Cheap money, the ready availability of capital and the hunt for yield are luring some investors into risky behaviour, but throwing caution to the wind is never the right thing to do, as chasing yield can destroy value.
Cheap money, the ready availability of capital and the hunt for yield are luring some investors into risky behaviour, but throwing caution to the wind is never the right thing to do, as chasing yield can destroy value.
Experts agreed on these points at the PropertyEU Real Estate Risk and Asset Management Roundtable, which was held in March at MIPIM in Cannes.
'Risk management and responsible investments are crucial now that there are so many anomalies and distortions in the market,'said Martin Bruhl, head of investment management international at Union Investment Real Estate. '2016 at times feels like 2006, and we all know what happened then.'
People are becoming less careful in their assessment of risk, said Christiane Conrads, partner at Lupp & Partner. 'In the current market situation with cheap money and low rental yields many are going for lower quality assets which still offer a little more yield. Doing a very thorough legal, technical and environmental due diligence as well as a commercial evaluation is more important than ever, yet what we see in reality is the increasing trend to be more negligent.'
Study the cycles
There are different risks for every part of the property or investment life cycle, from the acquisition to the holding phase to disposal, and there are different risks at different stages of the economic cycle.
'The first question to ask is where are we in the cycles,' said Mahdi Mokrane, head of European research and strategy at LaSalle Investment Management. 'The economic cycle, the supply and demand cycle and the capital markets cycle, which is the most important but also the trickiest one to predict. Take a hard look at the numbers, use models, charts, surveys and data and think of insurance policies for your portfolios, then add the potential shocks'.
Shocks are by definition unpredictable and can vary from the migrant crisis to the UK leaving the European Union following the June referendum. Each fund manager should have a set of strategies to respond to every possible scenario, while always being aware of the constant evolution of living, working and shopping habits which have an impact on real estate.
The wise investor, or fund manager, learns to differentiate between the known unknowns and the unknown unknowns, to borrow former US Defence Secretary Donald Rumsfeld’s infamous phrase, said Bruhl: 'The objective is to make your portfolio weather-proof against the shocks that you cannot predict.'
