Sophisticated risk management designed for success

We manage risks at product level along with those at business division level through comprehensive, fully integrated management and risk reporting. That is part of Deka Immobilien’s management expertise. Our business policy and investment decisions for our products take sustainability risks – also referred to as ESG risks – into account at all times.

Integrated management of opportunities and risks

In the past few years, the real estate market has proven in dramatic fashion that it is not a one-way street with steadily increasing prices – it involves a considerable level of risk, just like other capital markets. Can a professional risk management system prevent something like this? Certainly not. However, it can be used as a systematic and integrated approach to identifying and assessing opportunities and risks based on a wide range of criteria, thereby bringing them to attention and allowing them to be managed.

Risk management plays an important role, especially in asset management. In addition to analysing risks that are already known, it also has to be capable of quickly identifying and actively managing new risks. Risk management therefore needs to be networked, integrated and forward-looking at all times. This is important for investors because it means the framework developed with the Deka Group provides guidelines for dealing with risks responsibly. What is particularly important for us is that our organisational structure has made risk management at Deka Immobilien independent of portfolio management and the front office units for acquisitions and sales and real estate management right from the start.

As a result, Deka Immobilien has many years of experience, expertise and in-depth knowledge in 27 markets. Deka Immobilien can also take advantage of the expertise of its real estate specialists and its related sector expertise to compensate for the limited availability of data in some areas. This allows us to achieve optimal results for our investors.

Maintaining an integrated view of risks

Deka Immobilien uses a comprehensive, fully integrated management and risk reporting system to maintain a complete view of risks at product level and business division level. Our business policy and investment decisions for our products take sustainability risks – also referred to as ESG risks – into account at all times. Due to their effects, however, these are always viewed in the context of the other risk types. Sustainability risks are managed using procedural measures that are implemented as part of the associated strategies and custom-tailored for each activity. While business risks and operational risks are the main focus at the business division level, four risk types are considered at the investment fund level (see chart).

Chart on risk strategy

Our tried-and-tested risk management system allows risks, results and products to be managed both strategically and operationally. The risk reporting system provides regular reporting on identified and assessed risks and the measures introduced for managing risks. It is continuously improved, including in terms of integrating sustainability risks. As a result, investors can be sure that in addition to macroeconomic risks, other sources of risk – such as external market effects or regulations – are also promptly included and optimally accounted for in the analysis.

Continuous identification, measurement and management of relevant fund risks

For real estate mutual funds, institutional real estate funds, direct real estate funds, funds of funds solutions and loan funds alike, Deka Immobilien offers an extensive and diverse range of real estate and loan funds for both retail and institutional investors.

Our sophisticated risk management system (RMS) plays an important role in the related processes and products by identifying, measuring, managing and monitoring significant risks in the investment strategies of the funds. In this respect, the RMS is a formal overarching framework that defines the rules and responsibilities for all employees.

Risk management at all points in the value chain

Firstly, all of the units concerned are involved in risk management and take part in the decision-making required at all stages, from product development and fund management to property management. In addition, our Risk Controlling unit also provides assistance to this value chain at all relevant levels of risk. To ensure a balanced discourse in terms of opportunities and risks, this unit is hierarchically and functionally independent of the operational areas. Using modern systems and models for risk assessment as well as individual security analyses allows Deka Immobilien to manage its products efficiently.

Chart on value chain risk management

Fund risk management and controlling

Risk management approach

Risk aggregation is one of the key challenges for modern risk assessments for real estate funds. This is because properties are highly individual assets and – unlike securities, for example – are very difficult to assess quantitatively.

However, Deka Immobilien uses a combination of quantitative and qualitative elements to obtain a true picture of all opportunities and risk.

At the heart of Deka Immobilien’s risk measurement system is a quantitative model in the form of a multi-stage Monte Carlo simulation with additional qualitative aspects.

Monte Carlo simulation

Deka Immobilien also uses a similar product process for each new asset being acquired for the investment funds, even though a new product process is not a regulatory requirement. This process combines comprehensive quantitative and qualitative analyses.

Risk controlling approach

One of the main duties of modern risk controlling at Deka Immobilien is developing and continuously improving methods for the risk types used. This forms the basis for ongoing risk monitoring, independent reporting including stress analyses and limit monitoring.

Because of the long-term investment horizons, the new product process (NPP) is critically important. Therefore, in addition to the NPP that is required by the regulations, Deka Immobilien has also implemented a product process (PP) to assess each individual asset, in which all of the functional units involved work together in an interdisciplinary manner. This ensures that every asset receives a comprehensive risk assessment that far exceeds regulatory requirements, even at the acquisition stage. In addition to the results from due diligence, the PP and NPP also include a wide variety of stress scenarios for calculating profitability and risk measurement results (two-stage Monte Carlo simulation), combined with qualitative factors. In our view, this is a key indicator of the high quality provided by Deka Immobilien, as it allows opportunities and risks to be taken into account and analysed optimally for each investor.

