PRISMS®

A large part of EG's success can be attributed to superior Risk Management

PRISMS® is a proprietary risk management software developed by EG to measure, price and manage the various risks that attach to leveraged commercial property investments. EG requires that all assets be assessed by PRISMS® to ensure that relevant risks are identified and priced on acquisition and appropriately managed or mitigated post-acquisition.

How Spreadsheets Lie and What You Can Do About It

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by Adam Geha

Proverbs are tweets from our ancestral past – messages that have so persistently proven their utility as to float above the implacable undertow of time.

Most messages are lucky to survive 10 years – so when a message has endured for over 500 years, it’s generally worth listening to. And here’s one of my all-time favourites:

For want of a nail, the shoe was lost,
for want of a shoe, the horse was lost,
for want of a horse, the knight was lost,
for want of a knight, the battle was lost,
for want of a battle, the kingdom was lost.
So a kingdom was lost—all for want of a nail.

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PRISMS® WEIGHTING

If PRISMS® assesses the property market is under-valued (scores of 0-30) then the default weighting to systematic risk reduces to 10 per cent.

Accordingly, if PRISMS® assesses that the property market is highly over-heated (scores of 70-100) then the default weighting to systematic risk increases to 50 per cent.

PRISMS® Systematic Risk is cycle-adjusted

To ensure appropriate conservatism in the assessment process, the weighting assigned by PRISMS® to the Final Systematic Risk score is cycle-adjusted.  

The effect of this is to entrench conservatism in the risk assessment process – such that, if systematic risk is high, the overall risk of the investment will be adversely impacted by a high systematic risk score.

PRISMS® Asset Risk

Asset risk refers to the risk inherent to an individual asset based on its particular physical and financial characteristics. It is also known as asset-specific risk, and unlike systematic risk, it can be eliminated through diversification. PRISMS® calculates Asset Risk by deconstructing base case returns (IRR) into the four underlying components of return: yield, passive capital growth, active capital growth and funding.

PRISMS® then assigns a risk score to each component of return based on a list of approximately 40 criteria specific to its market sector (e.g. office, retail or industrial).

PRISMS iQ

PRISMS® Systematic Risk

Systematic risk is another term for “market risk” or “cycle risk”. In Systematic Risk, PRISMS® aims to measure the market risk inherent in the Australian commercial real estate market as it varies from time to time. PRISMS® requires the entire EG management team to meet on a quarterly basis to consider sixteen criteria relating to four key risk segments: (i) ease of access to capital; (ii) risk premia relative to historic averages; (iii) market sentiment; and (iv) international risks.