Why a risk analysis is essential

Risks are unavoidable with every real estate investment and new construction project – building technology requires maintenance over time, and the location of the property can be subject to changes over time that affect the value of the property. Developers may be affected by supply bottlenecks that make real estate construction more expensive.

Why do you do a risk analysis?

A risk analysis is used to determine whether the planned investment or new construction is profitable and sensible. This makes it easier to calculate risks. Any bottlenecks or cost-intensive measures that arise can be better addressed later. The risk analysis can be used as a basis for the decision.

Those who buy capital investments or embark on construction projects without giving it much thought may, in the worst case, jeopardize their very existence. Investors and developers who approach risk management using risk analysis have a number of methods at their disposal. Common methods include SWOT analysis or the creation of a risk matrix. The micro-macro location is also examined more closely during the analysis.

SWOT analysis 1: identifying strengths and weaknesses

When strengths and weaknesses are examined and analyzed, factors are considered that affect the property itself and its location. These include, among other things, all key figures for financing, the location of the capital investment, rental income and operating costs, as well as the condition of the building. Possible rent losses must also be considered, as must the costs of maintenance, repair and other necessary and cost-intensive measures.

It is also important for builders to consider difficulties in the supply chain and possible shortages of skilled labor in the analysis. The challenging task of finding tenants for “unpopular apartments”, so-called residual properties, is also an important aspect.

The more information is available about the property and its location, the more detailed and accurate the risk analysis will be. This makes it easier to assess and evaluate the risk of the planned investment. The same applies to the quality of the information itself. Therefore, it is advisable to view the property in person, true to the motto “trust is good, control is better”. A construction and real estate expert can be consulted. After all, you can’t always rely one hundred percent on the information provided by the seller.

SWOT analysis 2: identifying risks and opportunities

Not only are all the facts and data on the property to be purchased important, but a market analysis is also essential. To find out whether the business is profitable, the regional real estate market must be considered. The following questions should be answered, among others:

• What is the infrastructure like in the region?
• What changes to the infrastructure are planned for the future?
• Which and how many companies have settled in the region?
• What is the unemployment rate?
• How is the population developing?
• How great is the demand for new rental apartments?
• How are household sizes developing in the region?
• To what extent is the government trying (or planning to try) to regulate the real estate market in the region?
• Which legal provisions influence the planned new construction project?

These are just a few of the aspects that determine whether a construction or investment location has been chosen well. With all the market factors and data, a forecast can be made as to how the value of the property will develop in the future and whether a new construction is really worthwhile. It is important to consider the regional market environment. General statements about the development of the real estate market are not helpful here. Investors and builders are well advised to seek the help of a regional real estate agent who has a good knowledge of the local market. They will be able to assess the market opportunities for the new construction project or the investment property.

• Risk matrix: How critical is the risk?

Once a thorough risk analysis has been carried out and it is clear what hazards and challenges the project or investment may face, it is possible to use a risk matrix to categorize the risk more precisely (low, medium and high). This makes it clear to the investor or builder how high the individual risk is. The matrix records the possible problems graphically in a diagram. The risks are compared with the resulting consequences. It is advisable to keep the matrix up to date. The risk matrix allows you to recognize relevant hazards at a glance. It is important that the graphic is based on the analysis results:

• What is the probability of occurrence of the individual risk?
• What damage will the investor or the project suffer?
• Which risks have higher priority?
• What is the risk value of the individual risk?

Priorities are assigned in advance and the risk value is calculated as follows: the probability of occurrence is multiplied by the amount of damage. A local investment broker can help you to create a risk matrix.

Calculating the return based on all the data

Once all the facts and figures have been gathered, the return on investment can be calculated. This calculation includes the rental yield, among other things. This is offset by rent losses, construction and repair work, rising and falling rent levels, and other financial aspects.

Reaching a decision

Once the potential return has been calculated and/or the risks for the project or investment have been visualized, a rational decision can be made for or against the project or investment. However, you do not necessarily have to shy away from risks.

The return on higher-risk investments is often higher. The level of risk also has an impact on the purchase price. Low-risk properties are usually more expensive. So if your main aim is to generate as much return as possible, you are less likely to achieve your financial goals with less risky investments.

The quality of the data and facts is particularly important. They must be complete and should come from a reliable source. Local real estate experts should be consulted for their knowledge of the property and the market. Even an inaccurate analysis can lead to a loss of value and financial burdens due to unexpected costs, just as the absence of such an analysis can.

Do you need a risk analysis for a construction project or an investment in Regensburg and the surrounding area? Contact us! We will be happy to advise you.

Notes

For the sake of readability, the generic masculine is used in this text. Female and other gender identities are explicitly included, as far as it is necessary for the statement.

Legal notice: This article does not constitute tax or legal advice in individual cases. Please consult a lawyer and/or tax advisor to clarify the facts of your specific case.