Risk reduction in property

Posted On Monday, 23 February 2004 02:00 Published by
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Reducing risk begins with the formulation of a risk-reduction strategy which can be translated into a risk analysis and an action-plan to identify, measure and reduce risk.

Jonathan SmithThe formation of a risk-reduction strategy requires the property practitioner to identify methods of quantifying and containing the risks identified last week. Examples of risk containment strategies include:

BUSINESS RISK:

Business risk - the risk associated with the tenant(s) within a property development or portfolio. More specifically, business risk may be defined as the variability of the expected net income from a property development. Prudent tenant selection and exemplary credit control are decisive methods of containing the risk associated with tenants. The following processes assist in containing business risk:

Credit profiling of tenants prior to the conclusion of lease agreements: this includes the assessment of a tenant's credit history, bank records and financial statements, capacity for security, net asset worth, management potential, business acumen, and trading history. nA detailed assessment of the economic and market environment in which the tenant operates and the identification of a tenant's potential to grow within the tenant's selected market environment.

FINANCIAL RISK:

Financial risk is the risk associated with the funding of a property development or portfolio. More specifically, this risk may be defined as the risk of the borrower defaulting on borrowed funds. Containment of financial risk requires the investor to project interest-rate volatility and to procure protection against such volatility and to manage and control collections and expenditure carefully. For example: nProcuring a fixed interest rate in a volatile market can be of extreme benefit in smoothing the actual return obtained from a property development or portfolio;

Agreeing escalation-capped increases in contractor and supplier services; Establishing and enhancing reserves to eliminate liquidity shortfalls; Obtaining appropriate insurance policies

MANAGEMENT RISK:

Management risk is the risk associated with the property management, asset management and investment management of a property or portfolio.

 

Last modified on Monday, 26 May 2014 11:03

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