Dynamic Real Estate Valuers

‘Dynamic’ Real Estate Valuers.

Profile;

‘Dynamic’ real estate Valuers firm is a registered property (real estate) valuers and consultancy firm based in, Queensland, Australia. The firm provides various independent services ranging from real estate valuation to consultancy services for all the real estate developers as well as investors for instance; feasibility advancements to advice and guide on the sale or purchase of residential houses or units. ‘Dynamic’ firm is an independent real estate valuers established in the year, 2002; it aims at providing sophisticated and professional depth of experience of key property valuation and consultancy firms, with neutrality, personal service and micro-firm economy at its heart. It has a wide chain of clientele which ranges from the country’s biggest mortgage provider to the individual investor.

The firm specializes in the following valuations categories; acquisition or purchase, mortgage security, development feasibility, investment analysis, resumption and unimproved value.

Vision of the firm;

To be the leading influential and respected valuation provider; to achieve, we need the highest levels of performance, passion and professionalism. The higher we set our standards, the more efficient we will serve our clients better.

Abstract;

This paper will present a theoretical framework for analyzing potential risk factors and steps to be taken in responding to behavioral factors that causes indirect behavioral expectations set by the investors. It tries to identify the main variables and mechanisms, by which risk assessment before an investment venture may influence the success of a potential investor in the real estate sector. We will use Axioma daily factor fundamental risk model, to assess market factor performance by creating both short-term and long-term portfolios that either minimize or maximize their exposure to risk factors while it remains unaffected by all other risk factors in the Axioma risk model. The relevant performance of these market portfolios compared with the analysis test shows risk-adjusted results that portrays a relative performance of the stated risk factor (John,1999) .

The paper will explores different pressures over which risk management of real estate valuation firms adopts a concise technique in dealing with the various uncertainties related to it. It also develops a strategic approach in how to deal and handle such potential risks in the real estate sector.

Table of Contents:

Contents; Pages;

Title page 1

Abstract 2

Table of contents 3

Nomenclature 4

Introduction 6

Theory 7

Experimental Setup and Procedures 8

Conclusion 15

references 16

Nomenclature:

Acre; it is a unit for measuring land that equals; 43, 560 square feet or 4,840 square yards or 160 square rods.

Allotee; this is an individual who has been allotted/assigned a property, either by government authority or by a developer.

Acceptance; it is the expression of the intention of the person receiving/accepting an offer i.e. from the seller, to be bound by the conditions and terms of the offer. The person accepting the acceptance must communicate to the offeror and it must be in a documented form for it to be enforceable.

Abandonment; it is the voluntary surrender of property rights with no apparent intention of reclaiming the property and without any vested interest in any other person.

Acceleration clause; this is a clause in agreement of sale, which allows the lender to call for all sums due and payable in advance of the agreed fixed payment date in case of an occurrence of any specified event of any nature, for example, default, sale, assignment or further complexity of the property in question.

Acknowledgement; it is a formal declaration that is made before an authorized official by a person or a party executing a document, that he or she signs the document by a free act and deed. The official presiding over the acknowledgement is always a notary public who plays a role in witnessing the signature and verifies the identity of the person.

Affidavit; this is a written statement sworn to be true before an administrator of oaths.

Alienation; this is the voluntary transfer of real property from one party to another.

Breach of contract; it is the violation of any of the terms or conditions of a contract without legal permission.

Central business district; this is a commercial area that is located near the city center and forms the hub of all major commercial activity.

Credit; this is the money extended from one party (lender) to another person (borrower).

Conventional mortgage; this is a mortgage offered by a government sponsored agencies which includes banks.

Construction loan; this is a short-term loan for new households construction that is accompanied by a convectional long-term loan.

Debt; this is the amount of money a borrower owes to creditors.

Default; it is the act or inability of a borrower to make regular and consistent payments of a loan.

Depreciation; this is the measure of loss in value of an asset, home, or property.

Security; this is a term that is usually used in the context of lending, it is a collateral pledged to secure a payment for a loan.

Tenant; it is a person who possess a land or tenements in form of a legalized title.

Valuation; it is the act of approximating value.

Vendee; this is a person who buys an asset or property. He is the buyer.

Vendor; this is a person who transfers property in form sale.

