On the pulse of the property world

Managing risk in residential portfoliosAn instrument for the benchmarking of risk forreal estate investors and social housing associations

Rob CourtensBert TeubenMaarten Broek Eindhoven, June 17th 2011

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Agenda

• Introduction

• The Blundell risk dimensions

• Suitability for Dutch residential market• Top down• Bottom up• Parameters and Ranking

•Towards the Risk Web

• Ambition/ Further research

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Introduction

• Investors point of view

• Return is reward for risk

• Risk based on volatility lacks diagnostic

content• Risk based on volatility of past returns is

backward looking

(Blundell et. al., 2005)

• What causes volatility in portfolio returns?

Total return = income return + capital growth

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Blundell Risk dimensions

Sector Balance Score

Income return

Location concentration

Development exposure

Asset/ Lot size concentration

Lease Length

TICCS stress score

Tenant concentration

Weighted Beta

Void rate

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Introduction

• Also for Dutch residential investment market

What is the Dutch market???? • € 197 billion market size• € 110 billion in residential (75 % private)• € 19 billion in IPD/ROZ residential universe

But also: The Dutch social housing market

• € 243 billion market size (market value)• € 66 billion in IPD/aeDex universe

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Suitablility for dutch residential market

Dimension Suitable to dutch investment market?

Suitable to residential market seperately?

Data available at IPD Netherlands?

Sector balance score Yes No Yes

Income return Yes Yes Yes

Location concentration Yes Yes Yes

Development exposure Yes Yes Yes

Asset concentration Yes Yes Yes

Lease Length Yes No* No*

TICCS stress score Yes Yes No

Tenant concentration Yes No No

Weighted Beta Yes Yes Yes

Void Rate Yes Yes Yes

* Data not relevant for residential market

Top Down

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Suitablility for dutch residential market

Bottom Up

Identifying risk dimensions for Dutch market• IVBN report• IPD/ROZ questionnaire:

0

2

4

6

8

10

12

14

Dis

count ra

te

Vacancy rate

Turn

over

rate

Concentr

ation o

f re

nta

l valu

e

Location c

oncentr

ation

Asset C

oncentr

ation

Dow

nsid

e ris

k b

ased o

n

his

torical r

etu

rns

Port

folio

age

Overr

ente

d p

art

of

port

folio

Develo

pm

ents

Part

ly s

old

com

ple

xes

Energ

y e

ffic

iency

Type s

ingle

/multi te

nant

dw

elli

ngs

Share

gro

und r

ent

min

mean

max

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Commercial: concentration 5 highest value props Social: same as commercialCommercial: No interesting outcomesSocial: No interesting outcomesCommercial: concentration of assets in 5 regionsSocial: same as commercialCommercial: Turnover rate (valuation)Social: same as commercial Commercial: Bad energy label or no labelSocial: Not enough data yetCommercial: Concentration 1945-1980Social: Concentration 1945-1974Commercial: Volatility of invested segmentsSocial: same as commercialCommercial: Based on % market rental valueSocial: same as commercial

Parameter and ranking

• Concentration of rental value• Development exposure• Asset concentration• Over-rented part of portfolio• Location concentration• Turnover rate• Energy efficiency• Portfolio age• Weighted Beta• Vacancy Rate

Commercial: concentration > €1.000/ monthSocial: % gap to maximized legal rent

Commercial: Sale incomeSocial: Total transformation

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Asset concentration

Location concentration

share 1945 - 1980

Regions concetration

(demographic decine)

Vacancy

Energy efficiency

Turnover rate

Share rental value > € 1000

Sale income

Weighted Betas

Index

FUND X

Towards the Risk Web

Asset concentration

Location concentration

Age (1945- 1974)

Regions concentration (demographic decline)

Weighted Betas

Effi ciency rate

Turnover rate

Vacancy

Gap in % of maximized legal rents

Transformation

Index

Fund xx

14

0%

10%

20%

30%

40%

50%

60%

70%

0 5 10 15 20 25 30 35

index

FUND X

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Ambition?

• Prediction of tracking error

• Quick and dirty research on volatility • No statistically significant conclusions yet !

• Underlying parameters of dimensions should be discussed• More long term average research• Play around with segmentations• Timing of risk (correlation) • Limitative set of definitions (with predictive use)

R² = 0.1765

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0 2 4 6 8 10

Vacancy

Vacancy

Lineair (Vacancy)

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