Risks Assessment In Real Esate Investments: An AHP Approach

Purpose: Aim of the paper is to provide an ex-ante valuation model to address risk and uncertainty in real estate investment decisions. We propose a model for risks assessment that helps to evaluate risks and opportunities of real estate assets taking into consideration different aspects of the project and related risks (market risk, valuation risk, market growth risk, operating risk, etc.). Our main objective is rather to provide research tools that reveal the riskiness of a property investment than to provide an interpretative model.Design/Methodology/Approach - Rigorous risk assessment measures, based on mathematical algorithms, are here presented. Specifically, we propose an overall risk scoring model to classify real estate investments' riskiness and we propose a procedure for a synthetic risks assessment that, based on the AHP model, will help investors to manage risk exposure and opportunities in property investments.Findings - We define the risk components and relative measures according to the literature and experts in real estate investments. We determine each risk component by implementing the mathematical algorithms provided. Then, according to a pool of experts and financial managers' judgments, we define the thresholds to classify each risk component as conservative, moderate, aggressive and finally we aggregate them into a synthetic overall risk index. Numerical examples on urban development projects are presented in order to test the effectiveness of the AHP model in supporting decisions and adapting strategies to a permanently changing environment.Research limitations/implications - We provide mathematical algorithms, adaptable and interpretable, that can be generally applied in real estate investments. The proposed model can be easily understood by third parties and applied to different property types. Risk measures and relative thresholds may be dependent on the investment (e.g. new development, renewal, etc.) and the property type (e.g. office vs residential building, etc). As far as the scoring model is concerned, the weighting has been identified with reference to the Italian scenario, and similarly the classification of risks.Originality/values - The risk assessment model here proposed may have interesting effects in terms of risk management strategies. Results are transparent and easy to be understood.