Risk perceptions in the European real estate industry
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Risk perceptions in the European
real estate industry
When real estate investors consider Nyenrode Business University (the
investment strategies and Netherlands) and ING Bank Real Estate
opportunities, which risk drivers do Finance (ING REF) recently conducted
they attach most weight to in their a survey among 25 European real estate
decision-making? And how do they investors (both listed and non-listed) and 27
expect banks to weigh these risks? European real estate bankers to investigate
And to what extent do investors’ the degree to which investors’ and bankers’
views actually match bankers’ risk perceptions of relevant risk drivers match
perceptions? The 2014 ING/Nyenrode or differ, and what this might mean for real
Survey conducted among international estate lending practice. It turns out that while
institutional real estate investors and banks allocate significantly more weight to
bankers reveals that there are some management risk than investors, investors
striking differences. are more concerned about country risk
than banks.
opportunities and strategies (orange), how
they believe that banks argue (grey), and
how banks actually argue (blue). “We see
that investors are right in thinking that banks
find management risk more important, but
that they underestimate the importance
banks attach to property management risk,”
says Professor Tom Berkhout of Nyenrode
Business University. “Perhaps investors see
Jan-Evert Post, Tom Berkhout, Professor “Investors and banks clearly share the
member of the Global of Real Estate, view that property market risks are of the
Management Team, Nyenrode Business
utmost importance.”
ING Real Estate Finance University
Prof. Tom Berkhout
Interestingly, investors and banks attach themselves as more expert in real estate
more or less equal importance to property than banks. Another interesting difference is
market risk, but investors underestimate the in the weight of country risk. Contrary to
banks’ interest in this risk driver. what investors expect, banks seem to attach
much less importance to country risk than
Main risk categories investors do themselves.”
The five main risk categories investigated
were (1) country risk (e.g. fundamental,
macro-economic, demographic and political
aspects), (2) property market risk (e.g. Fig. 1 How investors weigh risks,
yields, rental development, vacancy risk), how banks weigh risks, and how
(3) financial risk (e.g. interest rate risk and investors think banks weigh risks
debt availability risk), (4) structure ris
(e.g. legal and fiscal aspects) and (5)
Country Risk
management risk (e.g. track record of
Percentage
management). Both investors and bankers 40
were asked to weigh each category 30
Management 20 Property
(total = 100%). In addition, investors were Risk 10 Market Risk
0
asked how they think that banks weigh
these risk factors when reviewing investors’
investment opportunities and strategies.
The answers resulted in the following Structure Financial
picture: Risk Risk
Figure 1 shows the similarities and Investors
differences between how investors argue Investors’ views on banks
when it comes to assessing investment Banks
Aspects most frequently taken these teams focus on local opportunities
into account only. That would mean that they are not
In a further set of questions, respondents taking into account why a given country is
were asked to what extent they take into particularly attractive to investors compared
account specific aspects of the five main risk to other countries. And with the dominance
categories. Within the category of country of international liquidity flows in our sector
risk, the most important aspect turned out these days, I’m wondering whether banks
to be ‘political stability’. However, this aspect are conscious enough of what drives these
is taken into account far more often by flows, and whether they believe that these
investors than by bankers, and investors flows are here to stay.”
also overestimate the importance that banks
attach to a country’s stability. “In general, “The importance of the yield spread
it looks as if banks take a more opportunistic as investment criterion seems to be under-
approach when it comes to country risk,” estimated by many real estate bankers.”
