REAL ESTATE RISK AND ITS IMPLICATION FOR PROJECT VIABILITY (A CASE STUDY OF EKEDO RESIDENTIAL ESTATE)
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, one 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 one associated with short term profit with less sort (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 one 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 selfinsurance
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 the, loss of rental income and purchasing property with an imperfect title.
