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Real estate investors should be focused on risk

The high returns of the boom years have been replaced by another ‘R’ word: risk, according to a series of white papers by Ernst & Young. Real estate companies should now be focused on capital sources, reevaluating their business model and managing global risk.

At the height of the real estate boom, real estate companies were focused on generating the highest possible returns for their investors. Today, that attention is primarily being targeted at managing risk, according to Ernst & Young.

In a series of white papers based on more than 40,000 client meetings globally, the accounting and advisory firm said real estate firms should be developing a “plan of action” if they were to thrive from the downturn. That plan should be focused on capital availability, reevaluating the business model and risk management.

With almost three-fourths of real estate executives anticipating a “permanent change” in the risk management of their organisations, Ernst & Young said everyone had to learn lessons as they tried to prepare for “success”.

Three keys areas, the firm said, included increasing capital availability, whether through debt refinancing, credit lines, raising equity or debt in public markets and forming alliances with other equity investors, and reevaluating business models to see ”whether changes should be made, such as a shift in focus, for example, from development to asset management”.

In the
Lessons From Change report, the firm added that real estate companies should also be managing the expectations of investors who had grown accustomed to the “very high returns [of the] boom times, but who now may have to accept lower returns as some companies focus on lower yielding but lower risk investment”. The report warned: “In boom times, the R word was return; now it's risk.”

Global real estate leader Howard Roth said increased government regulation would be one issue facing all investors, particularly private equity and real estate funds, where there is growing demand for more disclosure of investment plans and asset verification.

Dean Hodcroft, Ernst & Young's real estate leader for Europe, the Middle East, India and Africa, went on to say: “Two years ago, real estate executives spent most of their time on new deals. Now they spend most of their time firefighting: protecting assets, controlling costs and, most importantly, managing cash flow.”