Quantitative Risk Management in Real Estate – Previous developments, comparative comparision of practices and derivation of an evoluation matrix "

The importance of real estate risk management has recently been highlighted by various developments: The GFC in 2007 as fundamental crisis, recently increasing disruptive events and fat tail risk, as well as a general shift up the risk curve due to yield compression in the asset class real estate. Thus, professionals show an increased interest for adequate methods to manage the risk of their position. These professionals include the Deka Immobilien GmbH, who financially as well as intellectually support the present paper. On the other hand, academic literature shows a vital discussion in the risk management of real estate and the feasibility of corresponding methods. Accordingly, the need for an evaluation pattern in order to judge the adequancy of each existing method in the context of fundamental characteristics of the asset class and its dynamics appears to be the logic step. To date, no such real estate-specific assessment pattern exists. Consequently, the central idea of the present paper is to develop a model to evaluate practices from an academic point of view with regard to their adequancy of asset characteristics as well as recent dynamic developments of the market environment. In order to set up this evaluation pattern, economic as well as legal requirements are described and hierachially ordered by ubiquitary versus firm-specific ones to discriminate development levels and set up the evaluation matrix. Subsequently, risk management methods are presented. Lastly, observed methods are evaluated with the newly developed evaluation matrix to assess their feasibility to fulfil above mentioned economic and legal requirements.