We manage risks at product level along with those at business division level through comprehensive, fully integrated management and risk reporting. That is part of Deka Immobilien’s management expertise. Our business policy and investment decisions for our products take sustainability risks – also referred to as ESG risks – into account at all times.
In the past few years, the real estate market has proven in dramatic fashion that it is not a one-way street with steadily increasing prices – it involves a considerable level of risk, just like other capital markets. Can a professional risk management system prevent something like this? Certainly not. However, it can be used as a systematic and integrated approach to identifying and assessing opportunities and risks based on a wide range of criteria, thereby bringing them to attention and allowing them to be managed.
Risk management plays an important role, especially in asset management. In addition to analysing risks that are already known, it also has to be capable of quickly identifying and actively managing new risks. Risk management therefore needs to be networked, integrated and forward-looking at all times. This is important for investors because it means the framework developed with the Deka Group provides guidelines for dealing with risks responsibly. What is particularly important for us is that our organisational structure has made risk management at Deka Immobilien independent of portfolio management and the front office units for acquisitions and sales and real estate management right from the start.
As a result, Deka Immobilien has many years of experience, expertise and in-depth knowledge in 27 markets. Deka Immobilien can also take advantage of the expertise of its real estate specialists and its related sector expertise to compensate for the limited availability of data in some areas. This allows us to achieve optimal results for our investors.
Deka Immobilien uses a comprehensive, fully integrated management and risk reporting system to maintain a complete view of risks at product level and business division level. Our business policy and investment decisions for our products take sustainability risks – also referred to as ESG risks – into account at all times. Due to their effects, however, these are always viewed in the context of the other risk types. Sustainability risks are managed using procedural measures that are implemented as part of the associated strategies and custom-tailored for each activity. While business risks and operational risks are the main focus at the business division level, four risk types are considered at the investment fund level (see chart).
Our tried-and-tested risk management system allows risks, results and products to be managed both strategically and operationally. The risk reporting system provides regular reporting on identified and assessed risks and the measures introduced for managing risks. It is continuously improved, including in terms of integrating sustainability risks. As a result, investors can be sure that in addition to macroeconomic risks, other sources of risk – such as external market effects or regulations – are also promptly included and optimally accounted for in the analysis.
For real estate mutual funds, institutional real estate funds, direct real estate funds, funds of funds solutions and loan funds alike, Deka Immobilien offers an extensive and diverse range of real estate and loan funds for both retail and institutional investors.
Our sophisticated risk management system (RMS) plays an important role in the related processes and products by identifying, measuring, managing and monitoring significant risks in the investment strategies of the funds. In this respect, the RMS is a formal overarching framework that defines the rules and responsibilities for all employees.
Firstly, all of the units concerned are involved in risk management and take part in the decision-making required at all stages, from product development and fund management to property management. In addition, our Risk Controlling unit also provides assistance to this value chain at all relevant levels of risk. To ensure a balanced discourse in terms of opportunities and risks, this unit is hierarchically and functionally independent of the operational areas. Using modern systems and models for risk assessment as well as individual security analyses allows Deka Immobilien to manage its products efficiently.
Risk aggregation is one of the key challenges for modern risk assessments for real estate funds. This is because properties are highly individual assets and – unlike securities, for example – are very difficult to assess quantitatively.
However, Deka Immobilien uses a combination of quantitative and qualitative elements to obtain a true picture of all opportunities and risk.
At the heart of Deka Immobilien’s risk measurement system is a quantitative model in the form of a multi-stage Monte Carlo simulation with additional qualitative aspects.
Deka Immobilien also uses a similar product process for each new asset being acquired for the investment funds, even though a new product process is not a regulatory requirement. This process combines comprehensive quantitative and qualitative analyses.
One of the main duties of modern risk controlling at Deka Immobilien is developing and continuously improving methods for the risk types used. This forms the basis for ongoing risk monitoring, independent reporting including stress analyses and limit monitoring.
