Risk assessment in commercial real estate development. An application of analytic network process

AuthorMalka Thilini, Nishani Champika Wickramaarachchi
DOIhttps://doi.org/10.1108/JPIF-01-2019-0002
Pages427-444
Publication Date05 Aug 2019
Risk assessment in commercial
real estate development
An application of analytic network process
Malka Thilini and Nishani Champika Wickramaarachchi
Department of Estate Management and Valuation,
University of Sri Jayewardenepura, Colombo, Sri Lanka
Abstract
Purpose The purpose of this paper is to analyze the commercial property development risk factors from
the entrepreneurs point of view against social, economic, environmental, technological and political risk
assessment criteria. After that, this study aims to assess the risk factors based on the analytical network
process (ANP) model and to prioritize the key risk factors to identify which risk factor is highly affected to the
commercial development process.
Design/methodology/approach Thedata were collected throughface-to-face interviewsusing a structured
questionnaire. The analysis of therisk factors involved the ANP model using super decision software.
Findings The results revealed that there are five major risk factors such as environmental, social,
economic, technological and political risk, and 32 sub-risk factors. According to the super matrix calculation,
the synthesized values for three projects were 0.0704, 0.0532 and 0.0431, respectively. It was identified that
Ward City was 0.0704, indicating that it is comparatively less risky and, hence, can be categorized as the best
development and considering the sub-risk factors; the results show that the highly affected risk factors for the
development are: the council approval process, climate changes and natural disaster, and the least affected
risk factors are confidence to the market, lifecycle value, investment return and currency conversion factor.
Practical implications The paper includes implications for the development of commercial properties,
risk and risk assessment criteria to make risk management strategies and policy implementation.
Originality/value The research findings are helpful in improving risk management strategies in the
country, and policy formulation should focus on the above identified three risk factors in order to mitigate the
risk in every stage and to achieve sustainable project development while increasing the satisfaction of
long-term investment goals.
Keywords Entrepreneur, Risk, Risk assessment, Commercial real estate, Analytic network process,
Real estate development
Paper type Research paper
Introduction
Real Estate, compared to other industries, has been making a significant contribution to the
economy of the country during the last three decades. As a result, Real Estate has been a
field of interest of many entrepreneurs. Investors who are keen on real estate development
tend to invest on various types of developments irrespective of the risk. Property
development is inherently a riskier business, due to the difficulty of predicting the stage at
which a developer must face with risk and uncertainty. In the development process, from the
conceptual design to construction, stage, letting on rent occupying the building or the
handover stage, risk is a common encounter.
In Sri Lankan setting, investors find the knowledge gap created by inadequate research
and analyses on the risk factors in commercial development, a shackle in making business
decisions. As a result, bridging this gap on risk factors, particularly in terms of urban areas
of Sri Lanka, is of utmost importance. Since the majority of such development has taken
place in western province especially in and around the capital of Colombo the research
mainly focuses on analyzing the risks in commercial real estate development in Gampaha
Jaela Ekala area from the entrepreneurs point of view, and identifying the best development
Journal of Property Investment &
Finance
Vol. 37 No. 5, 2019
pp. 427-444
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-01-2019-0002
Received 7 January 2019
Revised 7 April 2019
Accepted 7 April 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
This research was supported by a grant from the RPDC, DEMV, University of Sri Jayewardenepura.
427
Commercial
real estate
development
in this area, and the highly affected risk factors and the least affected risk factors in the
commercial real estate development process.
Risk and uncertainty arecommon to all real estate development and, therefore, the actual
return of the investments will differ from what is expected. In certain cases, it includes the
prospect of losing the original investment. However, Pidgeon as cited in Khumpaisal et al.
(2010) classifies risk into objectiveor statistical risk and subjectiveor perceived risk. In
this classication, Pidgeon et al. pointout that the objective risk, which is unique, substantive
and physically measurable, can be determined by quantitative risk assessment methods.
Furthermore, Hargitay and Yu have classied risk into systematic risk s and
unsystematic risks, which is a different reading compared to the previous one. Moreover
Hargitay, Yu, Brown, Matysiak, Baum and Crosby as cited in Khumpaisal et al. (2010) had
observed systematic risk (uncontrollable risk) caused by external factors that affect all
investments; examples include market risk, ination or purchasing power risk, and interest
rate risk. Unsystematic or specic risk refers to risk over which the investor has limited
control and is specic to a particular company or investment decision-making process.
In those circumstances, where risk and uncertainty are reported according to the RICS
Appraisal and Valuation Manual RICS (1996) as cited in Adair and Hutchison (2005)
prescribed standards the profession has been condemned for irregularities and letdowns. To
reect risk and uncertainty in certain valuation assignments such as the pricing of urban
regeneration land (Syms, 1996). However, Hutchison and Nanthakumaran as cited in Adair
and Hutchison (2005) examine issues relating to market efciency, individual and market
worth, and risk analysis. Indeed, the Investment Property Forum and Investment Property
Databank (IPD) 2000 as cited in Razali and Adnan (2015) highlighted the need for more
rigorous risk assessment measures within the broad property investment industry,
comprising asset and fund managers and advisors.
Furthermore, Huffman (2002) put major risks associated with commercial real estate
development intothree categories such as nancial risks, physical risksand regulatory risks.
But Booth as cited in Khumpaisal and Chen (2009) shows that the STEEP factors, namely
Social, Technological, Economic, Environmental and Political factors, have been widelyused
in the business context, but with different names, such as PEST, TESP and STEP. In this
regard, PEST is an abbreviation of political, economic, social and technological factors; these
factors shall be concerned while the decisionmaking. The real estate developers haveto take
into account the assessment method; the current practice established is the risk matrix
ioMosaic; Kindinger and Rafele as cited in Adairand Hutchison (2005) describe the likelihood
and consequencesof each risk in a tabular format.It states that the risk can stronglyinfluence
each project stage: the project conceptual, project feasibility analysis, design and planning,
bidding and tendering construction and execution and handover stage.
Risks are associated with every investment; real estate development, as an investment, is
not an exception. Real estate development has its own risks, particularly in relation to the
decision-making process of a new development project. Hence, risks affect the entire project
management process in terms of schedule delay, cost overrun and quality of products,
according to Khallafalah, Flyvbjerg and Gehner as cited in Adair and Hutchison (2005).
According to Khumpaisal and Chen (2009), risks in each commercial real estate development
can be identied at the project management level, using brainstorming techniques. Risks are
generally dened as events that could arise and affect the critical factors of one project
(Khumpaisal and Chen, 2009). Khumpaisal and Chen (2009) had identified many direct or
indirect reasons why risks may occur in commercial real estate development, and several
normal reasons relevant to the fragment existed throughout a project lifecycle covered by
design, construction and facilities management, which are consequences of lack of integration
of building elements, communication among project partners, and even misapplication of the
building structure and its services systems. With regard to competitive enterprise growth and
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