From today, we will run a column that covers the measurement and management of risk in property investment. Let's start by identifying the various economic risks:

-> Market (business) risks: This risk concerns the change in demand and overall economic challenges which a region or a country faces.

- Project risk: This risk is related to the micro-economic factors specific to the subject property.

- Financial risk: This risk is associated directly with the cost of capital through debt financing.

- Liquidity risk: Cash shortfalls can result in insolvency, although the medium prospects remain good.

- Management risk: Any poorly managed project will encounter trading difficulties in the medium term.

- Legislative risk: Changes in legislation can present operational problems which cause financial loss.

- Environmental risk: relates to both location and atmospheric changes.

Before considering the ways to mitigate these risks, it is necessary to measure the risk of a property investment by a calculation known as standard deviation.

The standard deviation is a measurement of the projected difference between the most probable return of an investment and the worst-case and best-case levels of return that the investment can expect to achieve.

A standard deviation is calculated by performing a sensitivity analysis first: this step takes cognisance of all the variables that will affect the investment's projected return by etermining what the changes to the return will be as the variables change.

Consider, for example, how a reduction in income as a result of tenant delinquencies will affect a return. The premature termination of a tenancy as a result of the tenant's non-payment will cause the property's return to reduce. Depending on the size of the tenant's rental contribution, the return could vary marginally or significantly.

This sensitivity analysis is the first step in determining a project's standard deviation.

The performance of some properties will be more sensitive to unexpected changes in market conditions than that of other properties.  - The Star

- Information from Courtwell Consulting director Jonathan Smith. He can be contacted on 011-888-5978 or

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