Malcolm Frodsham, Real Estate Strategies
I’m not sure if it is my advancing years or having three teenage children, but some expressions cause me late night irritation. “A month’s worth of rain has fallen in one day” we are reverently told, but what is this statistic intended to imply? Has this amount of rain ever fallen in one day before or does this happen quite often?
Expressing rainfall, as with many other measures, with reference to an average is not necessarily helpful without further clarification. How often does the average monthly rainfall total fall in one day? What impact will this amount of rain have on the transport infrastructure?
Measuring portfolio risk is similarly subject to the tyranny of averages. The average vacancy period for a particular unit might be 6 months, but what is the likelihood of a longer vacancy period?
Are such events likely to be isolated or are similar units also likely to be affected? Understanding the vulnerability of portfolio income to such events is the key to risk management and measuring the empirical history is the key to estimating the risk. If you are interested in such a study please get in touch.
As with the weather, we may not be able to predict extreme events, but we can at least understand their likelihood and make the necessary preparations and contingencies.
NB: the portfolio affect is amply demonstrated by daily rainfall totals for the South east as a whole for which no single day’s rain has exceeded the monthly average since records began in 1931.