Blog assignment #6

Risks of real estate

During my studies I came across this interesting article about the risks of during real estate development. I must admit that real estate development is the part of this real estate class that intrigues me the most. However, after the collapse of huge real estate institutions like Fannie Mae and Freddie Mac during the credit crisis the risks of during development have become even more evident. Let me just highlight some of the points that this article come across.

First of all, he points out the most important thing in investment - diversification. When doing development, it's of utmost importance that all developments you do are not in the same line of business. You must diversify your development portfolio over several sub categories like retail, commercial, residential etc. This will lowers the risk of developing real estate.

Also, as a real estate developer you must be aware about two more things both related to risks. First of all, since all real estate projects have their own risk, you must know what kind of risk a specific project has. This includes among other;

• Land value risk - what is the value of the land you are building real estate on.
• Planning permit risks - what are the risks in planning the construction of real estate. Are there any zoning restrictions as well as easement requirements that you should be aware of as a developer. If these restrictions are not covered early, whole real estate projects might fall apart because the use of the real estate on that specific piece of land might not be used for the designated purpose.
• Revenue risk - will the real estate give you a revenue. If the market for real estate is bad, this risk is specifically high since vacancy rates will be high as well.

These are some of the risks that one must account for on a project level. This list is far from exhaustive but just illustrates some of the points and risks for a real estate development. However, as a real estate developer you also have to decide what kind of development you want to do. Retail, offices, industrial and residential are some of the categories. Supply and demand will determine what is the most profitable. Say in College Station, Texas, the demand for industrial property is very low, but for student housing very high and still increasing. Hence, almost all development here are of residential character in order to saturate this demand.

http://www.globalriskconsult.com/article-6-real-estate.php