After a year of significant political turmoil and with more to come in the months ahead, it would be good for investors if European property investment risk ratings were given a standalone model, according to BrickVest, the international online real estate investment platform.
'Evaluating political risk using qualitative and quantitative tools has now become essential,' said Emmanuel Lumineau, BrickVest CEO. 'It is about time that the available data was aggregated to evaluate the political risks associated with real estate investments, emancipating them from sovereign debt ratings.'
Such a risk indicator 'would prove extremely valuable both in terms of yields and for regulation,' he said. 'Data remains the golden goose of the digital economy, an environment that real estate investments is embedded in today.'
The goal is to make investing in real estate more transparent and comparable. In order to make the risk indicator a reality, BrickVest is designing a proprietary algorithmic risk-based rating model, which will enable investors to classify real estate investments according to risk, using an approach similar to that used by fixed income rating agencies. To develop it BrickVest has assembled a Rating Committee, a board of specialists headed by Remi Antonini, former head of European real estate research at Goldman Sachs and Exane BNP Paribas.
A structured evaluation of political risk as it applies to real estate assets involves considerable data collection from real estate markets in terms of demand (transactions, average square footage, rise and fall of rental rates), supply (rate of vacancy and unoccupied stock) and investment (volatility, ROI for real estate transactions). It also requires access to data in real time.
The project will therefore be easier to realise in the UK than in the rest of Europe. 'The UK possesses one of a very few highly transparent real estate markets in the world, along with that of the US,' said Thomas Schneider, CIO at BrickVest. ‘Data collection initiatives, which are conducted by the Investment Property Databank (Ipd), have been underway since 1986. In this respect the German and French markets remain murkier and data is harder to come by, largely due to a lack of committed resources.'
The UK has experience the downside of a political risk that is difficult for investors to evaluate and quantify: last year the lead-up to the referendum froze £1 bn worth of transactions in London alone, and some investors are still pulling out.
Brexit led to a fall in the UK’s debt rating from AAA to AA, according to both Fitch and Standard & Poor's rating agencies, 'but investors cannot effectively rely on such ratings to assess the change in real estate market risk, since real estate and sovereign risks are not always correlated,' said Schneider.
Hence the need for a dedicated risk indicator, which would use data concerning transactions and yields, data on crime statistics, economic activity and unemployment rates to evaluate location-based rental risks, and include issues of taxation and the investment scenario.
