risk (equity): Risk that insufficient (or later than planned) new equity can
be raised to achieve the ARC Fund’s strategic objectives. (Re-) Funding risk (debt):
risk that the ARC Fund’s is unable to (re-) finance portfolio at the desired
conditions [..].”
(Annual report 2013, Amvest Residential Core Fund)
Liquidity
Income
Debtors
SHARED RISK MANAGEMENT CONCEPTIONS (SPECIFIED)
Listed
Contracts
Non-listed
Funding
100
80
Tenants
“Funding”, “Valuation”, “Debtors” and “Liquidity”
are shared risk management conceptions for both
listed and non-listed real estate funds.
Valuation
Debtors
60
Compliance
Liquidity
40
“Distribution”, “Income”, “Integrity”, “Risk
profile” and “Disposition” are context-specific risk
conceptions for non-listed funds.
20
Development
Distribution
0
Tax
Income
Organization
Disposition
Costs
Integrity
Risk profile
“Costs”, “Organization”, “Tax”,
“Development”, “Tenants” and “Contracts” are
context-specific risk conceptions for listed funds.
Differences in meaning exist at more subtle levels
as well. The listed conception “Compliance” has a
quite similar meaning in conversation as the nonlisted conception of “Integrity”. The data on
phenomena indicates corresponding results as well.
Nonetheless, they cannot be treated the same.
external appraisal; invalid valuation;
frequency of appraisal; value fluctuation; net
asset value (nav); monitoring; sensitivity;
stress testing; valuation model
demographic; regional; sectoral; segmental;
object; policy; catchment area; composition
payment policy; amount of receivables;
payment conditions; guarantees;
uncollectable; monitoring; provisions;
creditworthiness; counterparty risk; nominal
position
policy; spread of loans; credit facility;
forecast; timing; matching; (free) cashflow;
disposition
[VALUATION] (75%)
[DISTRIBUTION] (70%)
[DEBTORS] (65%)
[LIQUIDITY] (50%)
Refers to the actions managers take to make
sense of the actual present value of the
portfolio, the possibility of future
fluctuations and the sensitivity of the
portfolio to these fluctuations.
Mentions the actions managers take to
distribute their risk. Options for distribution
range from country-level to object-level.
Addresses the process of income realization.
Bridging the gap between expected utility
and realized income.
Reveals the actions managers take to match
incoming and outgoing streams of money
and the different tools available to match
these streams efficiently.
SHARED RISK MANAGEMENT CONCEPTIONS (OVERALL)
policy; composition; ltv; icr; interest rate;
limits; sensitivity; refinancing ability;
conditions of refinancing; maturity schemes;
interest sort; hedging; amount of leverage;
equity attraction; availability of debt; term;
repayment; cross default; debt duration
[FUNDING] (100%)
Mentions the actions that are needed in
managing the risk involved with financing
the portfolio.
concept; risk appetite; avoidance;
acceptance; managing risk/return; risk
philosophy
lease income; lettability; realization of
expected return; rental risk; rental conditions;
attractivity; rent in arrears; property
management; rent level
management structure; seperated functions;
external appraisal; three lines of defense;
four lines of defense
[INCOME] (70%)
[ORGANIZATION] (50%)
Provides insight in the way managers expect
a certain utility and the characteristics that
influence this utility either positively or
negatively.
Reflects the actions managers take to
organize the risk management process at the
level of the organization by dividing
responsibilities and creating walls between
functions.
[RISK PROFILE] (50%)
Provides insight in the ambiguity of this
concept as it still remains unclear which
process leads to a certain risk profile.
GET CONSCIOUS
This paper has been assembled with the greatest focus.
It therefore only includes the research highlights.
The full story, background and perspective
we rather tell you in person.
Get in touch today.
Ruben van der Lecq
M: +31 6 36 31 55 44
E: Email
W: www.conscious.estate