Real Estate Risk Evolution: Adapt through Corporate Governance

Economic and Social issues came to the fore of the 2021 Global Risks Perception Survey (GRPS), presented by the World Economic Forum, which coincides with the rising importance placed on Environmental, Social and Corporate Governance (ESG).

In this article, I will explain how effective Corporate Governance provides for better stewardship and risk management and mitigation for Real Estate owners throughout their real estate development, tenant experience and value at asset disposal.

C-Suite Consideration

Effective Corporate Governance establishes its most potent foundations when risk managers are heard at the C-suite level and when they present a broader enterprise risk management perspective to drive resilience for the long-term. From a Property perspective, transferring risk through insurance is not sufficient and should, instead, be viewed as a backstop. Typhoon Mangkhut in 2018, for example, resulted in economic losses totalling US$3 billion in Asia and highlighted the immediacy of required action and the financial sense of preparedness. Indeed, over a ten-year horizon, environmental risks occupy the first three positions in GRPS in terms of likelihood, as they have done for the past three years, and they occupy three out of the top five positions in terms of impact.

Risk surveys and effective loss control measures can reduce both the frequency and intensity of losses and positively affect values. Alternatively, a failure to take action will result in higher costs, more expensive insurance premiums, higher deductibles, reduced income through business interruption and weaker tenant demand. This ultimately translates into lower capital values.

However, insurance is a short-term solution as it must be renewed each year, and long-term issues tend to have no owner due to short-term pressures. A 10-year horizon falls comfortably within two Real Estate investment life cycles, so asset values at disposal must be considered. When your company’s C-suite is onboard to drive such long-term resilience, your company sets the right foundations and strategic horizons for effective risk management and mitigation throughout the real estate cycle.

Tenant Experience

For Corporate Governance to measure and mitigate risk, your Real Estate investment should focus on the physical and operational aspects of improving the tenant experience, satisfying wellbeing, business continuity and resilience, while enhancing flexibility.

Respondents to the GRPS viewed societal risks as presenting the clearest and present dangers over the coming 2–3 years, as they included infectious diseases and the subsequent livelihood crises, as evidenced by the lasting effects of the current pandemic. With support measures gradually phased out, it is likely for inequalities to exacerbate throughout society and the Real Estate sector will not escape the consequences.

Rightly so, Real Estate tenants are reviewing their occupancy footprint, not always to downsize, but with a greater awareness of risk factors and with an eagerness to ensure their Real Estate is an enabler of collaboration, productivity, and creativity. Property owners that can invest in response to changing occupier preferences and future-proof their assets will attract a larger share of demand. Hence, your business needs to consider this value that other property owners are providing their tenants.

Technology

As success in Real Estate becomes ever more reliant on technology, the need for robust cybersecurity strategies becomes critical to operations. According to the 2021 edition of GRPS, digital power concentration and digital inequality appear in the top 10 likely risks. 

While this has obvious implications for society as a whole, it is also shaping the retail fabric of major cities as large online retailers assume an enhanced role. Retail space is giving way to alternative uses while demand for warehousing and distribution space has risen. Somewhat surprisingly, the perceived likelihood of cyberattacks and data fraud or theft has weakened according to the survey, continuing a three-year trend. For Real Estate though, it could be argued that the threat posed by these risks has increased with the continued rollout of Proptech applications in physical infrastructure, building operations and occupier activity.

The cost implications should cybersecurity be comprised are significant and implementing data protection should be a priority throughout enterprises.

Conclusion

Therefore, good corporate governance enables your business to identify and measure risk, which is also a step towards savvy financial planning. As risk transfer is generally viewed as a cost, in the form of insurance, retained risk can also be quantified in financial terms to be taken into consideration by Real Estate companies.

Real Estate owners, and indeed occupiers, can thus make informed decisions regarding possible risk transfer according to individual risk profiles.

 

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Edward Farrelly

Senior Vice President, Asia Real Estate Industry Lead

Please note that Marsh PB Co., Ltd and Marsh McLennan are not engaged by nor involved in any manner with Bonus Ranch and its promotion, and has not placed any insurance for nor insured any of its businesses or operations. Marsh as a licensed insurance broker will not request customers to make payment via non-standard methods, such as the transfer of money to any individual’s bank account.