NEW YORK CITY-New theories and best practices for commercial real estate investment risk management are being developed and tried out by asset managers around the globe, according to MSCI Inc.’s bi-annual survey of asset allocation practices among pension funds and sovereign wealth funds. The hitch is this, says Peter Hobbs, managing director of Research for MSCI-IPD: “The jury is still out about whether they will work in times of distress like the financial crisis of 2008.”
Still, it is good that the industry is realizing its previous shortcomings to its approach to risk, he tells GlobeSt.com. “Now we have more and more capital coming into this asset class around the world. The market is heating up.”
Even as asset managers take new approaches to risk, the report, titled “Long-Run Investment Ambitions and Short-Run Investment Processes,” points out that there are long-term management challenges in these investments.
For instance, even as more (now it is 70%) managers benchmark the progress of their portfolios-a best practice often overlooked in previous years-the MCSI survey found that more than 80% of those that do have some type of benchmark misalignment, such as using domestic benchmarks when investing in foreign markets.
Another problem is that the relatively small scale of real estate in a larger investment portfolio, coupled with the asset class’s idiosyncrasies, has meant that many risk teams leave real estate departments to manage their own risks, the report said “contributing to the poor integration with other asset classes.”
As noted, though, this is changing as investors gain a greater appreciation for the role of risk management in CRE.
“Risk managers, they are really wanting to have a dialogue now with the CRE group in a language they understand,” Hobbs says.
Please come back for part 2 of this article tomorrow. We will go in-depth into the emerging best practices for benchmarking and pricing.