MICHAEL B.
Ideation • Branding • Creative Strategy • Web Content Optimization • Global Marketing
What's the best way to calculate risk for building a commercial, industrial or residential structure?
Next, add to it that it may be built in a Third-world market. How do these factors differ compared to First-world markets?
Also, is there a way to calculate what kind of companies characteristics are best-suited for such development according to risk factors? If so, what are those factors?
Answers (4)
John A. K.
CEO at Greenfield Advisors
Best Answers in: Commercial Real Estate (1), Government Policy (1)
Generally, one does a "sensitivity analysis" in which the cash flows are pro-forma'd under "worst", "most likely", and "best" case scenarios. The range of the three scenarios gives an expanse of likely outcomes. One can then play with some probabilities of each of the three to get some sort of probability distribution function.
"Risk" for a development deal can be sliced and diced into a number of different categories. "Financing", "Marketing", "Construction", "Legal", and others are all potential risk categories. As we've discovered in the past few years, accurate quantification of these risks is highly problematic. There's a bit of Darwinism going on in the investment field today -- the survivors (who are continuting to get to play) are those who either explicitly or implicitly understood risk modeling during the recent downturn. However, many (most?) of the survivors either CAN'T elaborate on their models (often very subjective) or WON'T elaborate (why give away the secret ingredients?).
Finally, I would suggest that the same categories of risk exist in both developed and undeveloped economies, but the degree of risk in the undeveloped economies is usually higher. However, the returns are also potentially higher. Empirically, one needs to recognize that capital will flow to an undeveloped economy if and only if the perceived risk-adjusted returns are equal or better than what would be available elsewhere. Hence, if one observes successful projects, and their returns (which should, on average, be much higher than those in developed economies), then one can reverse-engineer the quantified risk by comparing those returns to those available in developed countries.
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John provides an excellent answer, below and I can only add one thing, it's all about the taste for it really. Do carry out the normal risk assessment(s) but it comes down to a very simple formula really......
Risk (calculated, preferably) = Opportunity + Instinct (RoI) = Reward (RoR)
Those companies "best" suited might not want to take the risk, for a whole host of reasons and those wanting to take the risk might not succeed, to reap the reward.
Malcolm T. also suggests this expert on this topic:
Wallace J.
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