Risky business

The recent announcement by M&G that they’d let an over 100,000 sq. ft. speculative office scheme to SSE in Reading rather endorsed their decision to develop the project 3-4 years ago. At the time I was pretty surprised to see such a large project go ahead in central Reading.   I thought that it was a particularly high risk project given a subdued letting market and a still huge supply of out-of-town space in Green Park. However, M&G’s decision clearly seems to have been vindicated. There’s a pattern. On a much larger scale, Prudential (as M&G were known) also got the development cycle right with Green Park just before the dot.com bubble burst. In 1988, they completed a letting of a new building on King’s Road at £30 psf whereupon rents feel dramatically in 1990. It wasn’t until 2000 that they got close to that level again and they’ve just about got over it again recently.

A student dissertation by Markian Chemij’s tried to get under the skin of risk evaluation in the development industry. As many of the textbooks don’t tell us, development risk is really multi-faceted and presents lots of ‘wicked problems’ for developers. It varies between projects and over time. Some risks are driven by the project (planning delay and uncertainty, construction costs overruns, site constraints etc.), some by the market (value shifts, letting delays, rises in labour and material costs) and others are operational (poor design, poor feasibility analysis etc.). Gearing can introduce additional volatility. Developers are then faced with problems of risk identification, management, control, transfer, measurement, pricing etc.

Given the scope of the topic just outlined, Markian decided wisely to focus on a particular point of the development process – site acquisition. He was interested in procedures within development companies and the role of judgement and intuition in decision-making. Drawing upon a small number of in-depth interviews with large developers, he identified a range of approaches and practices. The role of governance and joint decision-making to control “risk-seeking individuals” came through strongly. Perhaps unsurprisingly, the importance of distinguishing between focusing on a specific project’s risk and the wider spread of risks to which the company was exposed was emphasised by some respondents. For some firms, the risks of a specific project need to be assessed in the context of the company’s broader risk exposure. Of course, risk management at the project AND firm level are not mutually exclusive. The words ‘gut’ and ‘experience’ emerged quite a lot in the interviews. However, it was interesting to note that there was a perception that approval procedures by senior management tended to emphasise more formal, numbers-driven justification for projects.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s