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SustainableRealEstateMarketsRestoringConfidenceinFinancialMarkets
Peter Champness
MIPIM
PaM
Cannes
March 2011
improvingperformanceinbankingandrealestateinvestment
BackgroundtoRiskAssessmentinRealEstate(PaMModel)
Investors and financial market analysts require a more scientific approach to understanding holding risk, liquidity and volatility in RE Markets. The regulatory gap exposed by inadequate information on real estate risk has eroded prudent mortgage underwriting practice and hampered the effectiveness of monitoring by regulators and the role of Rating Agencies.
TEGoVA2003standard EuropeanPropertyFederation20032005report RICS2007report BasleII&BasleIII UNECE/REM (i) UNECEPolicyFrameworkforRealEstateMarkets Principle7 (Transparency/Valuation) (ii)FutureadvisoryworkREpropertyandmarketriskevaluationforREbackedfinancial products
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Lackoftransparencyandilliquiditycontributeto volatilityandundermineinvestorconfidence.
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Howdowemanagerealestaterisk?
Indices,suchasIPD,trackhistoricmarketperformance. Valuationassessesspotmarketprices. Modernportfoliotheoryfacilitatesportfoliodiversification,concentration; moderatingsectorrisk. The quality of real estate as collateral for loans is recognised by credit risk scoring, loan to value ratios (LTV) and interest cover. Research; Identifying the demand and the supply pipeline and shifts in capital markets provides transparency and aids understanding of the dynamics of real estate markets.
AmorerobustprocessoffundamentalanalysisofREassetsis vitaltomoveriskmanagementoutoftheDarkAges.
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10 9 8 7 6 5 4 3 2 1
PaM provides an analysis of the risks and potential inherent in a property or portfolio. Credit risk scoring is not specifically incorporated the focus is on the asset.
mediocre slightly below average average slightly above average good very good excellent
PaM is complementary to Valuation. But Valuation sets out only what a typical purchaser would pay in the spot market on a specific valuation date. Valuation can be affected by transient market sentiment. It is no indicator of the medium and long term sales prospects of a property.
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10 9 8 7 6 5 4 3 2 1
Socioeconomic/demographic/realestatecycle
2Location30%
Suitability/standing/transportinfrastructure/facilities/environment
3Property20%
Construction/layout/sustainability/energyperformance
4Qualityofcashflow30% Tenantsituation/rental&valuegrowth/lettingprospects/vacancysituation/expenses
OverallPropertyMarketRating110 Quality/marketability/sustainablevalue
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RealEstateMarketRatingiscomparabletoRatingAgenciesCreditScores
Aaa to AA3 A1 to A3
Baa1 to Baa2
Baa3 to Ba1
Ba2 to Ba3`
B1
B2
B3 to Caa
Moody's
AAA to AA A+ to A-
BBB+ to BBB
BBB- to BB+
BB to BB-
B+
B- to C
S &P
good
above average
average
below average
doubtful
loss
10
good
poor
very poor
disastrous
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PaM Identifies:
UnderlyingAssetQuality/Sustainabilityofvalues RelativeVolatility similartoBetaratings Liquidityorrelativemarketability
Provides:
Enhancedtransparency
Enables:
Informedanalysisandportfoliodiversificationbyrisksegmentation(abottomup approachtorisk) Effectiveportfoliomanagementoptimisingfutureperformance Riskappraisal
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2. Banks
1. 2. 3. 4. 5. BasleIII Loanpricing Management Coveredbonds/securitisation Riskmanagementteamdialogue withpropertybankers Valuationcheck Consistency Riskpremiums Analysis Qualityofadvice
3. Valuers(KSWS3)
1. 2. 3. 4. 5.
Property Market
Risk
Asset
Cash Flow
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Economy
Property
Cash Flow
PaM
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Contact
Peter Champness Itrium Limited Oakdene House Mayfield East Sussex TN20 6EJ United Kingdom + 44 (0) 759 7979 689 pchampness@itrium.co.uk
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