Control Risks has been publishing RiskMap, our annual forecast of political and security risk, for more than 25 years. In the past few years, we began publishing a list of our Top Five global risks, to help our clients focus their time and energy on the most important topics and trends for the coming year.
This year we have taken our Top Five risks one step further, to include the most important risks for the real estate and property sector. Our predictions, released at MIPIM 2019, are:
1. Fraud and corruption risks in investment portfolios
Fraud and corruption revolve primarily around issues of valuation of properties. Where data is unavailable, insufficient or imprecise, valuation becomes subject to judgment. Undervaluing – or overvaluing – an asset is at the core of most corruption and fraud. Data analytics solutions can help identify incidents of portfolio fraud.
2. Extreme weather disruption
This is one of our global Top Five risks – one which will without exception impact the real estate industry in 2019 and beyond. 2018 was a record year for weather-related insurance claims; these are likely to be exceeded in 2019. As the industry continues to develop real estate sites in high risk areas, where population density is low but growing, for example, we will see increasing exposure to extreme weather disruption driven by climate change.
3. A spike in insurance costs
The insurance industry needs to better understand risks to infrastructure and real estate projects. Projections of reinstatement costs can often be based on profit and loss statements; the real risk exposure can be much lower. Without precise risk information, the costs of insurance premiums can be prohibitively large for some developers. Businesses should look at the valuation of risk and how it is presented to underwriters. This is the best way to manage risks to corporate assets and, ultimately, manage the associated premiums.
4. Worker welfare
Reputation is a critical asset for most industries, and it’s no different in the real estate sector: it doesn’t take much to destroy a reputation painstakingly built over decades. Mismanaging worker welfare on major development projects is an enormous source of reputational risk for the property sector. The issue stretches far beyond property developments and extends (amongst others) new energy extraction, refining and shipment points. These projects can employ tens of thousands of construction workers, including significant numbers of third-country workers. Compensation, feeding, housing, human rights, health and safety – a complex duty of care – are all paramount. Now, companies must now be able to demonstrate their policies and practices aimed at ensuring worker welfare.
5. US-China trade conflict
Another of our global Top Five risks is the growing rivalry between the US and China in trade and technology. We fully anticipate that this rivalry will spill into global infrastructure development. Among other things, we feel strongly that the US will resist, or at least seek to counteract, China’s Belt-and-Road initiative in Africa. Major infrastructure development with Chinese participation will become highly politicised; companies – and investors – may be forced to choose sides in the growing political and economic conflict between the US and China.