Academic Research on real estate business risks

Business Risks in Real Estate

The risks that the commercial real estate business is exposed to can be divided into two: good and bad risks.

Good risks:

1. There can be favorable governmental action near or around the property which is the inventory of the business. These actions include:

a. Infrastructure development like building of bridges, roads and railways;

b. Urban zoning that includes building of government offices or causing private business to converge in the area due to offer of benefits as tax haven for urban business that opt for relocation;

c. Relocation of hubs like bus and railway stations, even airports and seaports if feasible;

d. Government sponsored or led housing projects to decongest urban centers

2. Natural happenings like earthquakes and typhoons in some areas can leave a particular real estate business (probably due to sheer luck) stock in trade property spared. This will lead to an exodus of people and business from the damaged areas to the lucky property, thereby increasing its sale value.

Bad risks:

1. Economic downturn may happen locally, nationally and internationally. This is what happened in the United States right at the time when the Obama administration took over. This caused the collapse of Morgan and a number of businesses. Many more would have suffered the same fate had the government not rescued them. An example of this is the bailout which the AIG was privileged to be subjected to.

An economic downturn adversely affects the employment rate. This has the further consequence of affecting the buying power of the working class. This class happens to be the biggest group of consumers of real estate business. This can be rather ironic considering that the acquisition of real estate is not a top priority in the row of man's needs.

An economic downturn will also put a squeeze on the credit market. This credit market serves as the wheel that spins for the acquisition of real estate. People do not usually put their cash to acquire real property. They would rather acquire property on payment terms as they watch their property revalue in time while the money that they spend for amortization devalues but remains nominally fixed. If this is not a good set up, I don't know what it is.

2. Big investments for acquisition of inventory by businesses can slowdown. While these investments signal the road to recovery, this recovery can be hampered due to the installment terms practiced in the industry.

3. There can be unfavorable governmental actions which are exactly the opposite of No. 1 (Good Risks) above. Politicians can step in to protect their own self interests. They play a big role as non-development of areas that are not their sympathizers.

4. The government has an excuse to impose new taxes which could be great burden to real estate sales. They can also impose new rules on the pretext of regulating the industry like delimitation of stock in trade; and probation of sale over a minimum area in some areas that are deemed industrial.