says Jan-Evert Post, member of the global Jan-Evert Post
management team at ING REF. “They seem
to trust the investor’s risk analysis in this In the property market risk category, the
respect and attach more value to assessing most striking difference between investors
deal- and property-related risks rather than and banks was observed in the aspect of
bigger-picture country risk. As our industry real estate versus government bond yield
is a local business, and most banks work spread. “This is quite telling,” says Jan-Evert
with teams on the ground, it could be that Post. “Here, too, we see that the ‘bigger-
Fig. 2 Aspects of country risk Fig. 3 Aspects of property
market risk
GDP growth Pricing-yield change
Employment
Vacancy rate
Inflation
Demand
Stability
Market orientation Rental growth
Size of population Investment volume
Growth rate of population
Pricing - Absolute yields
Consumer confidence
Wealth Real estate versus
government bond
yield spread
less more less more
important important important important
Investors Investors
Investors’ views on banks Investors’ views on banks
Banks Bankspicture’ yield spread aspect is far more record and morale. “For banks, management
important to investors than to bankers. risk is particularly important,” says Professor
The spread reflects the risk/return profile of Berkhout. “They not only assess the quality
our industry versus the risk-free return of the underlying assets to a loan, but also
on government bonds. Investors use this the investor’s capabilities in managing those
yardstick in their country allocation of assets. Good management will safeguard
investments, whereas banks do not. the debt servicing capacity in the long run.”
It looks as if banks have little interest in
understanding the international macro What can we learn from the
drivers behind investment flows.” mismatches?
In essence, the survey results are positive
Management risk and comforting: investors include most risk
The management risk category also showed drivers when making investment decisions,
some noteworthy results. When assessing and banks’ perceptions of these risks are
investment opportunities or strategies, largely in harmony with those. Jan-Evert
banks clearly find management risk aspects Post of ING REF sees two main takeaways.
much more important than investors do.
The latter most probably believe that good “Other important risk factors are reputation,
management on their own part is a given. experience, track record, soft skills and
However, investors still underestimate the wealth background.”
importance that banks attach to investors’ Banker
management capabilities, particularly track
“According to economists, real estate is a
lagging industry, with real estate investments
Fig. 4 Aspects of management risk normally following the economic cycle,” he
says. “However, right now, the activity level
in our industry seems to suggest that the
Morale of
business partners real estate sector is fronting developments,
already factoring in economic growth that
Potential for exposure to
controversial topics has not yet materialised. Part of the current
Experience with activity level in the real estate sector is driven
asset class by a need for rationalisation of distressed
Tenure of key people property portfolios ‒ typically an exercise that
follows the economic cycle. However, another
Operational risk significant part can currently be recorded as
buying and selling of property in the ordinary
Track record course of business. Banks supporting this
of own people
basically show loyalty to their clients: they
less more trust that investors are indeed targeting the
important important
Investors right opportunities in the right countries.
Investors’ views on banks They take the investor’s performance in line
Banks with the banks’ view on management risk.In my view, therefore, ‘loyalty’ is the first wrong’. The risk of not focusing on country
main takeaway from this survey: banks tend fundamentals, but merely on the character-
to follow their clients. For the majority of istics of the underlying asset and the quality
the remaining risk drivers, there is harmony of the management, is that there could be a
between the investors’ and banks’ approach. lack of a long-term view on a specific market,
and the way markets interrelate. This might
“Of course, the risk factors to be considered not pose any problems in the short term, but
(and their weight) may differ depending on could nonetheless have effects in the long
the economic cycle. While refinancing risks run. And if we add here the fact that banks
and country risks were key for both banks seem to prefer to make loans in geographies
and companies after Lehman, currently where they have ample liquidity, one could
these risks are considered less important.” predict a concentration of loans on the
Investor banks’ balance sheets in some geographies,
based on where they raise their liquidity
The second takeaway is slightly more rather than a balanced view of country
thought-provoking and concerns the banks, fundamentals, timing and correlations. Of
says Jan-Evert. “By not assessing country course, it is easy for banks to rely on the
risk and yield spreads when allocating the management views of their clients, but we
banks’ capital across countries for real may wonder whether banks are putting
estate loans, the portfolio effect of running a in enough effort to really understand the
loan book in this asset class can be anything markets to which they are exposed.”
