the framework of risk management in a real estate ... · development project with a focus on...
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Akın ÖZTÜRK, Harun TANRIVERMİŞ, Yunus Emre KAPUSUZ Ankara University Faculty of Applied Sciences
Department of Real Estate Development and Management [email protected], [email protected], [email protected]
Delf Univeristy, Eres 2017
The Framework of Risk Management in A Real Estate Development Project With A Focus on Macroeconomics
Aspects: A Case of Mixed-Use Real Estate Project in Ankara Province
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What is Risk?
• “Risk, which is mathematically related to concepts of probability and impact, is a potential event or situation that has negative or positive impacts on the project targets” (PMI, 2000, Demir 2010).
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Risk Management
• RiskManagementisaprocesswhichinvolves• Planning,• Iden9fying,• Analyzing,• Responding,• Controlling
• Aimoftheriskmanagement• maximizetheresultsofposi9verisks• minimizetheconsequencesofnega9veevents
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LSU10/09/2007RiskManagement 4
Risk during the project • Riskmanagementimportantbecause
• Costofrisksvariesovertheprojectlifecycle• Projectsuccess
Figurefrom“ProjectManagement”byGrayandLarson
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Risk Types?
• Economical• Social• Poli9cal• Financial• Environmental• ProjectSpecific
• Development• Appraisal• Usage• Loca9on
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Risk Studies …. Economic Risks
Source:Khumpaisaletc.(2010)
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Literature Overview
• Lots of studies about profitability and risk analyses for real estate development in scientific literature such as: • Croen etc.-1999, De Marko - 2001, Fikirkoca -2003,
Wolski et al. – 2007, Kleczyk – 2008, Brown – 2009, Demir 2010, Hayunga et al. - 2011, Hardin et al. – 2012, Sitek - 2013
• Scenario analysis method is used by • Kucharska - 2006, Demir et al. - 2010
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The Risk Management Process
RiskMonitoring
Riskassessment
RiskResponsePlanning
Accept Avoid Mi9gate Transfer
RiskAnalysis
Priori9zedrisks
RiskIden9fica9on
Listpoten9alrisks
RiskPlanning
Whatshoulditinclude
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Identifying Risk
RiskIden.fica.on:revealswhat,where,when,why,andhowsomethingcouldhappenandpoten9aleffectsontheobjec9ves.
RiskIden.fica.onTools:• Brainstorming• Checklists• Interviewing• SWOTAnalysis(strengths,weaknessesopportuni9es,threats)• DelphiTechnique(anonymousconsensusbuilding)• DiagrammingTechniques
• Cause&effect• FlowCharts• InfluenceDiagrams
• Documenta9onReviews• Informa9onGatheringTechniques• Assump9onAnalysis• ExpertJudgment
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Risk Analysis
• RiskAnalysis:Establishprobabilityandpoten9aloutcomesofeachrisk.Whatarethepoten9alaffectgoalsandobjec9ves?
• Qualita.veRiskAnalysisTools:• Riskprobabilityandimpactstatement• Probabilityandimpactmatrix• Riskdataqualityassessment• Riskcategoriza9on• Riskurgencyassessment• ExpertJudgment
• Quan.ta.veRiskAnalysisTools• Datagatheringandrepresenta9ontechniques• Quan9ta9veriskanalysisandmodeling(Sensi9vity,Scenario,Simula9on,DecisionTree,ExpectedMonetaryValueAnalysis(EMV)etc.)
• ExpertJudgment
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Risk Response Planning
• RiskResponse:Planningwhatshoulrdoiftherisksoccurs• RiskResponseTools:• Strategiesfornega9verisksorthreats• Strategiesforposi9verisksoropportuni9es• Con9ngentresponsestrategy• ExpertJudgment
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Risk Response Planning
• Techniques/Strategies:• Nega%veRisks(orThreats)
• Avoid–Eliminate• Transfer–Share• Mi9gate–Reduceprobabilityorimpactofit• Accept–Donothing
• Posi%veRisks(orOpportuni%es)• Exploit• Share• Enhance• Acceptance
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Risk Monitoring & Control
• RiskMonitoring&Control:Assesseachiden9fiedriskregularlytodecidewhetherornotitisbecominglessormoreprobableandwhethertheeffectsoftheriskhavechanged.Mustdiscussoutcomeswithmanagementlevel.
