Property investors have to be helmsmen with a steady hand, in the knowledge that their ship could be tossed into a storm at any point: the importance of risk management in an uncertain world was emphasised by all participants in the PropertyEU European Real Estate Risk Management Briefing, which was held in London last week.
'I think the property cycle is as inevitable as death and taxes, and when the downturn comes it brings a lot of pain,' said Charles Ostroumoff, director of Arca Property Risk Management. 'It is important to have a holistic risk management strategy and use all the appropriate tools. You have to steer the ship as best you can.'
Caution is an obvious but effective strategy, said Christoph Schumacher, board member of Union Investment Institutional Property: 'In Hamburg we say it is better to have the boat prepared for the storm that may come anytime and from anywhere. In a low-yield environment it is tempting to go up the risk curve, but it is better to be disciplined and not get involved with assets that do not fit your strategy.'
Union chooses to only invest in core and avoid critical geopolitical areas. Even London, if there is a Brexit, will be off-bounds, he said, 'because there will be years of uncertainty.'
A good risk management strategy is not sufficient, said Mahdi Mokrane, head of European Research and Strategy at LaSalle Investment Management: ‘The dynamic process that comes with it is even more important. Keep asking questions, focus on the risks you can manage and avoid the others. We give our fund managers a hard time, constantly ask them to rationalise their portfolios.'
Location and liquidity are even more important now, 'to the power of ten', said Mokrane. 'If you have a great location and a good product you protect your capital value, whatever happens. Only take calculated risks and choose deals you can execute.'
Opinions differed as to whether the lessons of the great financial crisis have been learnt.
'I cannot see the downturn being any different this time,’ said Ostroumoff. ‘History repeats itself and people have not learnt the lesson. It is true that this time there are no crazy deals and no froth, but it is a riskier world with new risks to manage. It is still the case that you can build a great portfolio over ten years then see your capital value wiped out.'
There is a new sense of restraint in the market that was not there ten years ago, said David Ryland, partner at Paul Hastings: 'We are not seeing the high levels of leverage we saw then, or many speculative loans, except to some extent in the context of residential.'
According to Schumacher 'the lessons of the last downturn have definitely been learnt. The banks are stricter and investors are more cautious. There is no excessive lending, no large numbers of opportunistic deals.' His prediction is that the downturn, when it comes, will be 'a gentle slowdown like in Japan, rather than a sharp break. I am rather optimistic and I believe there will be a soft landing.'
