Risks are usually not noticed until they have manifested. The “safe investment” nimbus, the complexity of the property investment, countless contributory factors and other interests of the investor (e.g. taxes) often result in an underestimation of the volatility and changeable nature of the situation. Despite what is usually a long-term commitment the property investor must focus on the future as well. The approach is called “risk monitoring”.
Risk monitoring is concerned with the future of the property and the future risks involved in holding it (maintenance and renovation), in managing it (operation and letting) and with the eventual disinvestment (sale, conversion into a condominium, etc.).
Risk monitoring is designed to avoid unpleasant surprises such as
- Change in the macro and micro location
- Infrastructure projects (road, railway, airport etc.)
- Demographic structure
- Lacklustre location
- Competing properties (e.g. construction of another hotel in the vicinity)
- Letting competition in the case of newbuilds
- Sudden change of tenant and re-letting at worse conditions
- Outmoded division of office space
- Rejection by prospective tenants
- Obsolete plumbing and heating systems
The situation where a property has to be sold below its value or even below its purchase price as the last resort because of its failings and to avoid having to make disproportionate investments at a later date should be prevented. Below its value because as a new investor, the buyer bears the risk of redecorating and re-letting the property, together with the capital expenditure.