from ‘optimal by accident’ to ‘exactly
About the survey supervision of Professors Tom Berkhout and
The goal of the explorative research was Ad Kil from Nyenrode Business University,
to identify risk perceptions of European the Netherlands, in consultation with ING
real estate investors and banks through REF, coordinated by Jan-Evert Post,
questionnaires completed by selected member of the global management team
ING clients and bankers as experts. of ING REF. This collaboration falls under
The respondents included 25 real estate the partnership between ING REF and the
companies and funds (‘investors’) managing Nyenrode Center for Real Estate Finance.
assets in, among other countries, Austria, Set up in 2011, this partnership combines
Belgium, Czech Republic, France, Germany, their respective areas of expertise in real
Hungary, Italy, the Netherlands, Poland, estate commercial practice and academic
Spain and the United Kingdom, as well coverage of the sector. The knowledge and
as 27 real estate experts from real estate expertise thus gathered is shared with ING
banks (‘bankers’) active in Austria, Belgium, REF’s clients and made available through
France, Germany, Italy, the Netherlands, publications and meetings, with the aim of
Poland, Spain and the United Kingdom. making a positive contribution to the general
The research was carried out under the functioning of the real estate market.Contacts (global) France
Coeur Défense A
ING REF head office 92931 Paris La Défense Cedex, France
Bijlmerplein 888 Elmer Feenstra
1102 MG Amsterdam, the Netherlands Head of ING REF France
T +31 6 5431 3351
Global Management Team E Elmer.Feenstra@ingrealestate.com
John Boyles
Global Head Germany
T +31 20 576 6581 Hamburger Allee 1
E John.Boyles@ingrealestate.com D-60486 Frankfurt am Main, Germany
Martin Knof
Peter Göbel Head of ING DiBa REF Germany
The Netherlands T +49 69 7593 6133
T +31 20 576 5200 E Martin.Knof@ingbank.de
E Peter.Gobel@ingrealestate.com
Italy
Jan-Evert Post Via Paleocapa 5
Germany, CEE, Asia and Special Projects 20121 Milan, Italy
T +31 20 576 9816 Massimiliano Rossi
E Jan.Evert.Post@ingrealestate.com Head of ING REF Italy
T +39 02 4657 6319
Michael Shields E Massimiliano.Rossi@ingrealestate.com
Western Europe, US and Structured Products
T +44 20 7767 5239 The Netherlands
E Michael.Shields@ingrealestate.com Bijlmerplein 888
1102 MG Amsterdam, the Netherlands
Corporate Clients Peter Göbel
Arie Hubers Head of ING REF the Netherlands
Head of Corporate Clients NL T +31 20 576 5200
T +31 20 576 9812 E Peter.Gobel@ingrealestate.com
E Arie.Hubers@ingrealestate.com
Poland
International Business Plac Unii, ul. Puławska 2
Mario van Teijlingen 02-566 Warsaw, Poland
Head of International Business Włodzimierz Skonieczny
T +31 20 576 57 74 Head of ING Bank Śląski S.A., REF Poland
E Mario.van.Teijlingen@ingrealestate.com T +48 22 558 7552
E Wlodzimierz.Skonieczny@ingbank.pl
Contacts in Europe Spain
Calle Génova 27
Central & Eastern Europe (excl. Poland) 28004 Madrid, Spain
Bijlmerplein 888 Wouter Mijnen
1102 MG Amsterdam, the Netherlands Head of ING REF Spain
Jan-Evert Post T +34 91 789 8455
Head of Central & Eastern Europe (excl. Poland) E Wouter.Mijnen@ingrealestate.com
T +31 20 576 9816
E Jan.Evert.Post@ingrealestate.com United Kingdom
60 London Wall
London, EC2M 5TQ, United Kingdom
Peter McAnally
Head of ING REF UK
T +44 20 7767 5384
E Peter.McAnally@ingrealestate.comYou can also read
