By performing strategic risk analysis studies, investors can obtain insight into the risk ñ return characteristics of the current asset portfolio and into the most important risk drivers. Furthermore, via strategic risk analyses, investors can obtain insight into the relative effectiveness and efficiency of the policy instruments available to them. Policy instruments available to real estate investors are, for instance, sector (residential, retail, office, industrial) / market segment allocation and the term for new rental contracts. The selection of individual investments is not a policy instrument at the strategic level. In the Netherlands, scenario analysis by means of Monte Carlo simulation is widely accepted by institutional investors to be the most appropriate way to perform strategic risk analyses. In this paper we describe the standard methodology used by these institutional investors. Up till now this methodology has hardly been applied to strategic risk analyses for real estate portfolios. One of the reasons for this is the lack of reliable historical data with respect to direct (rental income / market rents) and indirect (capital growth) returns on commercial real estate. In this paper we discuss some potential solutions to this problem. Finally, we show some preliminary results of a strategic risk analysis performed for a Dutch real estate investor.
