Risk’s and Uncertainties in Real Estate

Risk’s and Uncertainties in Real Estate

Risk is an unavoidable feature in business and can be defined as unknowns that have measurable probabilities, while uncertainty involves unknowns with no measurable probability of outcome.

The concepts do have a relationship, and are not the same. Uncertainty and risk are closely related concepts in economics and the stock market.  Risk is defined as a measurable probability involving future events, and there are arguments that risk will not generate profit. Risk is calculated using theoretical models, or by calculating the observed frequency of events to deduce probabilities.

Uncertainty is not quantifiable because future events are too unpredictable, and information is insufficient. The uncertainty of the event is not something that can be calculated using past models. Though randomness of events underlies both principles, it is important to distinguish the differences as they relate to investments.

An investor has the opportunity to calculate the risk by deducing past probabilities to protect their investment portfolio.

In the real estate industry, risk and uncertainty needs to be managed. The management of a real estate investment firm clearly draw a strategy on how to reduce risks of property investments and their uncertainties. This will enable the investor to make a better investment decision. Therefore it is important for the investor to first scan through the market and study all existing risks and uncertainties considering the political, economic, social, technological, environmental and legal factors in Botswana so that they will be able to make the best decision on investments. Common risks that Batswana real estate investors should consider are explained below:

  1. Tenant risk

Tenants are the people who get to use the property. An investor of property is interested in accessing quality tenants. There is also insecurity to know if the building will be fully occupied. High voids implies that the investor will cater for the operating costs therefore, reduce his earnings. 

2.Sector, Use and Investments market risk

Different sectors perform differently depending with the economic situation in a particular country. Investors face a risk of investing in a sector that might be on the verge of collapsing for example at any point in Botswana, a particular product could be popular and with time fade.

3.Planning risk

Planning is defined as the process of controlling development. It is a political and also a technical process which affects the planning and controlling of development in an area. Planning policies generally are for the public benefit however at some point, these obtain a risk of impinging upon performance of an investor’s project.  

4.Legal risk

Property investors should thoroughly check for existing rights on a property prior to developing or purchasing it. It is possible that one can obtain ownership and legal title on a property but will not be allowed by the regulatory authority to do certain activities on the piece of land. 

5.Political Risk

Political risks are available in property issues. This is a situation whereby politics of the land plays a critical role in safeguarding or even threatening ownership of certain properties. Political risks affects investor’s confidence. For example in the Zimbabwean context, the land redistribution program that took away farms from the white farmers. South Africa is talking of land expropriation while Botswana recently proposed a bill that will allow farmers to subdivide 50 percent of their farms. 

6.Structural risk

Properties is a commodity which can be affected by the activities of the next person or even weather conditions. Other factors may also include natural disasters like earthquakes. Investor worries mostly and carries the risk of building failure, accelerated depreciation and obsolescence of his investment. 

7.Legislation risk

Legislative risk is different to planning risk.  In Botswana, legislation is made in the house of parliament were members of the parliament deliberate on some issues to form new laws. Of the new laws to be formed, there is also a likelihood that they might encroach on the side of investors. 

8. Yield Risk

Some scholars argue that there is also existence of yield risk in property. Yield is the return one makes from an investments. Since yield cannot be fixed, it is obvious that the main reason for investing in property will be to obtain a higher yield. However since development normally takes long, once the development is completed, the yields in the particular investment would have lowered.

9.Taxation risk 

Properties attract tax from the BURS. Taxation is a common way in which the Botswana Government can raise its revenue. By owning a property, an investor will be exposed and a possibility of future taxes on property will be possible. 

For sound investment strategy advice, contact us at: info@vantagepropertiesbw.com

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