• Tools:• Riskreassessment
• Riskaudits• Varianceandtrendanalysis• Technicalperformancemeasurement
• Reserveanalysis• Statusmee9ngs
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Case Study
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• Theprojectstarted2010,construc9onwascompleted2014inAnkaraProvince,Turkey
• Locatedovertwoplots• Selectedprojectareais232,000metersquares
• ItliesbetweentheBayındırHospitalandtheUfukUniversityHospitalintheBalgatNeighborhood,oppositetheArmadaBusinessandShoppingCenter,attheintersec9onofAnkaraEskisehirRoadandKonyaRoad.
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Risk Identification - SWOT Analysis
Opportunities Threats
Strengths Location
High demand for office
Under ground transportation opportunity
Mix project (office, residence, retail)
Being an original architectural concept
Functions that facilitate life (lounge, restaurant, sports club,
shopping center, entertainment areas, parking area etc.)
Price is going up
Economic conditions
Easy connection two main roads
Project area has not yet become a living space
Inconsistencies in the Turkish economy, possible risks in
political and economic terms (interest rates, cost,
revenue, production, etc.)
Recent opportunities in the second hand market
Being unconventional project mix
Weaknesses Investment opportunities
First residence project in Ankara province
Not stable announced price
Poor construction of existing hospital buildings in
surrounding parcels
Traffic
Housing and office block are close togetherPasifik
İnşaat’ın ilk geliştirdiği projesi olması
No brand awareness in the industry
No data for planning
Do not address family life
Expected to be high dues
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According to The Risk Perception Survey Result, Which macro economic series play role for risk management?
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10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
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According to The Risk Perception Survey Result, Risk analysis methods?
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Whataretheriskanalysismethodsusedbyyourcompany?
(Mul9pleselec9onsarepossible.)
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Risk Analysis - Scenario Analysis
Scenarioprepari9on
DefineKeyFactors
FutureProjec9on
DeterminingScenarios
ResultAnalysis
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Turkey Macro Economic Depict(s)
GDPbyIncomeApproach-CurrentPrices(TURKSTAT)(Quarterly,TRYThousand)OriginalFrequency,DISCRETE,OriginalObserva9on
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Turkey Macro Economic Depict(s)
HousePriceIndex(HPI)(2010=100)(Monthly)(CBRT)OriginalFrequency,DISCRETE,OriginalObserva9on
WeightedAverageInterestRatesForBanks'Loans(FlowData,%)(Weekly(Friday))
ConsumerPriceIndexandIndicesbyRegions(2003=100)(TURKSTAT)(Monthly)OriginalFrequency,DISCRETE,OriginalObserva9on
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Scenario Analysis – Inputs Why discount rate is different
Discount Rate for retail section of the projectRisk-free rate 10 years Turkey Treasury Eurobond simple interest rate
Industry premium Potential real estate buyer's profit forecast * Risk of low liquidity Risk of liquidation of real estateOperational risks Business and management risk
Cap Rate 8,50%
Risk-free rate 2 years Turkey Treasury Eurobond simple interest rateIndustry premium Potential real estate buyer's profit forecast * Risk of low liquidity Risk of liquidation of real estateOperational risks Business and management risk1.50%
11.50%
2.00%0.00%5.00%
6.00%0.00%3.00%2.50%
Discount Rate for office and residance of the project