Because of the long-term investment horizons, the new product process (NPP) is critically important. Therefore, in addition to the NPP that is required by the regulations, Deka Immobilien has also implemented a product process (PP) to assess each individual asset, in which all of the functional units involved work together in an interdisciplinary manner. This ensures that every asset receives a comprehensive risk assessment that far exceeds regulatory requirements, even at the acquisition stage. In addition to the results from due diligence, the PP and NPP also include a wide variety of stress scenarios for calculating profitability and risk measurement results (two-stage Monte Carlo simulation), combined with qualitative factors. In our view, this is a key indicator of the high quality provided by Deka Immobilien, as it allows opportunities and risks to be taken into account and analysed optimally for each investor.
The strategic objectives of the funds are also regularly reviewed during the holding period based on the existing situation, knowledge gained in the past financial year and future performance forecasts. This ensures that investors can continue to achieve the best possible results.
At Deka Immobilien, effective risk controlling extends all the way to the reporting process. In addition to differentiated risk measurement, it also includes critically reviewing and managing regulatory (risk) models for our institutional investors, which include savings banks, private banks and Volksbanks (cooperative banks), and portfolio risk simulations during the portfolio selection process. These tailored services are customised to meet the specific needs of each of our clients. Our modern approach to risk management makes us an experienced and reliable partner in the real estate sector and gives institutional investors the freedom to take the actions they need for their core business.
We are committed to operating responsibly with a high standard for sustainability in our portfolio of products and services. As a result, we also take sustainability risks into full consideration. We use a variety of strategies and processes to ensure risk monitoring of sustainability-driven developments or events during the investment process and the entire asset holding period in order to minimise their impact. A distinction is made between environmental (E), social (S) and corporate governance (G) risks – ESG for short.
A variety of models are used to integrate ESG risks into the investment funds, ranging from limit management systems and scoring systems to integrating such risks into Monte Carlo simulations. A scoring system is used to continuously monitor social and governance risks, while environmental (E) risks are divided into physical and transitional risks during risk measurement.
All risk types are taken into account in the investment process and ongoing risk monitoring where necessary. In addition to direct return risks, adverse market and climate developments, as well as regulatory changes, are also taken into consideration.
Optimised risk systems are used depending on the product and are chosen based on the required objectives, available data sources and specific client needs. S and G risks can be measured across all product lines.
Risk measurement for direct real estate funds centres on macroeconomic parameters applicable to all properties, such as market rents, exchange rates, interest rates, yields, inflation, CO2 price trends and climate scenarios that are provided by the DekaBank Economics department. They are simulated using Monte Carlo simulations. In addition, property cash flows are calculated at property level using macroeconomic variables, the current leasing situation and possible climate risks. The goal is to model variance risk and identify risk avoidance strategies by using a large number of individual scenarios taking risk distributions into account.
Stress tests are performed on the basis of baseline scenarios concerning factors such as vacancy rates, liquidity, tenant default, property returns or reductions in the period of use. Combined scenarios involving simultaneous changes to multiple risk factors are also calculated and used in our risk model in addition to sustainability risks.
A special feature of the risk model is the integration of physical risks (see figure) that are identified and assessed on an individual basis for specific locations using an appropriate climate forecasting tool and included in the overall risk analysis.
To determine transitional risks, specific energy and CO2 consumption values are calculated for each property and compared to a benchmark – such as the Carbon Risk Real Estate Monitor (CRREM) – taking into account property measures such as maintenance. The resulting “carbon delta” is assessed accordingly as a monetary risk (see Transitional risk chart). The primary goal of this analysis is to minimise the risk of “stranded” assets – in this case, real estate where the value drops sharply in a relatively short period of time due to environmental and climate-related factors.
These analyses are performed both during the acquisition process and over the entire holding period, so that potential risks can be identified early and mitigated accordingly.
