Scoring Risk Factors as a Measure of Overall Risk Exposure in Real Estate Portfolios

In recent years, a revolution has been arising in risk as it is both measured and managed. Contradicting the relatively dull and routine history of risk analysis, new technologies and ideas have emerged among a new generation of financial professionals who are applying their model building skills and analysis to this area. Real estate portfolios are constantly exposed to different sources of risk and measuring this exposure is becoming essential for fund managers and other professionals in the industry. Traditional approaches on real estate portfolioís overall risk measurements are valid but have some limitations such as data availability. The purpose of this study is to develop and establish a scorecard methodology for funds in which factual historic data is used to determine the current and historic risk exposure of real estate funds. Seven different risk factors has been identified and its different value ranges tabulated: fund leverage, exposure to risky market segments, diversification of the fund across market segments, diversification of the fund at property level, exposure to developments, income style (unexpired lease lengths) and asset style (equivalent yield quartiles). The sum of the score associated to each of the above risk factors will provide an overall risk exposure measurement of the real estate fund under analysis.