Market Risk

Learn about the market risk that exists in our trade

Types of Risks

Liability Matching

The ability of investment returns to match its liabilities must be addressed by the investors. The duration and the type of property invested in will reflect the degree of risk to that investment.

Liquidity

Real estate property has less liquidity in comparison with other investments since it requires more time to find the purchaser or other interested parties. This will affect the risk and expected return from the property investment accordingly

Marketability

Due to its illiquid characteristics, real estate property is less marketable than other investments as property can sometimes languish unsold for some time. Property demand may also frequently fluctuate and not balance with the market supply.

Taxation liability

Investors have to factor in various forms of tax when they invest in property development, such as income tax deducted from rental income, property tax, etc.

Transaction costs

A variety of expenses appear during the transaction period when the property is transferred from the investor to the purchasers, such as legal fees, stamp duty, brokerage fee, etc.

Management costs

These are necessary for a property that needs an annual liability for repairs and insurance. That cost is distinguished from other investments since the investors have to employ a management agency as their representative for duties such as rent collection, portfolio management, and non-annual negotiations and rent review.

Investors’ Growth Expectations

The expected growth rate of the property investment is affected by the growth of both income (from rental or sales) and costs. Income growth may vary due to fluctuations in rent levels, the broader economic situation, and marked conditions. Another concern for property investors is the physical depreciation of the property, as this will cause a fall in value throughout the investment period.

risk factor

1. General Market Risk

All markets have ups and downs tied to the economy, interest rates, inflation or other market trends.

2. Asset-Level Risk

Some risks are shared by every investment in an asset class. In real estate investing, there’s always demand for apartments in good and bad economies, so multifamily real estate is considered low-risk and therefore often yields lower returns.

3. Idiosyncratic Risk

This risk is specific to a particular property. The more risk, the more return. Construction, for example, will add risk to a project because it limits the capacity for collecting rents during this time. And when developing a parcel from the ground up, investors take on more types of risk than just the construction risk.

4. Liquidity Risk

Taking into consideration the depth of the market and how one will exit the investment needs to be considered before buying. An investor can expect dozens of buyers to show up at the bidding table in a place.

5. Credit Risk

The length and stability of the property’s income stream is what drives value. A property leased for 30 years will command a much higher price than a multi-tenant office building with similar rents. However, keep in mind that even the most creditworthy tenants can go bankrupt.

6. Structural Risk

The financial structure and the rights it provides to individual participants. A senior secured loan gives a lender a structural advantage over a “mezzanine” or subordinated debt because senior debt is the first to be paid; it has a top place in the event of liquidation. Equity is the last payout in the capital structure, so equity holders face the highest risk.

7. Leverage Risk

. The more debt on an investment, the riskier it is and the more investors should demand in return. Leverage is a force multiplier: It can move a project along quickly and increase returns if things are going well.