Return/risk profile focused ratios for property investments

Abstract

Purpose

In order to take properly founded investment decisions, the anticipated value creation of a property investment should be identified by the investor. Because usual methods of analysis for determining the return/risk profile produce an inaccurate and incomplete picture, the purpose of this paper is to propose a number of improvements.

Design/methodology/approach

By examining the framework on which most used statistical risk analyses are based, improvements can be made, based on known, but not commonly used approaches. These improvements give a more satisfying risk analysis result, in which chances are also made visible.

Findings

Main principle of use is the downside risk approach, which only takes into account the negative deviations from self‐determined return criteria. The analysis is then based on four new created ratios, which collectively provide a better and more complete picture of the return/risk profile as a whole.

Practical implications

The ratios address risk from a downside perspective, but they also take into account the chances for investors to meet the return criteria, which provide the upside potential for the investments. Furthermore, the ratios express risk in terms of real volatility of the actual return. And last, they provide improvement of the entire return/risk profile, which therefore highlights the value creation achieved by the management.

Originality/value

By using the proposed ratios, risks and chances associated with property investments can be better quantified, thus producing a return/risk profile that paints a more realistic picture of the degree of value creation for investors.

Citation

Keeris, W.G. and Langbroek, R.A.R. (2009), "Return/risk profile focused ratios for property investments", Journal of European Real Estate Research, Vol. 2 No. 1, pp. 6-17. https://doi.org/10.1108/17539260910959527