Classification of risks in the real estate market

Crucial to the analysis of the effectiveness of investment and construction and real estate companies in the real estate market is the problem of risk.
It should be borne in mind that any operation with real estate - an operation that carries elements of risk. This real estate operations are among the most risky sectors of business. The reasons for this are many, but are essential features of such real estate market, locally, the high dependence on the state of regional economy, long-term investment, low liquidity of the goods on the market. Superimposed on the high capital intensity of real estate and a significant level of costs of real estate transactions, these circumstances raise the issue of risk management at one of the first places in the business in the real estate market. One might say that risk management - the quintessence of all governance issues for business in real estate. In order to manage risk, above all, you need to know the content (nature) risk.

Risk - is the possible deviation of actual results of an operation or project in a negative direction compared with the planned initially.
In real estate transactions risk can manifest itself in lower than projected earlier, the price when selling real estate, in a higher than anticipated level of operating expenses for property management and in reducing the actual cost of the investment project to its original design and even the loss of property - in connection with the destruction of the "body" of real estate, and because of the loss of rights to property.
The magnitude of such risks may be very different: the loss of income or part thereof up to the total loss of the invested funds or property.

What is the cause of the risk? The idea that this can give a general classification of risks, according to which we can highlight:
market risks (business risks, business risks) associated with the specific business areas and the influence of macro-economic and regional factors;
production (economic) risks related to the level of the firm and determined by the quality of CE activity;
financial risks, as caused by the general condition of the financial system in the country, and arising in connection with the adoption of the company (the company) of any decisions regarding the financing of its activities.

It is advisable to consider the general classification of risk in relation to real estate, starting with market risks.
It is known that any property has legal, physical and economic certainty. In this case, any real estate transaction takes place within a certain territorial entities with inherent administrative rules and procedures.
We can distinguish the following sources of market risk:
legal (possible loss of property rights, education, losses due to errors in the conclusion of agreements and contracts, the emergence of third-party claims, the existence of unidentified object encumbrances, etc.);
economic (macroeconomic developments and changes in the regional economy, changes in the status and trends of supply and demand in the market, the emergence of competitors or new products, etc.).

The specific economic and legal real estate turnover, multi-real estate transactions require special attention to the legal side of transactions. This is particularly important in the Ukrainian context, as not yet completed development of legislative base of real estate transactions, a number of normative documents contradict each other, in transactions not always accurately determine the composition of the transferred rights to the property, not a developed system of property registration and transfer of these rights. As the experience of becoming the real estate market in Ukraine, cause subsequent claims of the deals, litigation is often a low level of legal analysis in transactions, inability to obtain complete information about the legal status of real property and the rights of third parties.
The thoroughness of legal research, cooperation with the insurance companies will reduce the likelihood of these risks, to prevent a large part of them;
architectural and construction (wrong choice of the project, its compatibility with surrounding buildings, errors in design decisions, wrong choice of materials, imprecise definition of layout of apartments or other object), usually associated with insufficient detailed study of project construction and real estate development, the weakness of their technical expertise. This category includes the risks and technological risks, which are largely due to specific project sites. Thus, when a number of development projects of real estate in Kiev, their organizers are faced with the need to strengthen the soil and foundations, the production of additional work for the conservation of neighboring buildings. There have been occasions when the realization of fantasy owners of individual apartments in remodeling space, creating additional amenities (bathrooms, swimming pools, etc.) resulted in an excess of allowable loads on the supporting structure of buildings, which created an emergency situation. When making decisions about the development of the property is particularly important consideration technological risks, but often with their face and in the transactions on the secondary market;
administrative risks in the Ukrainian context are of particular importance. It is not uncommon, when progress of the projects has substantially changed the conditions that require local governments (tax regime, the requirement to implement the commitments on development of urban infrastructure, the conditions of connection to utility services, etc.). It is important therefore to the stage of obtaining permits for construction, reconstruction, alterations, etc. make precise commitments to be met the organizer of the investment project, and documenting;
The economic risks arising from transactions with real estate, related primarily to changes in market conditions. This change may find expression in a number of factors - a change in demand under the influence of reduction of business activity or income, price increases for materials and equipment, the emergence of alternative proposals on the market (for example, an increased supply rental as an alternative to purchasing the property) to increase the supply of competing firms, etc. Ability to prevent or reduce the likelihood of losses of the company (companies) in connection with the existence of economic risk is largely dependent on the depth elaboration of making economic decisions, constant study of the market, the availability of alternative supplies, etc.