The strategic objectives of the funds are also regularly reviewed during the holding period based on the existing situation, knowledge gained in the past financial year and future performance forecasts. This ensures that investors can continue to achieve the best possible results.

Custom-made services

At Deka Immobilien, effective risk controlling extends all the way to the reporting process. In addition to differentiated risk measurement, it also includes critically reviewing and managing regulatory (risk) models for our institutional investors, which include savings banks, private banks and Volksbanks (cooperative banks), and portfolio risk simulations during the portfolio selection process. These tailored services are customised to meet the specific needs of each of our clients. Our modern approach to risk management makes us an experienced and reliable partner in the real estate sector and gives institutional investors the freedom to take the actions they need for their core business.

Integration of sustainability risks

We are committed to operating responsibly with a high standard for sustainability in our portfolio of products and services. As a result, we also take sustainability risks into full consideration. We use a variety of strategies and processes to ensure risk monitoring of sustainability-driven developments or events during the investment process and the entire asset holding period in order to minimise their impact. A distinction is made between environmental (E), social (S) and corporate governance (G) risks – ESG for short.

A variety of models are used to integrate ESG risks into the investment funds, ranging from limit management systems and scoring systems to integrating such risks into Monte Carlo simulations. A scoring system is used to continuously monitor social and governance risks, while environmental (E) risks are divided into physical and transitional risks during risk measurement.

  • Physical risks have a direct impact on the properties and are physical consequences of the effects of climate change, such as rising sea levels. This type of risk can be acute or the result of long-term changes.
  • Transitional risks related to the environment can occur for various reasons, including in connection with the transition to a low-carbon economy or, more often, regulatory interventions. For example, they can lead to price increases or shortages of fossil fuels due to factors such as CO2 pricing or a ban on operations when certain CO2 or energy consumption limits are exceeded.

All risk types are taken into account in the investment process and ongoing risk monitoring where necessary. In addition to direct return risks, adverse market and climate developments, as well as regulatory changes, are also taken into consideration.
Optimised risk systems are used depending on the product and are chosen based on the required objectives, available data sources and specific client needs. S and G risks can be measured across all product lines.

Sustainability risks relate to damage from environmental, social or corporate governance events that has a negative impact on financial position, financial performance, and cash flows – or on reputation.
Chart on ESG risks

Risk Awards for Sustainability

The Risk Controlling team at Deka Immobilien has been honored with the prestigious EY Risk Award in the “Sustainability” category. The award ceremony was held on April 18, 2024 in Berlin, recognizing companies that have developed innovative solutions for sustainable risk management. Deka Immobilien was celebrated for its exceptional achievements in this arena.

Risk management for product categories

The structure of loan funds differs considerably from the other product types in our business division. Loan funds finance a broad range of assets and projects, such as real estate, infrastructure projects (e.g. wind farms), aircraft and ships.

Credit risk is particularly important when investing in loans, as a deterioration in borrower credit ratings or default can have a negative effect on the loan fund. Risk management for these products therefore mainly focuses on monitoring the ratings of the exposures and ensuring that suitable collateral is provided, so that an in-depth assessment of the current creditworthiness and future changes can be performed for each borrower. Loan exposures are also monitored using a variety of leading indicators to identify signs of deterioration in financial circumstances and the value of the collateral provided.

These analyses make use of the extensive back office lending expertise that Deka Immobilien has gathered. We use a variety of scenarios ranging from rating downgrades across all loans to defaults on individual loans to ensure that our assessments of the effects of credit risk on our loan funds are optimal.

In addition to credit risk, market price risk is also important for loan funds. Loan exposures are subject to currency risk, interest rate risk and spread risk. Derivatives can be used to hedge currency and interest rate risk at the fund level, and are also included in risk measurement. Our risk management system also uses a variety of stress scenarios that are continuously adjusted during periods of capital market stress to analyse potential changes in market price risk.

Collateral agreements associated with a loan are another source of risk. In some cases, this risk can be unilaterally triggered by the borrower, such as if the borrower terminates the loan agreement. We already take measures to counteract this risk when assessing whether to invest in a loan by including any collateral agreements in the assessment. A Monte Carlo simulation is used to simulate future changes in capital market parameters, such as interest rates and spreads. A migration matrix is also used to assess potential rating changes for the loans.

Risk assessment of loan funds
Chart on risk assessment of loan funds

Similar to real estate funds of funds, sustainability risks are monitored using a scoring model developed specifically for this purpose that takes into account the special features of the assets financed by the loans. Physical and transitional risks for real estate financing are measured in a manner similar to real estate funds. With respect to infrastructure, the focus is on renewable energy loans. For ships and aircraft, attention is paid to satisfying the latest technical standards. Limits based on the type of loan are also used to help with risk measurement.

Your contacts
Burkhard Dallosch Managing Director CRO Real Estate Division
Benjamin Klisa Head of Business Development Real Estate