How to evaluate risk for Italian real estate funds

Abstract

PurposeThe purpose of this paper is to define an approach useful to evaluate real estate funds on the specific characteristics of the Italian market and on the basis of international best practices.Design/methodology/approachThe first step is to identify specific factors and portfolio construction choices that could impact directly on the variability of inflows and outflows related to real estate fund. The analysis is realised constructing standard measures of financial and downside risk and identifying a panel model that allows to explain risk measure dynamics on the basis of some investments and portfolio characteristics. Results obtained are tested with an out of sample procedure in order to evaluate the type of misclassification risk related to each model. The second step is to evaluate the impact of debt policy on the risk assumed by a real estate funds. After an analysis of debt sustainability for each real estate unit on the basis of deadlines and amount of flows related to each investment, the study proposed looks directly at the debt policy of listed real estate funds: the analysis is aimed to evaluate the relationship between leverage choice and inflows/outflows variability and the coherence between declared results and expected results for high‐leveraged funds respect to the others.FindingsThe results stemming from the use of a real estate database supplied by Beni Stabili Gestioni Società di Gestione del Risparmio showed that the portfolio's construction choice impacts strongly on the variability of results of a real estate fund. The strict linkage between characteristics of debt and type of property makes difficult to evaluate the additional risk related to debt choice but on the basis of Italian market data are possible to point out the higher difficulties for high‐leveraged funds to achieve the result communicated to the market (the so‐called target IRR).Originality/valueThe value added of the paper is to study the relevance of specific risk factors respect to portfolio's ones in the evaluation of risk exposure for a real estate portfolio and the impact of the leverage choices on the variability of inflows and outflows related to the real estate investments.