Like in many industries, real estate professionals often function in an industry of known and unknowable risks. These can include anything from sudden changes in the economy to environmental disasters. This research aims to provide a framework to help managers navigate these risks.
- David Higgins
- Dr Treshani Perera (RMIT University)
Whilst existing literature on real estate risk management focusses almost exclusively on holistic risk management techniques, documented increases in frequency and magnitude of unforeseen, rare and extreme events can throw up sudden, unexpected shocks that can challenge recognised real estate decision-making strategies. The research aims to discuss this issue and provide a conceptual real estate framework to manage these risk events.
To advance real estate decision-making practice in this area, this research paper takes the skilfully conceptualised downside risk framework presented by Diebold et al. (2010), being the known (K), the unknown (u) and the unknowable (U) risk categories, to provide a blueprint for effective real estate decision making in a changing global environment.
With the understanding of KuU risks in their theoretical perspective, a schematic classification was prepared with respect to empirical knowledge by means of the availability of existing literature; methodological knowledge with regard to the quantification by assigning probabilities; impact across the timeline; and, finally, the level of awareness.
The mastery of modern real estate risk management can be better served by understanding and managing extreme downside risk events. Creating a comprehensive risk management framework can enhance comparative real estate performance whereby unprepared competitors fail in a world increasingly affected by large, highly improbable and unpredictable events.