Risk in commercial property

Posted On Monday, 09 February 2004 02:00 Published by eProp Commercial Property News
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Considering risk

Jonathan SmithRisk is the potential variation between a potential future benefit and the actual future benefit that will be derived from an investment.

A key factor influencing investment in fixed property (or immovable property or real estate) is this consideration of risk.

The degree of uncertainty facing a property investor can vary, depending on the number of variables and the degree of knowledge which is available to assess such variables.

The financial returns of an investment in property development depend on two income sources: the cash generated by the net tenant income and the cash generated during the sale of the property.

Various factors - as we will discuss in this series - can influence the cash flows derived from a property development on a regular basis or upon disposition (sale) and it is the risk that a projected cash flow or sale value will not be achieved which requires understanding to be successful property practitioners.

The primary tasks of a property investor or practitioner vis-a-vis risk is, therefore, to:

  • Identify the risks that may affect a projected (total) return.
  • Measure the identified risks that may affect a (total) projected return.
  • Decide - in the light of the identified and measured risks that may affect a projected (total) return - whether the particular property investment should be proceeded with.
  • Manage the risks associated with a development.
  • In some instances, an investor may elect to vary the price he or she is willing to pay for an investment opportunity in order to compensate for a perceived risk. Over the next few weeks we shall look at the risks that are common to property developments and portfolios as well as methods of quantifying and compensating for such risks.

    In conclusion, a few pertinent definitions:
  • RISK is the potential variation between a potential future benefit and the actual future benefit that will be derived from an investment.
  • RISK ANALYSIS is the structured process of identifying and measuring a set of risks associated with an investment.
  • RISK ADJUSTMENT is the process of adjusting values and / or expectations so as to compensate for identified and measured risk associated with an investment.

 

Last modified on Monday, 26 May 2014 11:08

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