Recently, Ernst & Young released the results of its annual business risk survey, our scorecard for how observers around the top 10 risks facing businesses globally.  As part of the overall survey, Ernst & Young’s Global Real Estate Industry Center worked in collaboration with Oxford Analytica to poll real estate analysts, business executives and E&Y real estate professionals.  Here’s what our survey revealed:

1.  Credit Shocks, Deleveraging,
Refinancing Uncertainty

With more than $1.4 trillion in commercial debt maturities expected between now and 2013, continuing decline in property values and stricter loan underwriting, it’s hardly surprising that this is top-rated risk in business. What’s a little more surprising is that there seems to be almost universal agreement among our real estate commentators that this will remain a priority risk for the foreseeable future.

2.  Further Declining Economic &
Real Estate Fundamentals

This is second half of the one-two punch.  Will the economy rebound?  If so, when and what impact will it have on real estate demand and net operating income?  It is concerns such as these that placed this area of risk as the second-highest, ranked across all analysts and executives interviewed.

3.  Pricing Uncertainty

The problem of pricing uncertainty ranked as the third-highest risk of concern by the analysts and executives interviewed; and ranked in the top five by all.  Given significant declines in real estate and cash flows, a dearth of transactions (and many of those transactions that do take place are either seller-financed or under distress) it is no wonder that companies are rethinking their approaches to real estate valuation and risk management.  Proactive performance monitoring, stress testing and obtaining a thorough understanding of real estate exposure are once again top of mind.

4.  Regulatory and Taxation

This risk didn’t appear on last year’s list and was a “write-in candidate” in 2010, which indicates it really is on the minds of professionals in the real estate industry. Given the complex new regulatory environment, which varies by jurisdictions, companies need to track changing requirements to be able to react quickly.  Those who are able to address these shifting requirements first will be better able to attract investment.  The broadening global nature of many real estate businesses may also explain why this risk is now on the radar.

5.  Aging Infrastructure

It’s widely accepted that infrastructure in many countries around the world is inadequate, and in desperate need of repair. That’s particularly true in the United States.  In addition, many countries need significant investment in infrastructure to accommodate their future population growth. In fact, there is a direct correlation between the quality and extent of a country’s infrastructure and its ability to grow both its population and its economy. Commentators felt, and the E&Y team agrees, that investments in infrastructure could open up significant opportunities for public and private partnerships, specifically to help public entities build and refinance growth.

6.  Global Talent War

Another risk aimed solidly at a business’ ability to grow is the quest for human capital.  While Ernst & Young respondents and industry analysts put this risk below their radar, real estate executives saw the possibility of a worldwide competition for talent as a middling risk among the Top 10, suggesting that expansion,  and the means to achieve that goal, is very much on their minds.  Clearly, real estate companies are among those businesses surveying the talent pool and positioning for growth.

7.  Rising Interest Rates

The possibility of rising interest rates was not included on last year’s risk list, evidence, if any were needed, that we have been part of one of the lowest interest-rate environments in recent global financial history.  However, it was suggested independently as deserving to be among a new Top 10.  While the US Federal Reserve and other national banking institutions have moved aggressively to maintain low interest rates in recent months, there is clearly an awareness in our industry that this could be temporary and that rates may rise in the near future.

8.  The Green Revolution

While climate change and sustainability are growing concerns within the real estate community, these risks ranked quite low on everyone’s radar.  The green revolution is well underway;  what little construction is taking place is viewed predominantly as sustainable in some form with many projects in the US, for instance, certified under the US Green Building Council’s LEED standards.  It is rare to find a new building that isn’t in some form certified as green.  Similarly, many property owners and investors are retrofitting existing buildings to comply with green standards.  Ultimately, the risk here may be what happens to buildings that don’t possess some green accreditation or features, especially in future transactions.

9.  Fraud, Corruption, Disputes 

As businesses diversify into new and unfamiliar markets, not surprisingly, the potential for fraud, corruption and disputes increases. Ernst & Young participants felt there was an additional reason to pay attention to this area, however. The partners we interviewed felt that this risk was particularly important to consider given the difficult economic times, which often result in increased fraud.

10.  Inability to Find and Exploit
Global & Non-Traditional Opportunities

As the global distribution of wealth and economic activity shifts, this area of potential risk continues to pose a significant strategic challenge for the real estate industry. We see many companies globalizing their businesses through the use of joint ventures with local partners and through consolidation of the market to create larger, international platforms.  In the current financial climate, companies need to respond quickly to shifting wealth and have the confidence to move into new markets to take advantage of new investment prospects.

This list of risks is not exhaustive, and real estate companies need to assess their own business goals and operations to determine which risks may apply more directly to them.  However, this list is a good starting point for any company conducting an analysis of the risks likely to shape its global business in the years to come.

Howard Roth is the global real estate leader and a partner with Ernst & Young LLP’s real estate practice. You may contact him at [email protected]. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or GlobeSt.com.