A lot of focus is put on the heterogeneous nature of real estate with a recognition that every building is unique with different build quality, location and tenants. However, less effort is put into understanding the underlying risks and impact on valuation associated with the tenants that drive the cashflow.
Analysis by Income Analytics of the top 200 UK companies in each of 83 standard industrial classifications (SICs) shows a significant range of credit risk. The ranges in the chart represent the top 200 potential occupiers of prime UK assets, yet in some cases there is a 15% chance these companies will not be around to pay their rent within 5 years.
Investors need to focus on the specifics of their tenants and be aware of their income-at-risk and not rely on averages.
Income Analytics Expected Loss Adjustment Model (ELAM) provides a guide to the risk premia adjustments needed to reflect specific tenant risk. More on ELAM can be found in the technical paper