8.50%
Financial Ratios
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Scenario Analysis Result – Base Case
Years 0 1 2 3 4 5 6 7 8 9 TotalRetailRent $0 $0 $13,333 $13,733 $14,145 $14,569 $15,006 $15,457 $15,920 $16,398 $118,561RetailPeriodEndValue $0 $0 $0 $0 $0 $0 $0 $0 $0 $182,656 $182,656TotalCostandExpenses $15,167 $17,615 $1,368 $350 $359 $367 $376 $385 $394 $404 $36,785RetailCashFlows -$15,167 -$17,615 $11,965 $13,383 $13,786 $14,202 $14,630 $15,071 $15,526 $198,650 $264,431Net -$15,167 -$15,798 $9,624 $9,654 $8,919 $8,241 $7,614 $7,034 $6,499 $74,579 $101,200
$101,200Office(bigplot)Sales $44,711 $72,432 $0 $0 $0 $0 $0 $0 $0 $0 $117,143TotalCostandExpenses $11,311 $16,166 $0 $0 $0 $0 $0 $0 $0 $0 $27,478OfficeCahFlows $33,400 $56,266 $0 $0 $0 $0 $0 $0 $0 $0 $89,665Net $30,783 $47,795 $0 $0 $0 $0 $0 $0 $0 $0 $78,579
$78,579ResidanceSales $12,263 $29,501 $0 $0 $0 $0 $0 $0 $0 $0 $41,763TotalCostandExpenses $6,285 $9,424 $0 $0 $0 $0 $0 $0 $0 $0 $15,708RecidanceCashFlows $5,978 $20,077 $0 $0 $0 $0 $0 $0 $0 $0 $26,055Net $5,510 $17,055 $0 $0 $0 $0 $0 $0 $0 $0 $22,564
$22,564Office(smallplot)Revenues $22,916 $37,124 $60,040CostandExpenses $5,604 $7,918 $13,522GrossOperatingProfit $17,312 $29,206 $46,518Net $15,956 $24,809 $40,765
$40,765LandCost $6,987 $17,467 $20,961 $24,454 $0 $0 $0 $0 $0 $0 $69,868Net $6,987 $16,099 $17,805 $19,145 $0 $0 $0 $0 $0 $0 $60,036
plotNPV $60,036
$183,071TotalNPV
OfficeNPV
ResidanceNPV
OfficeNPV
RetailNPV
MixREDProjectbasedtwoplots(forbigandsmallplots)
Source: Colliers Feasibility Report, 2010
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Scenario Analysis – Pessimistic Case If some variables go worse together…..
§ Interestrate(Cap.Ra9o)§ Exchangerates§ Sales§ Costs§ Rents
0
1
2
3
4
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
TL/USDollar
0
0.5
1
1.5
2
2.5
3
201001
201008
201103
201110
201205
201212
201307
201402
201409
201504
201511
201606
HouseSales
Unemployment
HousePriceIndex(Ankara)
InterestRate
PPI
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Scenario Analysis Result – Pessimistic Case
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Years 0 1 2 3 4 5 6 7 8 9 TotalRetailRent $0 $0 $13,333 $13,733 $14,145 $14,569 $15,006 $15,457 $15,920 $16,398 $118,561RetailPeriodEndValue $0 $0 $0 $0 $0 $0 $0 $0 $0 $182,656 $182,656TotalCostandExpenses $15,167 $17,615 $1,368 $350 $359 $367 $376 $385 $394 $404 $36,785RetailCashFlows -$15,167 -$17,615 $11,965 $13,383 $13,786 $14,202 $14,630 $15,071 $15,526 $198,650 $264,431Net -$14,409 -$14,615 $8,670 $8,470 $7,620 $6,856 $6,168 $5,549 $4,993 $55,791 $75,092
$75,092Office(bigplot)Sales $44,711 $72,432 $0 $0 $0 $0 $0 $0 $0 $0 $117,143TotalCostandExpenses $11,311 $16,166 $0 $0 $0 $0 $0 $0 $0 $0 $27,478OfficeCahFlows $33,400 $56,266 $0 $0 $0 $0 $0 $0 $0 $0 $89,665Net $28,457 $42,995 $0 $0 $0 $0 $0 $0 $0 $0 $71,453
$71,453ResidanceSales $12,263 $29,501 $0 $0 $0 $0 $0 $0 $0 $0 $41,763TotalCostandExpenses $6,285 $9,424 $0 $0 $0 $0 $0 $0 $0 $0 $15,708RecidanceCashFlows $5,978 $20,077 $0 $0 $0 $0 $0 $0 $0 $0 $26,055Net $5,093 $15,342 $0 $0 $0 $0 $0 $0 $0 $0 $20,435
$20,435Office(smallplot)Revenues $22,916 $37,124 $60,040CostandExpenses $5,604 $7,918 $13,522GrossOperatingProfit $17,312 $29,206 $46,518Net $14,750 $22,318 $0 $0 $0 $0 $0 $0 $0 $0 $37,068
$37,068LandCost $6,987 $17,467 $20,961 $24,454 $0 $0 $0 $0 $0 $0 $69,868Net $7,336 $16,449 $17,703 $18,523 $0 $0 $0 $0 $0 $0 $60,011
plotNPV $60,011
$144,036
ResidanceNPV
OfficeNPV
TotalNPV
MixREDProjectbasedtwoplots(forbigandsmallplots)
RetailNPV
OfficeNPV
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Scenario Analysis – Optimistic Case If some variables go best together…..
