Insecurity in Real Estate Markets
When two investment segments in the real estate sector react differently on the ongoing insecurity in the market itself, it is quite an issue to be supported by transparent and objectified risk management processes backed by efficient predictive analytics tools in order for investors and decision makers to keep the track.
Here, we have a short note on direct investments in commercial real estate as well as the market for real estate shares.
Investment Markets
A short snapshot from the commercial real estate market:
There are revolving crisis unfolding (e.g. Covid pandemics, Ukraine conflict, rolling inflation). We face a distinct widening of country spreads in certain areas. And we have a mounting discussion about overheating markets in certain asset classes. Nonetheless, commercial real estate markets proved to be quite stable so far and even faced slightly rising market valuations recently.
Talking to market players though, reveals a rising level of insecurity and tension concerning future developments in the commercial real estate business.
A more distinct picture is lately offered by stock exchange markets. And to put a long story short, it’s been pretty rough. Monitoring the Frankfurt and Vienna stock markets, a big majority of real estate share prices are declining and moving with a slumping investment market.
Here is a sample of real estate shares and their overall performance:
Given these circumstances, volatility in the market rises as well which puts additional pressure on respective risk exposures.
Value at Risk — Vonovia SE
As an example of rising volatility, let’s have a look at the share pice development of Vonovia SE. Here is the respective chart for the time period mid of 2013 to end of September 2022:
The pricing situation is quite dire, I would say. This is confirmed when considering the share price for the last six months of this year. The downward tendency is evident.
In terms of volatility, we monitored the 95% Value at Risk (VaR) positions based on the daily share price returns of Vonovia. VaR was calculated based on a simple Standard ARMA-GARCH model.
Taking aside the intermezzo in the year 2015, the volatility in share price returns was quite stable during the time period. This changed when the Covid pandemics impacted the market beginning of 2020. From that point on, the situation got more unstable. But what hits the note is that with beginning of 2022 volatility started to increase by tendency.
VaR in share price returns for Vonovia lingered around -2.0% in all those years. Meanwhile we are getting close to -4.0%. Doesn’t sound much?
Maybe, but taking VaR as measurement for volatility and monitoring the empirical distribution of VaR values for Vonovia share returns over the time period you get a feeling of how far the volatility moved into the (risky) tail region.
Other Examples
Vonovia is a very good example of what is currently going on in this investment segment. But of course, there are even worse examples, like:
Even as the free float in shares of Demire AG is just close to 10 % and may therefore follow some kind of “different rules” (we had a say on that in another article: see references below), it cannot escape the market trend towards a much higher volatility. The movement into the high risk tail area is yet more accentuated.
On the other hand, and here we come to one of those market exceptions, CA Immobilien Anlagen AG could separate itself from the general market sentiment. Although, this could be caused by other reasons than pure market mood.
Conclusion
There is growing insecurity in the commercial real estate investment segment on how markets will further develop. Though, this fact is still not incorporated in current yield developments.
The stock exchange has a much clearer voice. Nevertheless, this investment segment works on expectations and reacts quite fast even on rumours which may be exaggerated as well.
No doubt, we face rising instability which is also reflected in rather frequent changes in mood and opinions by market players.
Given this insecurity, the more important it is to support investment decisions by transparent and objectified risk management processes backed by efficient predictive analytical models which are capable to open up mid- to longrun analytical perspectives without being too much “impressed” by (positive as well as negative) short term events.
References
Early Risk Warning Applications in Real Estate by Christian Schitton, published in medium.com/ July 12, 2022
Market data taken from https://finance.yahoo.com
Charts and calculations prepared in RStats
