the framework of risk management in a real estate ... · development project with a focus on...

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

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).

Risk Management

• RiskManagementisaprocesswhichinvolves•  Planning,•  Iden9fying,•  Analyzing,•  Responding,•  Controlling

• Aimoftheriskmanagement•  maximizetheresultsofposi9verisks•  minimizetheconsequencesofnega9veevents

LSU10/09/2007RiskManagement 4

Risk during the project •  Riskmanagementimportantbecause

•  Costofrisksvariesovertheprojectlifecycle•  Projectsuccess

Figurefrom“ProjectManagement”byGrayandLarson

Risk Types?

•  Economical•  Social•  Poli9cal•  Financial•  Environmental•  ProjectSpecific

•  Development•  Appraisal•  Usage•  Loca9on

Risk Studies …. Economic Risks

Source:Khumpaisaletc.(2010)

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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8

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

Case Study

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•  Theprojectstarted2010,construc9onwascompleted2014inAnkaraProvince,Turkey

•  Locatedovertwoplots•  Selectedprojectareais232,000metersquares

•  ItliesbetweentheBayındırHospitalandtheUfukUniversityHospitalintheBalgatNeighborhood,oppositetheArmadaBusinessandShoppingCenter,attheintersec9onofAnkaraEskisehirRoadandKonyaRoad.

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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0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

According to The Risk Perception Survey Result, Risk analysis methods?

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0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%

Whataretheriskanalysismethodsusedbyyourcompany?

(Mul9pleselec9onsarepossible.)

Risk Analysis - Scenario Analysis

Scenarioprepari9on

DefineKeyFactors

FutureProjec9on

DeterminingScenarios

ResultAnalysis

Turkey Macro Economic Depict(s)

GDPbyIncomeApproach-CurrentPrices(TURKSTAT)(Quarterly,TRYThousand)OriginalFrequency,DISCRETE,OriginalObserva9on

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

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

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

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

Scenario Analysis Result – Pessimistic Case

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$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


RetailNPV

OfficeNPV

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

Scenario Analysis Result – Optimistic Case

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$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


RetailNPV

OfficeNPV

Interpreting the Results

 Usinghistoricaldataforplanningisimportant Inputsarechangeable,donotassumetheyareconstantSensivityanalysisisnotsuitableforchangingmorevariables TheprojecthasanexpectedpresentcashflowsasNP183,071milliondollar NPVsoftheprojectvariesinintervalof(144,036to231,955)withlargerangeofpossibleoutcomes Attheendofconstruc9oncompleted(in2014)realNPVoutcomeoftheProjectwascalculatedas229,037milliondollar Whatarethedifferenceandwhy Attheendprojectmanagerissuccessfulornot

Questions ?????

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the framework of risk management in a real estate ... · development project with a focus on...

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