§ Interestrate(Cap.Ra9o)§ Exchangerates§ Sales§ Costs§ Rents
0
1
2
3
4
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
TL/USDollar
0
0.5
1
1.5
2
2.5
3
201001
201008
201103
201110
201205
201212
201307
201402
201409
201504
201511
201606
HouseSales
Unemployment
HousePriceIndex(Ankara)
InterestRate
PPI
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Scenario Analysis Result – Optimistic Case
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Years 0 1 2 3 4 5 6 7 8 9 TotalRetailRent $0 $0 $13,333 $13,733 $14,145 $14,569 $15,006 $15,457 $15,920 $16,398 $118,561RetailPeriodEndValue $0 $0 $0 $0 $0 $0 $0 $0 $0 $182,656 $182,656TotalCostandExpenses $15,167 $17,615 $1,368 $350 $359 $367 $376 $385 $394 $404 $36,785RetailCashFlows -$15,167 -$17,615 $11,965 $13,383 $13,786 $14,202 $14,630 $15,071 $15,526 $198,650 $264,431Net -$15,925 -$17,047 $10,672 $11,002 $10,445 $9,917 $9,416 $8,940 $8,488 $100,095 $136,002
$136,002Office(bigplot)Sales $44,711 $72,432 $0 $0 $0 $0 $0 $0 $0 $0 $117,143TotalCostandExpenses $11,311 $16,166 $0 $0 $0 $0 $0 $0 $0 $0 $27,478OfficeCahFlows $33,400 $56,266 $0 $0 $0 $0 $0 $0 $0 $0 $89,665Net $33,242 $53,080 $0 $0 $0 $0 $0 $0 $0 $0 $86,322
$86,322ResidanceSales $12,263 $29,501 $0 $0 $0 $0 $0 $0 $0 $0 $41,763TotalCostandExpenses $6,285 $9,424 $0 $0 $0 $0 $0 $0 $0 $0 $15,708RecidanceCashFlows $5,978 $20,077 $0 $0 $0 $0 $0 $0 $0 $0 $26,055Net $5,950 $18,940 $0 $0 $0 $0 $0 $0 $0 $0 $24,890
$24,890Office(smallplot)Revenues $22,916 $37,124 $60,040CostandExpenses $5,604 $7,918 $13,522GrossOperatingProfit $17,312 $29,206 $46,518Net $17,230 $27,552 $0 $0 $0 $0 $0 $0 $0 $0 $44,782
$44,782LandCost $6,987 $17,467 $20,961 $24,454 $0 $0 $0 $0 $0 $0 $69,868Net $6,638 $15,729 $17,891 $19,784 $0 $0 $0 $0 $0 $0 $60,041
plotNPV $60,041
$231,954
ResidanceNPV
OfficeNPV
TotalNPV
MixREDProjectbasedtwoplots(forbigandsmallplots)
RetailNPV
OfficeNPV
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Interpreting the Results
Usinghistoricaldataforplanningisimportant Inputsarechangeable,donotassumetheyareconstantSensivityanalysisisnotsuitableforchangingmorevariables TheprojecthasanexpectedpresentcashflowsasNP183,071milliondollar NPVsoftheprojectvariesinintervalof(144,036to231,955)withlargerangeofpossibleoutcomes Attheendofconstruc9oncompleted(in2014)realNPVoutcomeoftheProjectwascalculatedas229,037milliondollar Whatarethedifferenceandwhy Attheendprojectmanagerissuccessfulornot
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Questions ?????
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