Risk analysis uncovers how new fundamentals impact asset values

Value and risk are inextricably linked together. Value is an estimate of a property’s market price and defines the exit return on an investment, while risk is the potential for complications or for an investment to underperform. Value represents an analysis of a property in the current market, and risk estimates how the property will perform in the future, as market dynamics change. You cannot see an accurate picture of one without the other.

A risk analysis evaluates multiple factors that influence property value, both currently and in the future. There are seven key factors in the analysis: market, location, property, cash flow, ESG, health and safety. Within each category is a well of insightful data, and those insights expand exponentially when analysed all together. Location, for example, can explore crime statistics, proximity to public transit or access to daily needs amenities, like grocery stores and restaurants; climate defines exposure to extreme weather events and natural disasters as well as the long-term effects of climate change, like sea level rise and air quality; and market data illustrates broader trends, digging into employment growth, inward and outward migration and local regulatory barriers. Each bucket explores nuanced contributors to investment quality that can exist today or manifest in the future.

Technology is contributing to improved quality in risk assessments and increasing data accessibility for investors. The analysis is automated to incorporate timely data insights and reflect a property’s most up-to-date exposure, even as fundamentals change. By leveraging technology, risk assessments are not a snapshot in time but an ongoing analysis of liability that illuminate weak spots—and strengths—in a property portfolio.

As Hodge says, “the inverse of risk is opportunity.” Ultimately, the power of knowing your weaknesses is to have the opportunity to improve your position. Risk assessments grant investors that power. “This is quantifiable data that can point to the cause or multiple causes impacting value of a property,” says Hodge. “Once an investor knows the specific factors impacting pricing, they can make strategic adjustments.” Those adjustments include modifying lease terms, pursuing a re-zoning strategy or investing in property-level upgrades.

Investors can also tailor the analysis to reflect their internal business strategy, which might include a high tolerance or even an appetite for some challenges. An industrial developer, for example, is likely to have deep experience working on land sites with environmental hazards. If a specified analysis shows a vulnerability due to a problematic land site, the investor will likely still pursue the deal or even target similar deals. Likewise, investors can also pinpoint and avoid common emerging market challenges. Office sector stakeholders are a great example. Post-pandemic, they are more sensitive to migration patterns and employment trends and are looking to highlight these trends and how they affect specific properties in risk assessments to narrow exposure.

Investors have historically focused on tolerating a certain degree of risk; a customised analysis of downside exposure helps investors become even more risk conscious. By understanding the nuanced characteristics that influence asset value, investors are empowered to make strategic adjustments that drive returns.