PREDICTING CRISIS - "HEATMAPS" AND NETWORK DYNAMICS
The new 2021 is here and as every year, companies are reflecting the past and future challenges, especially when it comes to their business successes, profits, losses and similar… In the COVID19 context, in the commercial real estate field there is of course still ongoing discussion if we already see some impact of the current crisis or not.
Different asset classes have experienced different impacts… If we talk about the office market, due to the business specifics in the real estate sector, it is very probable that potential implications from the current circumstances could emerge in a protracted way.
COMPANIES AWARE OF THE POTENTIAL RISKS
If we come back to current analytics most of the companies are using, we can notice that they are based on some basic methods, where single factors, such as investment volume, are taken as indicative, without taking interdependencies with other market variables or even other real estate markets into account.
However, the last big financial crisis showed this quite clear. While the discussion about possible consequences is going on, at least part of the real estate companies are already taking care for a possible impact.
When analysing balance sheets of some of the biggest real estate companies, we can notice taking precautionary steps such as asset value adjustments in the profit & loss accounts or directly through the equity capital. Another strong sign that the business community is already getting prepared is that write-offs for rent receivables are distinctively higher than the years before. These steps are consequential and in line with the necessary and expected business cautiousness.
As the matter of fact the topic of risk management is becoming more prominent and structural thinking in this direction is emerging in the official documents and ongoing public discussions. Companies are getting increasingly aware that risk management has to be seen as a very important element in their business strategies especially in the unstable times as now.
DATA DRIVEN RISK MANAGEMENT - UNCOVERING NETWORK DYNAMICS
If we talk about the current risk management methods, mostly business analytics is being used for giving the managers situation overview, which enables them to successfully incorporate it in their business processes. It is encouraging that many of the real estate companies are already starting their digitalisation and data driven deciding journey and this is already giving them a certain competitive advantage in these turbulent times.
However, there is still a lot of space for expanding the analytical field in the direction of predictive analytics, helping companies get the overview which is incomparably more progressive when we are talking about highlighting the probable future scenarios.
Make no mistake: predictive analytics are not the often endeavoured myth of the 'look into the crystal ball' clearing up the future for you. When we talk about market forecasts, it is a well fabricated mixture of stochastic models, machine learning tools and networks dynamics applications, which dissects the anatomy of intertwined markets and pinpoints embedded market patterns and market behaviour. It helps to address potential risk evolving due to possible changing market situations and helps to quantify the consequences of changing risk exposures on companies within certain probability ranges.
It enables a hypothetical view on different business decisions and their impact on your company, short and long term, based on the data relevant for the markets you are interested for or present in and as well your company data, if you decide so. If you would like to describe it in simple terms, it is like using Google Maps app as opposed to the rough drawing of the main roads when planning your trip.
Especially networks analytics can be of tremendous assistance in the turbulent times as we have it right now. This statistical method is able to combine the elements among market features in a single market or asset class, but it also allows to combine the dependencies and causal relationships between different markets. (read more about this tool here)
So, working on the basis of connections and networks, it is able to offer predictively impact certain market indicators have on each other and also to see that market itself, as on of the indicators of a bigger picture, in this case network of real estate markets in the certain area (for example real estate markets in the whole Europe).
This way we are able to create a “heatmap” of a certain area which is highlighting how the market is about to develop and how it would impact different business scenarios within your company.
It is 'learning by doing', i.e. with every market update the networks analytics takes additional information about market behaviour into account and uses this new background. In the final result, a predictive and 'reactive' map of relevant market “hotspots” is put over the portfolio position of a real estate company, enabling a decision maker to build up its portfolio strategy and to react on possible upcoming events before others are recognising what might go on.
The reality is, if we talk in business terms, even with downsized asset values the “smell of a potential looming crisis” in the real estate sector will prevent deals from flowing. In other words, there is hardly a room for an active reaction with respect to potential unfavourable market scenarios. Here, predictive analytics comes into the limelight. It enables a decision maker to be one step ahead and to be able to react on possible market developments BEFORE it gets incorporated into the common market opinion.