Real Estate Risk And It’s Implication For Project Viability (A Case Study Of Ekedo Residential Estate, Uyo)

Project and Seminar Material for Estate Management

Real Estate Risk And It’s Implication For Project Viability (A Case Study Of Ekedo Residential Estate, Uyo)


Abstract


This study was carried out to examine real estate risk and its implication for project viability (a case study of Ekedo Residential Estate, Uyo). The study was carried out to identify the risks involved in real estate investments, examine the effect of real estate risk on project viability, and identify ways to minimize risk in real estate investment. The survey design was adopted and the Taro Yammane’s formula were employed in this study. In determining the sample size, the researcher employed Taro Yammane’s formula and selected 800 respondents and 200 were validated. Constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using five liket scale tables. While the hypotheses were tested using Chi-square statistical tool.The result of the findings reveals that real estate risk does affect project viability, among other factors affecting real estate, the federal government and the government agencies are the major factors affecting the real estate. Therefore, it is recommended that the the location of the site should be considered before carrying out the project as it has significant effect on the structural possibilities and value of the real estate. To mention but a few.


Chapter One


Introduction

1.1 Background to the Study

Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent (Syz, 2008). If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. A similar practice known as flipping is another reason for failure as the nature of the investment is often associated with short term profit with less effort (Clayton, 2007).

Management and evaluation of risk is a major part of any successful real estate investment strategy. Risks occur in many different ways at every stage of the investment process. For instance mitigation strategy for fraudulent sale is to verify ownership and purchase title insurance. Real estate owners often assume risk on their property exposure in response to unavailability of coverage. While risk retention by ‑ financially sound companies may help to reduce their cost of risk, absence of insurance is not always desirable. In many cases, property owners are required under the terms of their loan covenants to maintain full insurance to value, with restrictions placed upon the amount of deductibles they may carry (Fisher, 2005).

Additionally, under high-deductible or self-insurance programs, operating companies no longer have a budgeted premium, and payment of unexpected retained losses creates potential cash flow problems. Finally, property owners or management of companies have no ability to charge the full cost of retaining property risk to their clients. Although real estate markets represent a large proportion of total wealth in both developing and developed countries, the real-estate derivatives markets are still lagging behind in volume of trading and liquidity with has greatly influenced project viability (Black, 1986).

Over the last few years there has been increased activity in developing derivative instruments that can be utilized by asset managers to reduce real estate risk. The possibility of financial loss occurring as the result of owing a real estate investment and its implication on project viability will be focused on in this study. Real estate risk might arise from such things as liability, legal issues, partner problems that can force a sale, fire or theft, loss of rental income and purchasing property with an imperfect title.


1.2 Statement of the Problem

Real estate management is a particularly difficult challenge because of its tendency towards liquidity. Typically, even published indices in real estate are based on annual appraisals of large properties, not actual transactions. The recent unprecedented recession has resulted in major long term distress across the real estate industry, and has had severe implications for owners, developers, managers and investors alike. Environmental and construction exposures, catastrophic modeling, stricter lender requirements, and complex requirements involving distressed banks are just some of the risks facing the real estate industry. The researcher however will examine the real estate risks and its implication of project viability.


1.3 Objectives of the Study

The following are the objectives of this study:

  1. To identify the risks involved in real estate investments.
  2. To examine the effect of real estate risk on project viability
  3. To identify ways to minimize risk in real estate investment.

1.4 Research Questions

  1. What are the risks involved in real estate investments?
  2. What is the effect of real estate risk on project viability?
  3. What are ways to minimize risk in real estate investment?

1.5 Hypothesis

  • HO: real estate risk does not affect project viability
  • HA: real estate risk does affect project viability

1.6 Significance of the Study

The following are the significance of this study:

  1. Result of this study will educate the general public, investors and estate managers on the real estate risks, how it can be minimized and its implication on project viability.
  2. This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.

1.7 Scope / Limitations of the Study

This study on real estate risk and its implication on project viability will cover all the risks an investor is exposed to in real estate with a view of understanding its effect on viability of project.

Limitation of Study
Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


Chapter Five


5.0 Summary, Conclusion and Recommendation

The following are the objectives of this study:

  1. To identify the risks involved in real estate investments.
  2. To examine the effect of real estate risk on project viability
  3. To identify ways to minimize risk in real estate investment.

Discussion of Findings

Everybody has a way of viewing issues concerning real estate and its implication for project validity, haven gathered the responses from 200 respondents concerning the topic we were able to find out that:

  1. Real estate risk does affect project viability
  2. Liability, legal issues has significant effect on real estate risk
  3. Geographical location has significant effect on the structural possibilities and the value of real estate
  4. The ADR techniques is more efficient in resolving disputes than litigation
  5. Government and government agencies are among the factors affecting real estate.

Conclusion

From the result of data analysis from table 12 above, we conclude that real estate risk does affect project viability, among other factors affecting real estate, the federal government and the government agencies are the major factors affecting the real estate.


Recommendation

We therefore recommend that:

  1. The federal government of Nigeria should be more considerate with their policy on real estate.
  2. The location of the site should be considered before carrying out the project as it has significant effect on the structural possibilities and value of the real estate.
  3. Investor should stop going into negative cash flow for a period of time that is not sustainable.

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