External economic risks - the constant companion of any business, including business and real estate market, but their degree of probability essentially depends on the quality of the company (firm), which itself can be a source of risk.

In particular, the risks may arise for the following reasons:
insufficiently representative analysis of the situation on the market for similar transactions and projects;
incorrect interpretation of available data;
prejudicial attitudes to data;
unwarranted transfer of past experience for future periods without changing environment, etc.

It should be noted that the neglect of economic analysis - a common enough phenomenon in the modern Ukrainian business and business real estate market. Thus, despite the existence of numerous methods and programs benefit analysis of investment projects, they are malodeystvennymi because of insufficient attention to studying the market situation. It is often limited to bias or inferior data, its own experience and immediate environment. Often the analysis is limited to market research, without research on factors affecting its change.
For example, supply and demand trends in the real estate market largely determined by demographics, population migration, the general business climate, the level of tax rates, duration of procedures, transactions, etc. The influence of these factors, not momentary, but do not take them into account is impossible. And this happens quite often.
Disadvantages of economic analysis can be reinforced by ill-considered organizational and economic decisions (eg, incorrect choice of the organizational structure of company management or the project), which increases the likelihood of losses.
Ultimately, all kinds of risks one way or another have a financial dimension, or increasing the cost of the project or transaction, or reducing the income, or causing to exceed the planned timeframe of investment, either in the extreme case - the loss of not only income but also capital.
The analysis shows that financial risks can be divided into several groups.
1. Risks arising from the general condition and changes in the financial system (changes in interest rates, restrictions on currency fluctuations, changes in the rate of inflation compared with the predicted, changes in profitability of alternative invest-tion, for example, yields on government securities to corporate ).
2. Risks arising from one or another option, chosen by (company) to finance its activities, the degree of elaboration of its financial decisions. For example, the choice of financing as the project is more risky option compared with the issuance of common stock, as it implies the payment of principal and interest on a fixed schedule that does not exist in the issuance of shares. At the same time, the issue of shares without confidence in the possibility of their placement may be more expensive vehicle for funding, rather than credit resources.
3. Risks arising from errors in financial calculations. For example, errors in drawing up the plan of income and expenditure of financial resources may lead to the insolvency of the company (firm) at any stage of the project or transaction, thus requiring more expensive resources, if at all possible.

Present in virtually all real estate transactions, these risks at the same time play a different role, depending on market segment or activity.
For example, the primary market are important economic, industrial and technological risks; for secondary market significantly important and distinctive legal risks. This is partly due to the level of elaboration of the legal problems of the subjects of transactions. At the primary and secondary markets largely operate entities that have to be necessary qualified personnel. In the secondary market, the main actors - individuals and legal failures are possible to a greater extent that it is mainly due to the fact that the primary market only creates an object, and with him there could be no past transactions, while the number of deals with the subject in the secondary market can be very significant. In the current Ukrainian context, the current practice of attracting co-investors, the risks associated with the quality of the rights to "share" in the object, too, are significant.
You can also talk about the differences in the risks in relation to different spheres of activity in the market.
In the actual economic practice, all groups of risks are interrelated and often intertwined with each other. Thus, while substantially limiting the effective demand of the lack of studies of the status and trends of supply and demand in the market, dismissive attitude to financial planning can lead to much more serious consequences than in the situation of its stability, or even more growth.
How to overcome the risks? Delete them all, obviously, is impossible, some of them just need to take.

But it is possible to significantly reduce the risk, and there might help the next general scheme of risk management:
identify possible risk factors during a transaction or transactions with real estate;
qualitative and quantitative risk analysis (identification of the causes and risk factors increase the likelihood of their occurrence, risk zones, ie the stages of the transaction, in which the risk occurs;
Identification of possible size of losses caused by any risk);
identify opportunities to reduce risk and cost required to prevent it;
Develop and implement activities that prevent risks, to reduce the likelihood of their occurrence or possible amount of loss;
control over the conduct of required activities, making meaningful changes in the mechanism of their implementation.
Eugene Jura


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