REAL ESTATE RISK AND ITS IMPLICATION FOR PROJECT VIABILITY
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REAL ESTATE RISK AND ITS IMPLICATION FOR PROJECT VIABILITY
CHAPITRE ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Real estate investing entails the profitable purchase, ownership, management, rental, and/or sale of real estate. Real estate development is a sub-specialty of real estate investing that involves improving real estate property as part of a real estate investment plan.
Real estate is a capital-intensive asset with limited liquidity in comparison to other investments (although money can be gained through mortgage leverage) and is highly cash flow dependant (Syz, 2008). Real estate becomes a risky investment if these aspects are not effectively understood and controlled by the investor.
The fundamental cause of real estate investment failure is that the investor experiences negative cash flow for an extended period of time that is not sustainable, leading them to resell the property at a loss or declare bankruptcy.
Another reason for failure is a related practise known as flipping, where the nature of the investment is generally connected with short-term profit with minimal work (Clayton, 2007).
Risk management and evaluation are critical components of every successful real estate investing strategy. Risks manifest themselves in a variety of ways at each stage of the investment process. For example, one fraudulent sale mitigation approach is to verify ownership and acquire title insurance.
In reaction to the lack of coverage, real estate owners frequently assume risk on their property exposure. While risk retention by financially strong organisations may aid in lowering risk costs,
the absence of insurance is not always desirable. In many circumstances, property owners are compelled by loan covenants to retain full insurance to value, with limits on the amount of deductibles they may carry (Fisher, 2005).
Furthermore, running enterprises no longer have a projected premium under high-deductible or self-insurance programmes, and payment of unanticipated retained losses poses possible cash flow concerns. Finally, property owners or corporate management are unable to charge their clients the entire cost of keeping property risk.
Although real estate markets account for a significant amount of total wealth in both emerging and developed countries, real-estate derivatives markets continue to lag in terms of volume of trading and liquidity,
which has a significant impact on project feasibility (Black, 1986). In recent years, there has been a surge in the development of derivative products that asset managers can use to mitigate real estate risk.
This study will concentrate on the likelihood of financial loss as a result of owing a real estate investment and its implications for project feasibility. Liability, legal troubles, partner conflicts that force a sale, fire or theft, loss of rental revenue, and purchasing property with an imperfect title are all examples of real estate risks.
1.2 STATEMENT OF THE PROBLEM
Real estate management is a particularly difficult task due to its proclivity for liquidity. Even published real estate indices are typically based on annual evaluations of large properties rather than actual transactions. The recent exceptional recession has caused significant long-term pain in the real estate market,
with serious consequences for owners, developers, managers, and investors alike. Some of the risks confronting the real estate business include environmental and construction hazards, catastrophic modelling,
tougher lender regulations, and complex rules concerning distressed banks. The researcher, on the other hand, will investigate real estate issues and their implications for project viability.
1.3 OBJECTIVES OF THE STUDY
The following are the study’s objectives:
1. Recognise the dangers associated with real estate investments.
2. To investigate the impact of real estate risk on project viability.
3. To identify methods to reduce risk in real estate investment.
1.4 RESEARCH QUESTIONS
1. What are the hazards of investing in real estate?
2. How does real estate risk affect project viability?
3. What are some strategies for reducing risk in real estate investment?
1.5 HYPOTHESIS
HO: Real estate risk has no bearing on project profitability.
HA: real estate risk has an impact on project viability.
1.6 SIGNIFICANCE OF THE STUDY
The following are the study’s implications:
1. The findings of this study will educate the general public, investors, and estate managers about real estate hazards, how to mitigate them, and the implications for project profitability.
2. This research will also serve as a resource base for other academics and researchers interested in conducting additional research in this sector in the future, and if implemented, will go so far as to provide new explanations for the topic.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
This study on real estate risk and its implications for project viability will address all of the hazards that an investor faces in real estate with the goal of understanding how they affect project viability.
STUDY LIMITATIONS
Financial constraint- A lack of funds tends to restrict the researcher’s efficiency in locating relevant materials, literature, or information, as well as in the data collection procedure (internet, questionnaire, and interview).
Time constraint- The researcher will conduct this investigation alongside other academic activities. As a result, the amount of time spent on research will be reduced.
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