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Communicating Investment Risk to Clients: Property Risk Scoring

Author

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  • Norman E. Hutchison
  • Alastair S. Adair
  • Iain Leheny

Abstract

Investors require to be fully briefed on the risk profile of their investments. The UK valuation profession has been criticized for inconsistencies and failures to reflect risk and this was reinforced by the Investment Property Forum/Investment Property Databank (2000) which highlighted the need for more rigorous risk assessment measures within the property profession. The requirement of Basle 2, that banks must be more explicit about the risks of lending, has given added impetus to the desire for improved techniques for assessing and communicating risk. This study presents an alternative methodology for the scoring and reporting of investment quality risk -- Property Risk Scoring -- which utilizes the Analytic Hierarchy Process (AHP), a multi‐criteria decision making tool developed by Saaty (1980, The Analytic Hierarchy Process , McGraw Hill, New York, NY). The researchers asked senior valuers in the UK profession to identify, and score, the investment quality risks of prime offices at the date of valuation. The focus is on the principal elements of investment quality risk comprising yield movement, lease length, rental movement and change in occupier demand. Analysis of the results enabled the development of a generic market model to be used to risk score individual property investments. The results are reported on a 1--5 scale, similar to the widely accepted D&B credit rating technique, thus aiding market acceptance.

Suggested Citation

  • Norman E. Hutchison & Alastair S. Adair & Iain Leheny, 2005. "Communicating Investment Risk to Clients: Property Risk Scoring," Journal of Property Research, Taylor & Francis Journals, vol. 22(2-3), pages 137-161, June.
    • Handle: RePEc:taf:jpropr:v:22:y:2005:i:2-3:p:137-161
    DOI: 10.1080/09599910500453764
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    References listed on IDEAS

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    1. repec:arz:wpaper:eres1997-131 is not listed on IDEAS
    2. Andrew E. Baum & David J. Hartzell, 1997. "The Causes and Effects of Depreciation in Office Buildings. A Ten Year Update," ERES eres1997_131, European Real Estate Society (ERES).
    3. Yoram Wind & Thomas L. Saaty, 1980. "Marketing Applications of the Analytic Hierarchy Process," Management Science, INFORMS, vol. 26(7), pages 641-658, July.
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    Cited by:

    1. Cath Jackson & Allison Orr, 2011. "Real estate stock selection and attribute preferences," Journal of Property Research, Taylor & Francis Journals, vol. 28(4), pages 317-339, April.
    2. Tiffany Hutcheson & Graeme Newell, 2018. "Decision-making in the management of property investment by Australian superannuation funds," Australian Journal of Management, Australian School of Business, vol. 43(3), pages 404-420, August.
    3. Carsten Lausberg & Stephen Lee & Moritz Müller & Cay Oertel & Tobias Schultheiß, 2020. "Risk measures for direct real estate investments with non-normal or unknown return distributions," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 6(1), pages 3-27, April.

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