RISK FACTORS WHEN INVESTING REAL ESTATE

Investing in commercial real estate can give a large return, but it also contains many risks that affect the value of real estate that investors need to consider carefully. Valuation of commercial real estate is really necessary for investors to know the current value of real estate before entering the negotiating table.

Commercial real estate is real estate that generates regular income, built and used solely for the rental business. It is the largest class of real estate for investment purposes.

Commercial real estate includes: Condominiums, commercial houses with the main purpose of subleasing; office for rent; industrial real estate such as factories, warehouses; real estate for rent to open retail services such as shops selling clothes, electronics, food and beverages...; and hotel real estate such as motels, hotels, resorts. However, currently in our country popular types of buildings are built, including commercial and residential rental areas; Properties of this type are called mixed functions.

Other types of commercial property that can be owned by investors include parking lots, restaurants, and recreational properties such as clubs, marinas, and sports facilities. complex sports, etc. Some types of commercial real estate require more specialized management than others.

Among the major types of commercial real estate, hotels are at the top of the list in terms of day-to-day business management requirements, like running a business, requiring more in-depth management than other types of real estate. other commercial real estate such as residential apartments, commercial rentals, offices, retail rental areas. Shopping centers are also relatively in-depth management when maintaining a reasonable tenant structure and promoting the center play a very important role in determining the cash flow of real estate. Types of commercial real estate serving entertainment needs also have great requirements for professional management. Typically, investors consider investments in commercial real estate that require intensive management as having a higher level of risk due to the risk of operating the business. Therefore, a high profit margin is often required.

Most of the risk factors associated with investing in commercial real estate affect the value of the property, which in turn also affects the investment in real estate whether in the form of equity or loan capital. Financial leverage (debt) has an effect on an owners return on capital invested in real estate but has no effect on the value of the underlying property. Here are some of the risk factors in commercial real estate investing:

• Economic situation: The demand for commercial real estate rental depends on the economic situation of the locality, of a region, a country to the international economic situation. Factors such as Gross Domestic Product (GDP), the state of the job market, household income levels, lending rates, and inflation are all particularly relevant, affecting the real estate market. Economic fluctuations will impact real estate investment as both current rental income and the value of the property are affected.
• The long period of investment in new property construction prior to completion tends to lead to large fluctuations in property values ​​during construction as the situation in which the property is located can change significantly from the projected date. original ant.
• Cost of Investment Capital and Availability of Investment Capital: Real estate must compete with other asset classes to attract equity and loan capital. The lack of supply of loanable funds with high lending rates can reduce demand for real estate and cause property values ​​to drop significantly. The competitive pressure of the capital market can cause property values ​​to rise or fall, regardless of any changes in the basic demand for tenants real estate.
• Unforeseen inflation: Investing in real estate can somewhat insulate investors from inflation, depending on their ability to shift the pressure on rising costs from inflation to tenants by increasing rents . Real estate construction costs also tend to increase with inflation, creating upward pressure on real estate values. Thus, equity investments in real estate may not be subject to significant inflation risk, depending on the margin of increase or decrease in operating income and the value of the property relative to inflation. growth was higher than expected. In a weak real estate market with low actual occupancy rates and low rental rates, where investment in building new properties is not feasible, property values ​​may not increase with inflation.
• Demographic information: Population characteristics, including ethnicity, age, income, education level, home ownership status, and employment status all impact commercial real estate demand. . For example, a city with a large population structure between the ages of 25 and 35 will have a higher demand for rental housing than other cities with a lower population structure in this age group.
• Lack of liquidity: It is difficult for investors to buy finished commercial properties without making a decision to invest a large amount of money without carefully examining the real estate they intend to invest in. The verification process is both time consuming and costly. Therefore, it is difficult for buyers to make a quick decision to buy back a completed property without a significant purchase discount. The real estate market can fluctuate in price against the will of investors, including buyers and sellers.
• Environmental pollution in the commercial real estate area under construction has an adverse effect on the value of the property and increases business risks for investors as they may be held responsible before the law for all all costs used to remedy the environmental pollution arising from the operation of that commercial real estate.
• Availability of real estate market information: In real estate markets that are inactive or have underdeveloped real estate information databases like in Vietnam, sellers and buyers spend a lot of time. Time, effort, money, difficulty in finding buyers and finding the right property for your needs. This lack of information puts both the seller and the buyer at great risk in the purchase and sale transaction when both parties may agree to an unfavorable transaction price, due to not knowing the exact market value. reality of real estate. The lack of database on the real estate market and the difficulty of accessing information on planning from state agencies create major barriers to determining the value of real estate.Investors do not always have sufficient information and in-depth knowledge about the structure and features of real estate, which leads to ill-informed decisions that do not reflect the real value of the property. Investors real estate. Therefore, commercial real estate appraisal is essential for both parties before entering the negotiation round, helping the seller to know the minimum price that can be obtained from the sale of the property owned by him. property and help buyers set a reasonable price ceiling to avoid overpriced purchases, most often if there is a bid.
• Management risks: Real estate asset management is a characteristic factor associated with real estate investment. It includes the day-to-day management of the real estate business and the maintenance of the property. Management risk reflects the ability of managers to make sound decisions about real estate business operations such as lease agreements, property maintenance, property advertising. , and modify it if necessary.
• Financial leverage: Borrowing capital to invest affects real estate investment returns, but not the value of the underlying real estate. The use of financial leverage is expressed through the ratio "Loan capital / Value = Value of debt / Total value of real estate purchase."
• Other Risk Factors: Many other risk factors exist such as invisible structural defects of real estate, natural disasters, terrorism. However, the biggest risk is the unidentified risk at the time of real estate transaction; because the identified risk can be directed to risk management in advance by quantifying risk to money value through the purchase of insurance.

Through analyzing the risk factors in commercial real estate investment, we can see that commercial real estate appraisal is an indispensable step in real estate appraisal, before taking the next step. negotiate transaction prices.