Risk Management Re-examined
23 June 2021

Don’t look back

Despite its rather dry title, this webinar provided some fascinating insights on managing business risk across the economy, as well as homing in on some of the implications for real estate.

All three speakers agreed that it is impossible to avoid risk – and indeed that investors can only make money by taking risk – but that managing overall business risk is far more than just analysing historic data.

Blair Cameron of The Risk Partnership, a consultancy specialising in the management of security and risk, emphasised three aspects of risk – the courage to take risks, a willingness to change and a forward-looking approach – that are need for success in any business. How to manage such risks depends on understanding the balance between the firm’s risk appetite and risk aversion, and needs to be approached holistically across the whole organisation.  

Socrates Coudounaris, who works in reinsurance and is heavily involved with the Institute of Risk Management, agreed that managing risk has to be embedded in the corporate culture, from the top down to each individual employee.  Citing examples where this clearly hadn’t been the case including Carillion, VW and Deepwater Horizon, he also stressed the importance of open communication and an avoidance of group-think in order to ensure that emerging risks are identified and prevented from escalating.

A real estate perspective was provided by Gerry Blundell, SPR Fellow and former strategy director at LaSalle Investment Management, and also well-known for developing the ‘risk web’ technique to measure qualitative risks.  He noted that while those involved in investment often think about risk in terms of historic data, the biggest risks are often different from anything that has gone before and therefore unquantifiable.  For example, the rapidity of technological change is now threatening to make many buildings obsolete, meaning that adaptability can be a key factor in mitigating risk – an effect that is impossible to model.  

He also suggested a number of warning signs that organisations are failing to manage risk effectively.  These include isolating risk management from the core decision making process and seeing resilience in terms of spare capacity.  In a real estate context, danger signs include designing assets for perfection, having a portfolio loan-to-value ratio in excess of 40% and a high concentration of value in a small number of assets.

In the panel discussion led by former SPR president Robin Goodchild, Blundell said that the most important lesson about risk management from his long career in property research was to look forward and not back.  Good risk management is much more about the corporate culture and mind-set than about crunching numbers.

The panellists all agreed that excessive optimism can be a particular problem for risk management.  Cameron suggested that this was human nature and had helped it overcome many setbacks, but Coudounaris proposed that organisations needed to accept that bad things would happen at some point rather than just treating it as a remote possibility.  Blundell noted that excessive optimism had often been a hurdle to getting research messages across at LaSalle, but that property people were also prone to the belief that once the market had started performing badly, this was likely to go on forever. One of the roles of a strategy/research team is therefore to navigate through volatile market sentiment.