Risk in commercial property

Posted On Monday, 09 February 2004 02:00 Published by eProp Commercial Property News
Rate this item
(0 votes)

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

Most Popular

Three stocks to boost your portfolio in 2020

Jan 22, 2020
Dr Adrian Saville CEO Cannon Asset Managers
After enduring a trying decade under the mismanagement and malfeasance of Jacob Zuma,…

Africrest Properties completes mixed-use development, Stanley Studios in Johannesburg

Jan 21, 2020
39 Stanley Avenue
What could be better than living in an extremely well-priced apartment or working in…

New hotspots driving cost hikes in key data centre markets - thriving market in South Africa

Jan 21, 2020
Dan Ayley Turner and Townsend
Major global data centre markets are seeing soaring construction costs as development in…

Equites Property Fund Limited to develop a R1.3 bn warehouse for Pepkor

Jan 21, 2020
Andrea Taverna Turisan  CEO Equites Property Fund
Equites Property Fund Limited (Equites) today announced an agreement with leading…

2020 Commercial Property Themes –Electricity supply and cost will be a key wildcard for the Commercial Property Sector this year

Jan 23, 2020
John LoosFNB
Will electricity supply reliability and cost increases become a key issue again in 2020?

Please publish modules in offcanvas position.