Risk Management in the Real Estate Development Industry

Abstract

Real estate development is a speculative and entrepreneurial activity. Factors such as unknown future demand, risks and uncertainty are key elements of real estate development (BYRNE, 1996; ISAAC/ O’LEARY/ DALEY, 2010; SCHULTE/ BONE-WINKEL/ ROTTKE, 2002). Although not always evident during periods of strong economic growth, risk management is undoubtedly of paramount importance during economic downturns. The global financial crisis and the deterioration in real estate markets across large parts of Europe since 2008/ 2009 - inter alia - demonstrate the significance of the real estate industry for the world economy. Despite the structural significance of real estate to the economy and notwithstanding the thorough analysis of risk management in academic research, only limited substantive research is available on risk management pertaining directly to real estate development. Even less empirical data exists that can provide an overview of standard industry practice with respect to risk management by major development organisations (GEHNER, 2008; HARTIGAY/ YU, 1993; RICS, 2004; SHUN, 2000). An in-depth literature study has been undertaken to evaluate the existing knowledge pool and provide a conceptual framework by reviewing risk management and real estate theory in order to offer real estate developers suitable approaches toward the risk management process. As a major contribution the dissertation provides empirical data on a pan-European perspective with a comparably large size of 69 leading real estate development organizations (response rate of 43.7 per cent) thereby covering various sizes and legal structures. Statistical analysis using exact Fisher’s Test and Cramer's V has shown some correlations between different structural characteristics of responding organisation (developer type, geographic scope, ownership structure, project volume) and the consequential understanding and implementation of risk management. Further, the major findings of the empirical study indicate that: the developers’ approach towards the management of risks tends to be characterized by a lack of formalisation and co-ordination and largely rely on individual judgment and experience; risk management is not regarded as a continuous and dynamic process and is often fragmented with only few development organisations having formal processes to align risk management with corporate strategy; most real estate developers do not conduct their risk management aligned to the organisation’s specific risk appetite; many organisations have some measures of risk management activities but few can claim to have an enterprise wide risk management strategy; and demand for training and education is vital for a rigorous risk management practise. Consequently, the results and observations of this research have identified a lack of understanding in respect of risk management by real estate developers and have also distinguished weaknesses in addressing risk management issues. Hence, various potential benefits could be obtained by development organizations through careful review of their existing risk management practices, which subsequently may also have a positive impact upon the wider economy.

Date of Award	6 Oct 2012
Original language	English
Supervisor	William Earl (Supervisor), Michael Regan (Supervisor) & C A Langston (Supervisor)