Void; it is an act that is unenforceable, for instance it has no effect.

Introduction;

A real estate investment involves the most significant component of the real asset investments. Overtime, various analysts have used their own variants valuations formulae and models to value real estate. Valuation risk analysis for real estate investment is used to find out if the valuation is outside the variety of a client’s specific expectations. Valuation risk analysis is a written, standard communications detailing all outcomes and findings. Each range of analysis is proof checked or rather audited by a supervising officer before being delivered to the client.

Valuation risk analysis involves the following procedures; reviewing for accuracy of subject and comparable physical and locational characteristics, collection of public tax data based on the appraisal being reviewed, reviewing for accuracy of subject and comparable sale/transfer information, reviewing of market conditions as of the effective date of the appraisal utilizing the housing price index as well as capital market authorities data, reviewing for negative external influences, and reviewing for on appropriate appraisal practices.

The valuation risk analysis for the real estate is completed by qualified personnel and submitted to the client together with the findings and charts that have been generated for a quantifiable view of the conclusions. These valuations are not automated or auto-generated. The valuation risk analysis is completed from the office and no apparent cross-examination of the property in question is made.

Valuation risk analysis procedure is always useful for the following; lender buybacks, fraud detection, portfolio analysis and reviews litigation.

Theory:

Analyses of the current global economic crisis have shown that unclear regulatory frameworks in the financial and real estate sectors were among its main causes. The crisis brought up a range of problems and demonstrated the urgent need for United Nations Economic Commission for Europe (UNECE) to respond by providing guidance and promoting sound real estate markets in the region. (UNECE, 2010).

Real estate sector is a fundamental contributor of revenue towards national economy and therefore, real time financial planning and use is the force behind the robust economic growth and sustainability of a given economy, this is especially observed in developing countries. A move to improve and better regulations in risk assessment of real estates and linking it with the financial services will enhance; strengthening of credit systems, provision of concrete measurements in the factors underlying global financial crisis, contribution to minimize and manage such crisis in the future, and acceleration in growth while building confidence in the market.

In order to contribute to the creation of more efficient and developed markets, it is necessary to improve the reliability of valuation processes for transaction purposes or landed-property financings based on prudent loan-to-value ratios. On the other hand, developing and fostering the introduction of real estate rating systems may reduce sector investment risk and encourage loans at lower interest rates. (UNECE REM, 2010). This research provides an affirmative framework for designing accurate and transparent classification for real estate’s assets to be used as collateral for sourcing financial products.

Increase in investments in the real estate sector in the recent years is clearly witnessed across various economies around the globe, a huge number of both small and large scale enterprises invest their money into the industry with the expectation of achieving or rather realizing high profits. However, during the investment process on the robust industries, the expectation equals the high risks that the investor will most certainly encounter. Investors in the real estate sector, has portrayed aggressiveness for major possibilities for greater expectations that comes along when arriving at an investment decision, nevertheless, they have always ignored potential risks on their investment advancement.

Henceforth, risk valuation analysis is necessary for signification and continuity of investment. Enterprise which carry out real estate investment gets or rather achieves abundant profits, whereas, investors venturing into the market always end up suffering from possible losses that comes along from the investment cycle (Taperrell, Varmesh & Harland, 1983). Therefore, investment regulators need to encourage and promote investments by implementing new rules that will reflect and guard against all dimensions of liquidity.

Objectives of Risk Management:

AS/NZS ISO 31000: 2009 stipulates that when this principles and guidelines are implemented and maintained, the management of risk should enable all organizations to;

Increase the livelihood of achieving objectives

Encourage and promote proactive management

Be aware of the need to identify and treat risk throughout the organization

Improve the identification of opportunities and threats

Achieve compatible risk management practices between organizations and nations

Comply with relevant legal and regulatory requirements and international norms

Improve financial reporting

Improve governance

Improve stakeholder confidence and trust

Establish a reliable basis for decision making and planning

Improve controls

Effectively allocate and use resources for risk treatment

Improve operational effectiveness and efficiency

Enhance health and safety performance as well as environmental protection

Improve loss prevention and incident management

Minimize losses

Improve organizational learning

Improve organizational resilience

Experimental Setup and Procedures:

Part one: Analytical Skills Part two: Risk Evaluation

Step 1: For the operational services in the real estate investment to be effective, the client must follow the following processes; apply for a loan from a banking institution (use property/asset as a collateral), adhere to the full regulatory framework process i.e. field survey, financial statement analysis, cause and effect analysis, environmental license, urban planning licenses, economic assessment policy and any other relevant licenses from the relevant bodies.

