Risk has become a paradigm in the modern world given the ever-arising complexities of the 21st Century. The real estate industry is no stranger to this, with its reliance on human labour and external elements that can’t be controlled. Given that most industries have some connection to one another, it's clear that any disturbance in this interconnected web is likely to have a ripple effect across most or all industries.
This article looks at some of the more common and pertinent risks the industry is presently facing, how digital solutions will help mitigate some of these threats and vulnerabilities.
Increases in cost
Price hikes are a common phenomena for most businesses and industries and this is especially true for the real estate sector. Developers often budget for construction costs at the start of a project, forgetting that these costs are vulnerable to external shocks and influences. According Turner and Townsend, there was a construction cost inflation of 3.7% in 2016.
The increase in cost is often due to the change in value of building material, as well as the human labour required for construction. Rising commodity prices, fluctuating currencies and unforeseen political developments also contribute to the volatility of this facet of the market, adding further components of risk to investment decision making.
Sophisticated property development services now allow for comprehensive risk assessment and reporting for projects from the outset. Factors such as foreign buyer finance and local valuations risk are a few of the many areas which can be monitored and controlled, ensuring that project vulnerabilities are minimised and risk mitigated as best as possible.
Adverse fluctuations in real estate prices and value
Irregular fluctuations in land values can pose a significant threat to property development projects.Variables such as an increases in interest rates, cyclical movements in the market, as well as unfavourable economic conditions can lead to an unfavourable reduction in property value or increased holding costs. These also have an effect on buyer confidence, a fragile foundation upon which the wellbeing of the entire industry rests. The ‘It’s Time to Buy a Dwelling’ Index showed a reduction in those believing it was prime time to purchase property in the Australian market, down 1.8 per cent in July, following a 2.7 per cent drop in June 2016.
Ensuring that purchasers are secure and satisfied with their investment is a key concern for any real estate agent. Customer Relationship Management (CRM) can help to underpin and support buyers through the buying process.
Settlement risks are a significant concern for real estate developers and seems to be a particularly pertinent consideration for apartment buildings in Australia. Information coming out of financial advisory firm Ferrier Hodgson, shows warning signs that buyers are taking twice as long to settle on off-the-plan Brisbane units, with settlement time frames doubling from two to four months as of 2017.
While settlement delays could be the result of a plethora of factors and reasons, in this particular case, foreign buyers were largely unable to secure financing from foreign lenders, with many of them rescinding their contracts because of intense lending regulations.
Property Shell encompasses not only the management of the settlement process, but the mitigation of risk throughout this period. With the right property development software in place, not only can developers identify these risks from the outset, but also make sure the settlement process is smooth for both developers and their buyers. Ultimately, it leads to being able to take action in near real time where risk and problem purchases arise. From a reputation standpoint, buyers have increased confidence in the development and developer, helping to ensure not just a successful settlement, but repeat sales in the future.
Risk is inherent throughout any development and one of the critical building blocks of managing risk is great technology and process. Without it, developers are subjecting themselves to not only increased cost, but delay and potential project failure.
Property Shell is the only provider of solutions in the industry that focuses on automated risk management and mitigation through our technology. To learn more, feel free to get in touch with us today.