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From “Location, Location, Location” to a broader View at Real Estate Risk

From “Location, Location, Location” to a broader View at Real Estate Risk. Oliver Urschel Sustainable Management of Housing and Real Estate School of Economics and Business Engineering Universität Karlsruhe (TH). Hello! • Guten Tag ! Goddag ! Dzień dobry ! Bună ziua!

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From “Location, Location, Location” to a broader View at Real Estate Risk

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  1. From “Location, Location, Location” to a broader View at Real Estate Risk Oliver Urschel Sustainable Management of Housing and Real EstateSchool of Economics and Business EngineeringUniversität Karlsruhe (TH)

  2. Hello! • Guten Tag ! Goddag! Dzień dobry ! Bună ziua! Jo napot kivánok! Добрый день!Добър ден!Добар дан! Dobrý deň! Dober dan! Dobar dan! Mirëdita God dag! Goeden dag! Tere päevast! Laba diena ! Labdien ! Hyvää paivää! Góðan daginn! Grüezi! Bon jour! Καλημέρα! Buon giorno! Bom dia! Buenos días! Bon dia! İyi günler!

  3. Introduction • In the opinion of many real estate professionals real estate risk is dominated by three factors: • Definition of Real Estate Risk • Real Estate Performance: •  Real Estate Risk: Change of Net Cash Flow or Change of Value Real Estate Risk Location Location Location Net Cash Flow Return Rental Income Operating Costs - Bound Capital Total Return Fair Market Value (t1) Fair Market Value (t0) Investment - - Change of Value Return Bound Capital

  4. Literature analysis - proceeding • Collecting risk related terms mentioned in the literature and assigning them to a previously developed risk category system • Arranging the risk related terms thematically • Synonymous terms in the same row (e.g. "economic development" and "economy") • Similar terms in subsequent rows • Partly risk terms were assigned to several categories • Merging several risk terms to one risk • Terms often on low structural level, or applying only to few special situations (for example home purchase savings promotion was assigned to subsidies in the category political, fiscal and legal basic conditions)

  5. Results of a Literature Analysis regarding Real Estate Risk • Summary of a representative selection of 28 contributions concerning • general real estate risk management (3 contributions) • risk management of housing companies (1) • real estate portfolio management (3) • risk management of public private partnership projects (1) • risk assessment from the point of view of banks (5) • risk assessment of direct investments in real estate (2) • project development (6) • construction project management (4) • standard books of real estate management (1) • general risk management without relation to a spacial industry sector (2) including risks, risk categories and risk indicators mentioned by the authors.

  6. Table view Riskcategories Riskrelatedterm… …ismentionedbyauthor Riskrelatedtermssummeduptorisks

  7. Results from the literature analysis • Location and market related risks • Discussedmostintensely • Object-related risks during utilization phase • Disussedintensely, especiallybycontributionsaddressedtolong-terminvestors • Object qualities • Rather weak presence in Literature. In most cases the authors make no difference between fixed object qualities and object condition (changing during time) • Object-related risks during construction phase • Comparativelystronpresence, especially in articlesdealingwithprojectdevelopment • Findings from the area of construction management should be integrated • General company-related risks • Surprisingly strong presence in Literatur – this may be caused by the assignment of general financial risks to this category • Findings from the area of non-real-estate-specific risk management should be integrated (for example IT- of personnel-related risks)

  8. What should we learn from these results? Market- andLocation-relatedRisks ObjectrelatedRisks Company relatedRisks national Management Risks Location regional Staff-relatedRisks local Location Financial risk Micro-location Rental income Risksfromsupportprocesses Operating costs Location Change ofvalue Legal risk

  9. How do the several risks influence Real Estate Risk? „thelocation“ Political, legal andfiscalbasicconditions Infrastructure Economy Socio-demography Natural Desaters Image Supply Demand RE Market Neighbour-hood quantity quantity quality quality „theobject“ company (theoretical) rental Value Objectquality Management Rental income Staff Operation andmaintenanceexpenses supportprocesses RE Risk Net rentalincome Financial risk Change of Value Legal risk

  10. What effect has the discussion on "sustainable development"? • The sustainability of buildings is an aspect of building quality • higher productivity and comfort for users • growing demand for sustainable buildings – willingness to pay up to 5% • sustainability certification allows market actors to include these aspects into price calculation and the decision-making process • sustainability signals higher building quality  advantages in tenant‘sandbuyer‘smarkets • Sustainability may result in lower operation and maintenance cost • higher quality of construction, therefore lower maintenance cost • lower consumption of energy and other natural ressources • Optimized life cycle costs • Better performance • net rental income • change of value • lower risk (e.g. flexibility, obsolescence) • "location"  adaptionto environmental condition and climatechange

  11. First Test-Rating Results: „greener“ buildings = less risks Improved chances and/or reduced risks of sustainable buildings can be expressed and communicated by making use of already existing property rating systems Lützkendorf, T.; Lorenz, D.: Sustainability assessment and / or property rating? Presentation at the CESB 07 Prague

  12. Conclusions and remarks • The location is an important, but not the only risk factor in real estate • more differentiated view at location related risks • company related risks  high influence of management quality on real estate performance Location Real Estate Risk Economy Location Location Politics, fiscaland legal System Location Socio-demography RE market Infrastructure Environment Company-relatedrisks Management Finance others …

  13. Thanks for your attention ! Vielen Dank für ihre Aufmerksamkeit ! Många tack! Dziękuję za uwagi ! Спасибозавнимание ! Köszönöm a figyelmüket ! Merci pour votre attention ! Gracias por la atencion ! Grazie per la sua attenzione! Südamlik tänu ! Liels paldies ! Tänan väga ! Labai aciu ! Faleminderit shumë ! Mange tak ! Благодаря! Efharisto' poli ! Dank u wel ! Takk fyrir ! Tusen takk ! Muito obrigado ! Mult'umesc foarte mult ! Tack så mycket ! Dakujem velmi pekne ! Hvala lepa Teşekür ederim !

  14. From “Location, Location, Location” to a broader View at Real Estate Risk Oliver Urschel Sustainable Management of Housing and Real EstateSchool of Economics and Business EngineeringUniversität Karlsruhe (TH) If you have any questions, please do not hesitate to contact me:http://housing.wiwi.uni-karlsruhe.de oliver.urschel@kit.edu

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