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News & opinion

19 MAR 2018

A view from the finance and real estate worlds

Charles Ostroumoff is a Director of Arca Property Risk Management. He talks about the benefits of his RICS status and how being qualified in both finance and real estate helps him talk authoritatively in both worlds.

The experience of the early 90s, when my father’s property investment and development company took a big hit as interest rates shot up to 15%, marked me from an early age. Why would anyone want to work in such a volatile asset class? I did my best to avoid real estate and entered the financial world instead.

But ultimately property drew me back in because it’s such a great industry in terms of its people and work-life balance, which you can’t get so easily in other sectors.

When I was looking at property as an asset class and dealing with property experts, the attraction of the RICS qualification was a no-brainer. I gained my chartered status through the Property Finance and Investment pathway on the Professional Experience Route in 2013; I believe I was one of the first to qualify by this route.

Benefits of my status

One of the most valuable things about my RICS qualification is the ongoing education associated with it. RICS has many courses where I can top up my skillsets and delve into other related areas on an ad-hoc needs basis. That’s very valuable to someone like myself who wants to learn more about certain parts of the industry and help clients find solutions to their specific problems, e.g. helping fund managers to mitigate property market risk or providing Solvency II solutions for insurers holding property assets.

For me, CPD is crucial to my ongoing professional status, it’s not just a box to be ticked. Everyone needs to be constantly updating their skills and keeping abreast of industry initiatives. I think individuals are greatly influenced by the organisation in which they work, and if that organisation supports RICS’ goals of continuing education and the need to update skills, then it makes it a lot easier for that individual to progress their career.

RICS is also championing some big industry initiatives that are of interest to different organisations and user groups. I know lots of RICS professionals that participate and derive value from these in terms of their understanding of key issues, being at the forefront of the industry and, of course, winning new business. Members who just sit back and expect things to happen are missing out on the huge opportunities that RICS can offer if they are proactive.

One such initiative in which RICS is assisting is the Property Industry Alliance Debt Group, which is working to help establish where we are in the property cycle at a certain point in time using sophisticated modelling metrics. The Bank of England and the Prudential Regulatory Authority (responsible for the regulation and supervision of banks, building societies, credit unions, insurers and major investment firms) are very keen to have this type of toolset so they can manage property bubbles as and when they occur.

This early-warning system for a property downturn is important because it could be adopted by the banks so that when we start nearing the top of the property cycle, they can show restraint and reduce their exposure to the market by adjusting loan-to-value ratios, either subjectively or mandatorily through regulatory limits. This will help remove some of the systemic market risks and help to try to avoid another global financial crisis.

There’s also the RICS’ city engagement initiative. Since the global financial crisis, there has been increasing convergence between the worlds of capital markets and real estate, i.e. its people, markets, products, services and solutions. Clearly, there needs to be greater understanding between surveyors and capital markets practitioners, and RICS is helping to improve the communication between these two worlds.

It has also developed the Commercial Property Market Survey launch event into a quarterly forum where the results, as a forward-looking indicator, are discussed by RICS economists and debated by a panel of industry practitioners lending their anecdotal market evidence. This is a great example of RICS regularly engaging with the property investment community.

A global qualification

We’re looking to expand our business into the US market and RICS has grown its footprint and member base in the US over the last few years. Coming to that market with an RICS qualification has helped open doors for us because, while the US has a different appraisal system, it is increasingly looking to RICS for guidance on areas such as valuation and measurement standards.

So RICS’ focus on issues like the International Property Measurement Standards (IPMS) is great because it will help achieve some consistency across different markets, which will then foster capital market solutions. This is the big pre-requisite to increasing convergence. In the equity and bond world, everything is standardised, consistent and commoditised. However, property is a heterogeneous asset class; there are different markets in different countries, all with different standards, methodologies, ways of valuing assets, etc. RICS is doing a great job in harmonising these international variations and in making it a truly global investment marketplace.

Better communication

Having capital markets experience and RICS credentials allows me to talk authoritatively in both worlds. When looking at pricing a one-year property futures contract, it’s important to be able to quickly calculate the value of that one-year cash flow on the back of an envelope, in the same way that a property investor should be able to ascribe a rough market value to a building. In my experience, if you can’t do this, you’re never going to be in a position to trade a specific asset.

If you are trying to provide a capital markets solution to a property problem, e.g. the risk of when to bring a development to market, then being able to understand, articulate and provide an innovative solution to the developer is enormously useful and a competitive advantage. A capital markets person couldn’t do that unless they had extensive real estate knowledge.

So you need a hybrid of the two skillsets to be able to understand the real estate problem, and then to provide an appropriate capital markets solution if it exists.

Converging sectors

While there has been some progress, there is still some way to go before convergence between capital markets and real estate is sufficient for the two to work together seamlessly. Bank lending, for example, is managed in the same way as before the global financial crisis. The Property Industry Alliance initiative is looking to address the inefficiencies, but change in real estate is slow.

The real estate world is highly specialised but also highly segmented and siloed. Operating more effectively with capital markets needs change from the top down, e.g. through regulation, changing expectations and providing a better service for investors.

This will only really happen with the involvement of organisations such as RICS. For example, the Financial Conduct Authority (the regulator for financial services firms and financial markets in the UK) is mainly run by experts in the capital markets, i.e. equities and bonds participants. It has very few property experts. With its multi-faceted expertise in real estate, RICS could help plug the FCA’s knowledge gaps on a timely basis rather than rely on long, drawn-out industry consultations.

A look to the future

My relationship with RICS is two-way. As my career develops and goes in different directions, I will always lean on RICS to see how it can help me develop my skillsets. But I will also help RICS with its initiatives; for example, I sit on the RICS Commercial Property Board, where I give them the wider capital market’s point of view.

I think everyone gives a lot of respect and credibility to the MRICS qualification. It has only ever been a positive to my career and will continue to be so in the future, I am sure.