The client possible risks are as follows; currency inflation, interest rate risk, financing risk, investment period, market supply and demand risk, competition ability risk, real estate investment area, investment corporation mode and sudden alteration of political and economic environment.

This potential risks threats are evaluated and arrived at using the past statistics. Strategic risks Operational risks

Interest rate risk Financial risk

Investment period Currency inflation risks

Competition ability risk Market supply and demand risk

Investment corporation

real estate investment area

Alteration of political environment

Economic environment risk

Traded real estate securities risk

Depreciation risks

credit risk

source, EU (2010)

Step 2: Financial risk; this can always be arrived at by regressing returns on the class against returns on consolidated market portfolio, Du (2008). It always understates the true volatility in the market and returns are only provided for the long-term intervals. This can be maintained by using both the long and short-term intervals.

Currency inflation risks; this occurs due to economic crisis in the global economy, it might be due to the changes in the price of oil hence currency exchange rate will arise, a universal currency should be used in order to manage this.

Market supply and demand risk; in market demand risk, derived demand is always used in computing for the risk, in computing for this risk , differences in operating and financial leverage should be used.

Investment corporation; depending on the nature of the investing party whether sole proprietor or limited company, ratios should be used when computing for a limited company and sole proprietor takes the whole risk.

Real estate investment area; areas near the central business districts has higher valuation than areas located in the suburbs. Different valuations should be set for the different locations.

Alteration of political environment; political instabilities causes the disparities in the computation for risk, peace should always be preached across the globe in order to maintain a uniform political ground.

Economic environment risk; changes in tax laws and tax rates affect the computation for risks, steps to accommodate such changes should always be considered before investing.

Traded real estate securities risk; securitized real estate securities tend to behave differently direct investments, this can be solved by securitizing such securities into one cluster for instance; commercial property securities.

Depreciation risks; this is always associated with the value of the property dropping overtime, provisions for such changes should always be taken into account

credit risk; the value of the collateral might drop significantly due to economic crisis, hence the loan value will be affected, uniformity across the globe for some collaterals should be adopted. Operational risk (R) Quantity

q1 Quality grade q2 Outcome

R=q1q2

R1 w1 1,2,3,4, w1q2

R2 w2 1,2,3,4, w2q2

R3 w3 1,2,3,4, w3q3

R4 w4 1,2,3,4, w4q4

R5 w5 1,2,3,4, w5q5

R6 w6 1,2,3,4, w6q6

R7 w7 1,2,3,4, w7q7

R8 w8 1,2,3,4, w8q8

R9 w9 1,2,3,4, w9q9

R10 w10 1,2,3,4, w10q10

Source, John (1999).

21367751675764Monitoring and review

00Monitoring and review

Step 3: risk matrix,

Financial risk is the most rampant type of risk due to its nature of liquidity, while loan-to-value risk is recessive risk. This is due to the fact that risks always affect capital while assets are least affected by such risks.

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69151586360Establishing the context

0Establishing the context

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634365126365Risk Assessment

0Risk Assessment

291465103505

231267014605071628022225Risk identification

0Risk identification

716280403225Risk analysis

0Risk analysis

716280793750Risk evaluation

0Risk evaluation

13290551467485205741179133502019301550670231267073279023107651334135001539240114300Communication and consultation

0Communication and consultation

22815553422651386840857885013963654572001396365762007162801238885Risk treatment

0Risk treatment

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Step 4: credit risk; the international monetary (IMF) in the recent past did address the importance of securitization in the financial system and the flaws in its implementation. “The methodologies and inputs used to rate non-prime residential mortgage-based securities and collaterized debt obligations backed by mortgage based securities were particularly flawed; overestimating the quality of the underlying loans and underestimates the correlation of their performance. IMF (2009)

Financial risk; according to the European union, the most acute phase of the crisis in the banking sector has now receded, but the situation remains very fragile. European union banks are still highly leveraged and persistent worries about the quality of their assets have fuelled concerns about the overall health of their balance sheets. EU (2010). Transfer the above to the risk register in the treatment schedule.

