PRISMS®

Superior Risk Management drives EG’s success

PRISMS® is a proprietary risk management software developed by EG to measure, price and manage the various risks attached 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 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 market 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 market risk increases to 50 per cent.

PRISMS® Market Risk is cycle-adjusted

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

The effect of this is to entrench conservatism in the risk assessment process – such that, if market risk is high, the overall risk of the investment will be adversely impacted by a high market 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 market 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® Market Risk

Market risk is another term for “systematic risk” or “cycle risk”. In market 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 premium relative to historic averages; (iii) market sentiment; and (iv) international risks.