Measuring risk in real estate is as puzzling as Churchill found the behaviour of Russia.

RES are seeking to disentangle the various layers of property risk by concentrating on the source of all return and therefore all risk: income.

In investment, risk is receiving a lower return than we expect.

The income that investors can expect from real estate is the result of a sequence of distributions to rental value change, tenant retention, vacancy periods and tenant default.

We can start unwrapping the mystery of property risk by documenting these income drivers: how do they differ for different property types?  Do they differ by quality of property?

The riddle is what income investors can expect going forward (calculating all the income permutations from every combination of break, expiry, default and re-letting is a complicated riddle!). Fortunately, we can use technology to do the number crunching.  Like any good riddle though the answer is obvious once you know the answer and any investor can understand that a higher chance of tenants exercising breaks or not renewing their lease and longer letting periods will reduce their income.

Risk is the enigma: what is the risk of not getting the income, and therefore the return, that you expect? It is always possible that all your tenants go bust and you never let your property again. If you take this view then all property carries the same risk. But are there properties where vacancy periods tend to be more extreme in a downturn?  Do tenants stay put more often in some unit types than others? If investors can spot these properties then they can deliver superior risk adjusted returns to their clients.