1 Market risk
This is the risk that the value of the real estate in the Fund fluctuates due to supply and demand mechanisms in the markets in which the Fund operates. Some of the underlying risk factors may influence the Fund's income return and cash flows, while others primarily affect capital growth. A decline in the value of direct real estate in the Fund has a direct effect on the Fund’s capital growth.
The following risk factors may also influence specific assets in the Fund:
Occupancy depends on market demand, availability of competitive propositions and fund portfolio positioning in the market. Occupancy is an important driver for the Fund’s expected direct return. In the event of an oversupply of properties in (parts of) the Fund’s operating market, financial occupancy rates (rental cash flows as percentage of cash flows at market rates when fully let) may be lower than anticipated and affect the Fund’s cash flows and returns.
To rent out properties and to keep the Fund’s assets in good condition, the Fund has to incur operational expenses. If these expenses are higher than anticipated, this may reduce the Fund's returns.
Inflation risk is the risk that future inflation is lower than expected or rental markets deviate from these future inflation trends. Rental contracts usually contain inflation indexation clauses, which influences the Fund's (future) cash flows. In addition, real estate prices in general are influenced by general price rise assumptions.
This is the risk that the value of the property changes and does not reflect fair value. This risk is mitigated by having all properties owned by the Fund revalued by external appraisers on a quarterly basis. This revaluation is the most important driver for the Fund’s indirect return.
Market concentration risk
Part of the Fund's strategy is to select geographies where rental markets and rental properties are growing faster than the market as a whole. This strategy results in concentrations in geographical areas or property categories. This makes the Fund vulnerable when unexpected trends have a negative impact on these concentrations.
2 Credit risk & Counterparty risk
This is the risk that a counterparty cannot fulfil its contractual financial obligations (mostly rental payments). Defaults or payment problems may result in clients not paying their contractual rents and service costs and may affect cash flows and the value of the property. This risk is mitigated by (bank) guarantees and (where heightened risks are signalled) monitoring of credit quality.
The Fund may have to incur unexpected losses due to the default of one or more counterparties, such as banks and developers. The Fund’s liquidity is deposited with reliable, highly rated banks in the Netherlands.
Since the Funds strategy is to acquire properties that are sometimes under construction or even at the start of the building process, the Fund relies on these counterparties to complete these properties and has often already paid instalments to the developer in line with the progress of the construction. Should the developer run into financial difficulties, the Fund may incur additional costs to complete the property.
3 Liquidity & Funding Risk
This is the risk that the Fund has insufficient means to pay current or future commitments. This risk has two angles:
Liquidity: the liquidity required to pay the Fund's current expenses and dividends to its shareholders.
Funding risk: the risk that insufficient (investor) funding is available for the unfunded future commitments at the time of actual investment. This may then interact with market liquidity risk, which is the risk that the liquidity required in the market to dispose of assets (as part of its hold-sell analysis or to finance redemptions by investors) at prices in line with valuations is lacking (i.e. not distressed prices).
4 Non-financial risks
The Fund is also subject to the following non-financial risks:
Fiscal risk: the risk that changes in tax laws unexpectedly influence the value of the underlying properties or the value of the Fund's certificates.
Legal risk: the risk that interpretations of contracts and legal clauses unexpectedly influence the value of these contracts.
Outsourcing risk: risk that outsourced activities are not executed with the expected quality or integrity.
IT risk: Risk related to IT systems, cybercrime, data security or IT strategies that are adequate enough to support key processes.
Model risk: the additional risk that expected (modelled) returns have not materialised at the time of sale or valuation and the risk that the Fund may not meet its plan IRR.
Other non-financial risks are mainly related to the management organisation and are managed at that level.