Step 5: to mitigate this risk, the treasury functions needs to work actively to realize financial awareness and preparedness by outlining loan and credit controls for both short-term and long-term borrowing. It can also be reduced by allocation of loan maturity equally over-time and by establishing different means of sourcing the capital.

Credit risk; to manage this risk, an investor needs to apply an extensive limit structure in the maturities, issuers and counter-parties in order to reject the credit risk.

Step 6: financing risk; an investor can choose to avert this risk by maintaining a long borrowing record. Accept the choice.

Credit risk; an investor in the real estate sector can avoid this risk by making agreements with the counterparties in line with the international swaps and derivative association(ISDA) and making all necessary agreements. Accept the choice. Transfer this to the treatment schedule.

Step 7: to manage this risks, banking service providers should work hand in hand with the experts from the real estate sector. This will help in developing clear framework in curbing against financing risk.

Credit allotees and allocators should always involve legal experts when drafting any agreement as far credit taking is concerned, this will ease default risks by the credit takers. Step 8: once the investment is ventured into, the following should be done consistently to avoid possible chances of risks taking course;

Regular field surveys should be conducted to carry out analysis test for any potential risks that might occur due to absence of evaluation officer in the respective field.

Accounting experts should always carry out consistent auditing; this will help to ascertain whether the capital being employed in the field is being used as stipulated. Step 9: check to ascertain whether the following were covered appropriately;

Different types of risks in real estate investment

Relationships between these risks.

Crucial risks elements in the real estate investments.

Steps to control and manage these risks.

Recommendations in dealing with these risks in the future.

Conclusion:

The objective of this this writing is to carry out risk analysis and evaluation of the real estate sector using various dynamic, and as a result, we can demonstrate the in-depth nature of and complexities associated with the real estate sector. The paper also did aim to carry out risk analysis of the current status of the real estate sector and as a result advise accordingly on the factors that influence the rising cases of risks in the sector, this was undertaken in relation to the global financial feud in the recent past and how this can predict the certainty of the bow the sector will behave and cope with such crisis in the future. The analysis of these risk factors did involve a set of procedures and steps to be followed when dealing with such risk and recommendations on how such risks can be managed in the future.

Risk analysis and evaluation process is always ignored by the investors for instance; individual or smaller investors who in most cases behave too vulnerable towards the sector (Walter, !967). The risk analysis scenario in this writing is prepared for a client who wants to venture into the real estate investment sector and is uncertain of the possible risk factors associated with the sector. Despite the fact that, housing demand is skyrocketing, and most investors both the individual and corporate investors might be lured into the real estate sector to invest and meet the rental and housing shortages, they should seek for appropriate market analysis test and evaluation to find out any potential risk factors that might pose or cause loss in their investment ventures.

Lastly, potential investors seeking to invest in the real estate sector, should always approach a real estate valuation firm or company to seek for appropriate advice concerning the risk factors associated with the sector, this will work hand in hand towards realization of maximum returns on their investments.References:

Zhu, N. (2005). Strategic Risk Identification. Washington: Macmillan.

Du, Y. (2008). Enterprise risk management. London: Pearson.

European Union (2006). Directive 2006/48/EC of the European Parliament on the Council of 14th June 2006 Relating to the Pursuit of Business of Credit Institutions. Available: http://eur-lex.europaeu/lexuriserve.

BIBLIOGRAPHY European Union. (2010). Risk Analysis in Asia. Retrieved from Commission: http://ec.europa.eu/risk/what_en.html

Joint Technical Committee OB-007. (2009). Risk management-Principles and Guidlines. Melbourrne: AGPS.

Taperell, C. G., Varmesh, R. B., & Harland, D. J. (1983). Risk Analysis and Evaluation. Sidney: Lexis Law Publishing.

Walter, G. (1967). Australian Real Estate Sector. Cheshire: Butterworths.

John, P. (1999). Quantitative Decision Analysis. Shanghai, Far East Press.

United Nations Economic Commission for Europe Real Estate Market Advisory Group (2010). Policy Framework for Sustainable Real Estate Markets. Available: www.unece.org/hlm/publications-recent5.html