Risky business: how the property industry tackles an increasingly uncertain world

Whatever you think about Brexit, the threat from Isis, a potential economic downturn or Donald Trump’s America, one thing is surely true: we live in uncertain times.

And the more uncertain the world is, the harder people have to work to ensure that their business is protected from any threat - physical or economic. None more so perhaps than the commercial property sector.

Buildings are on the front line of the economy: they often take years to complete meaning its difficult to know what the market might look like when they are finished, and leasing agreements are signed for 15 or 25 years. It is essential that companies know what they might be facing.

Step forward risk management specialists. You might not have heard of them, but amid the turmoil of the last year they are reporting soaring numbers of inquiries from investors and developers keen to minimise the risk of building or buying property across the world.

For property companies there is the threat that their buildings may not be occupied in five years’ time, and for investors, a market crash could cripple their returns.

“We’ve definitely seen an increase in people wanting this sort of service in the past year,” says David Lea, an analyst at risk consultancy firm Control Risks. “There’s a greater awareness of the duty of care that developers and investors have to the people working on their buildings and the people who are going to be occupying them.”

Lea says he has recently helped clients as diverse as a major international retailer, which was concerned about the threat of terrorism and the changes to operating conditions likely to result from the Brexit vote, to a major energy infrastructure project in south-eastern Europe, which wanted to know how political attitudes towards the project might change over its lifecycle.

Political volatility

For the UK, political risk in the last year has mostly been played out against the backdrop of the European Union referendum. Immediately following the vote, there were fears that the property market in particularly would be hard hit by uncertainty in the country’s political future, and in the days immediately afterwards many property stocks dropped dramatically in price.

Things soon began to reach a more even keel as companies got used to the changing environment. But Zachary Gauge, European real-estate analyst at UBS, offers a note of caution: “Brexit hasn’t started yet, and I don’t think anyone really knows what the medium- to long term consequences are going to be,” he warns.

He explains that investors tend to change tack during more volatile times, aiming for reliable income from buildings that are more likely to withstand market volatility. “Since the Brexit vote we’ve noticed a lot more interest in core assets, let on long leases,” he says.

Outside the UK, investors want to know what the relationship between developers and the government of the country they want to invest in. And in the case of new developments, people want to know whether there have been protests over building in the past, explains Lea.

“Berlin and Istanbul are places which have had this problem in the recent past,” he says, “and in the case of newly established business areas, people want to know whether lots of buildings going up at the same time is going to be a problem.”

Economic risk

Property is a notoriously cyclical business, going through peaks and troughs on a regular, and partially predictable, basis. Mike Prew, real estate analyst at Jefferies, says: “The office sector tends to be the one with the highest peaks and lowest troughs and that’s because it is prone to oversupply and undersupply.”

He points out that the gestation period for real estate leaves investors and developers “trying to guess” at what point the cycle will be at when the building is done.

He advocates “counter-cyclical gearing” - that is increasing debt at the bottom, and reducing it at the top.

That is what FTSE 100 company Land Securities has tried to do, explains Justin Murrell, the firm’s head of risk and internal audit.

“We set our business plan and we have a view of our market, and so after that it’s trying to understand how external factors impact that,” he explains.

He adds that the company keeps an eye on things such as how active its tenants are in expanding, and whether they’re reluctant to make decisions about their office occupation as a sign that things are potentially slowing down.

But the business also works to strengthen its balance sheet during times when it thinks the economy is on a downwards trajectory rather than an upwards curve.

“Part of the key strategy for us is very much about degearing,” he says. “Our loan-to-value ratio is down at 20pc at the moment, which is probably the best it’s ever been.”

He adds that a downturn in the market would present opportunities to buy, and Land Securities’ chief executive Rob Noel has been vocal in the past about Land Securities’ ability to buy well at the bottom and sell at the top.

Toby Courtauld, chief executive of developer Great Portland Estates, says much the same: “Our balance sheet has never been stronger and gearing never lower, giving us significant financial capacity to exploit any market weakness, just as we did in 2009,” he said recently.

Security threat

Calls to risk management specialists have also increased over the last decade for another major reason: a perceived rise in terrorism. “Increasingly when we have new offices going up in London the project managers will be including a lot of security measures,” says Mark Whyte, a senior partner at Control Risks, “and it’s something they’re now considering more up front.”

He estimates that during the last decade, around 8,000 bollards have been erected in the City of London in a bid to stop attacks from vehicles.

“These days, it is more about the risk from active shooters,” he explains, pointing to recent attacks such as the killings at French magazine Charlie Hebdo, as well as the Tunisian beach massacre, as examples.

Mark Preston, divisional director at risk management company Willis Towers Watson, agrees. “We now employ ex-service personnel who will carry out risk assessments in key locations,” he says. “This has become particularly important in high access locations such as shopping centres.”

Solutions can range from making changes to buildings such as blast resistant glazing, to encouraging management to make employees more aware of their surroundings.

The threat has changed over the last couple of decades, Preston says. “In the mid-90s, it was more about damage to buildings from groups such as the IRA, but now what people are typically concerned about is the lone shooter and what steps can be taken to minimise that.”

He explains that protecting employees is not simply altruistic: firms are increasingly concerned that they could be held liable for terror attacks. Victims in the Tunisia massacre called in lawyers over the hotel’s security.

A report released last year backed by the Mayor of London called for additional legislation to ensure new builds were fully terror-proofed, but strengthening existing buildings where possible must also be a priority, Preston argues.

In the meantime, businesses will keep trading regardless of the market, Land Securities’ Murrell says. “You’ve got to keep looking a long way ahead and not be swayed by short-term issues,” he says. “This is a long-term business, after all.”