While private equity real estate is a known diversifier, the true extent to which it increases a portfolio’s risk adjusted return cannot be derived from traditional return indices because of the absence of observable prices.  Relying on appraisals, real estate returns are biased and suffer from return persistence.  As a result, returns are smoothed; thereby misstating the asset class’ volatility.  Moreover, real estate is clearly a local asset, and published index returns provide little insight into the impact of ownership of specific properties on a broad investment portfolio.  Northfield has developed a model that spans the divide between real estate assessment methods and those used in securities markets to overcome these problems. The model incorporates financial market data that is external to real estate to forecast the possible range of inputs to the valuation process across time, and thereby derives a direct assessment of risk. The methodology also disaggregates a portfolio into buildings, and buildings into their constituent sources of risk including the cash flow from tenants, tenant credit risk, lease rollover and renewal rates, rent volatility, and the property’s financing structure.

The approach uses a factor model to produce sources and estimates of future risk at both the property and portfolio levels.  Users can assess risk by factor, geography, and/or property type as well as ascertain the effects of leverage on expected risk.  In addition, the model also generates a bond-equivalent duration estimate; a critical piece of information for those investors interested in asset/liability matching.

Richard Gold is Northfield Information Services’ Senior Real Estate Risk Analyst where his primary duties focus on the company’s risk modeling for private and public real estate as well as infrastructure. Northfield is a global leader in providing investors with models and analytical tools to identify, measure, and control risk for both absolute and relative return strategies.

Prior to joining Northfield, Richard Gold was Senior Director-Real Estate Research and Investment Strategy for Grosvenor Americas and Grosvenor Investment Management USA. In addition he was responsible for promoting the company’s research perspective both internally and to the company’s clients as well as managing new product development.

Prior to joining Grosvenor Richard Gold was founder and principal of Appleton Associates. From 1994 to 2001 he led the Real Estate Equity and Business Applications Modelling Team at Lend Lease Real Estate Investments. At Lend Lease he led a team that developed both economic and spatially-based (GIS) real estate market and portfolio forecasting models for commercial real estate investment funds.

Richard Gold has held senior real estate research positions at Aetna Life & Casualty Co. and Unum Life Insurance. Early in his career, he developed the one of the first commercial real estate econometric forecasting models for F.W. Dodge and was a senior regional economist at DRI, one of the nation’s foremost economic forecasting companies.

Richard Gold has numerous academic, magazine, and newsletter publications and was an editor of the Journal of Real Estate Research. Richard Gold has a BA in Political Science from the University of Redlands and Masters Degrees from Ohio University in International Studies and Economics.