Transcript Development Risks

Valuation &
Development Business
Development Risks:
Analysis, Valuation
and Regulation
Prof. Mikhail M. Soloviev
2015
Principle role of Risk
• The pair “Investment Potential - Risks” is one of
the main characteristics for investment
attractiveness and development for all hierarchy
levels of economics: country, regions, etc.
• Measure of risks is reflected through different
kinds of expert data and quantitative coefficients:
• qualitative estimations, ranks;
• discount coefficients – in the DCF concepts, e.g.
for investment projects analysis & business-plans;
• yield – for risk reflection in Real Estate market
statistics, for development projects analysis, etc.
Sample: The RF REGIONS’ ranking:
investment potential & risks
90s-2005
LOCO &
GROWTH
POTENTIAL
PROBLEMS
SPECIAL ATTENTION
High
Potential
TOP REGIONS:
Moscow
Moscow region (oblast)
S-Petersburg
Ural regions
Khanty Mansy (Oil-Gas)
Volga regions
Rostov-Krasnodar (Sochi)
Low Risks
& Potential
High Risks
INVESTMENTS
EUROPE
Prosperity of
the 2007-2008
Investment
Prospects
CITIES
&
City Risk-Free
RISK-FREE
Moscow: both
extreme ranks
«EuroProperty» Data (2004)
Development Risks:
basis concepts
Risk is a probable loss.
In principle waited results of any realized
processes may be worse because of different
negative factors influence.
So the Development Risks (in our course
context) are the probable development results
losses because of negative factors acting,
interaction problems between participants of
the real estate development projects.
FINANCIAL
INSITUTIONS
CONSUMERS
(RE Investors)
DEVELOPMENT
Environment
BUILDERS
SOCIETY,
AUTHORITUES
Risks of problematic interactions
with Authorities and Society
DEVELOPMENT
SOCIETY,
AUTHORITUES
Risks of interactions with
Authorities and Society
• Authority risk influence
– Planning permission (Town Planning rules)
– General plan’s zoning, restrictions, etc.
– Demands for RE improvement / Planning Gain
• Society influence
– Objections (protests): green, historical, cultural,
ecology, environment pressure, etc.
– Public opinion
– Mass media pressure …
Risks of problematic interactions
with Builders & other Contractors
DEVELOPMENT
BUILDERS
&…
Risks of interactions with Builders
& other Contractors
Problems and influences:
• To find reliable & high quality contractors
for the project management, projecting &
building works, & other special activities.
• To fulfill all the project works
– in time (good planning & work organization, in
time delivery, etc.)
– with confirmed quality level (TQM-systems)
– according to the confirmed quantity calculations
• To have good decision making means for
analysis and possible corrections
FINANCIAL
INSITUTIONS
DEVELOPMENT
Financial Risks
Financial Risks
• To find corresponding creditors / banks
(good rank, traditions, previous experience …)
• To confirm corresponding credit conditions
(credit line, %, repayment conditions, penalties…)
• Financial risks during the project realization
(materials and contractors works prices alters,
current payments problems, additional demands
expenditures, e.g. for environment protection, etc.)
• Difficulties with the project results profitable
(in time and with VfM) market realization.
Development Project: possible
balanced finance diversification
Будущие
FUTURE CLIENT
клиенты
20%
Девелопер
DEVELOPER
10%
Крупный
стратегичес
STRATEGY
кий
INVESTOR
инвестор
30%
CONTRACTOR
Подрядчик
10%
BANKS
Банк
30%
CONSUMERS
(RE Investors)
DEVELOPMENT
Risks of interactins with investors
(consumers, results buyers)
Risks of interactions with investors
(consumers, results buyers)
• Risks concerned with the concrete investor
participation in the project financing
according to confirmed conditions.
• Risks concerned with alters of investor
demands for the project characteristics.
• Risks - with the project results selling to the
investor in time & according to waited cost.
• Risks concerned with problems to operate
efficiently with the unsold developed object.
Risks of external and internal
environment influences
DEVELOPMENT
Environment
Risks of external and internal
environment influences
• External environment influences - such as
conditions and tendencies:
– Economy of state, region (investment rank,
GDP, recession, growth potential, reforms …)
– Social, Political, Ecology, etc.
– Market competitions and competitors acts …
• Internal conditions and tendencies
– Financial and other principle characteristics
– Internal alters (reforms, alters in strategy,
renewing plans, portfolio alters, etc.)
– Management (staff, leadership, experience …)
Developer Portfolio Strategies
during the crisis process
Selling part
of projects
RISKS:
ANALYSIS and MEASURE
CONCEPTS and METHODS
• Sensibility concept and methods
• Stochastic approaches
• Others (e.g. net-analysis / critical way,
decision-trees, analogies, etc.)
Risks’ sources
Sources of the development risks
are concerned with insufficiency of
information (for project, participants,
market environment, etc.), e.g.:
(1) information uncertainty,
(2) inaccuracy or non-correspondence,
(3) information absence or not in time,
(4) non-synonymous (diapason), etc.
Sensibility Risk-Analysis
Concept
∆Y (∆Xi) – deviations of results
WAITED RESULTS
xim
Y=Y(xi, … xj)
xjm
MODEL of Interacting
FACTORS of INFLUENCE
Ym
Ym
Sample of the diapason data influence
(onto the Capitalization Value)
CHARACTERISTICS / DATA
DESIGNATIONS
RENT (annual)
RENTING SQUARE
USING SQUARE
OPERATIONAL INCOME
g
S
I
giS
MAINTENANCE (annual)
J(S)
OTHER FACILITIES (annual)
F
OPERATIONAL EXPENDITURES F+J(S)
FUTURE PROFIT
CAPITALIZATION RATE (yield)
($/m²)
400-360 (-10%)
(m²)
2000
(%/100)
0,8
($)
640000 - 576000
($)
($)
($)
giS-(F+J(S)) ($)
k
MEANING
100 000
60 000
160 000
480000 - 416000
(%/100)
0,12
CAPITALIZATION VALUE A=(giS-(F+J(S))/k ($) 4000.000-3466.67
losses
-13.33%
Risk Factors different influence
onto the Capitalization Value
1. Operation Incomes
•
•
Rent payment (-10%
-13.33%)
Adequate influence – in concern with
squares under renting (measure of filling)
2. Operation expenditures
•
Management, maintenance and other
facilities
(+10% → - 3,33%)
Sensibility extreme analysis
•
•
INDEXES
Rent index (annual)
Designations & Measure
g
($/m2)
•
•
•
Square for renting
Occupation
I
Operational (annual) INCOME
S
(%/100)
giS
•
•
•
Maintenance (annual)
Other operational payments (a year)
TOTAL Operational expenditures
---------------------------------------FUTURE NET INCOME
•
Input data
integral
extreme
Yield
deviations
•
and
Development expenditures
•
•
•
J(S)
F
F+J(S)
giS-(F+J(S))
k
(m2)
0,8
($)
($)
($)
($)
($)
(%/100)
CAPITALIZED VALUE
=======================
A=(giS-(F+J(S))/k
($)
profitability
Project’s Profitability
results
B= (Bld+C+D)(1+р) ($)
R=(A–B)/B *100 (%)
Quantity / Value
350-400
2000
560000 - 640000
1000000
600000
1600000
4000000 - 4800000
0,12 - 0,14
28600000 - 40000000
25000000-27500000
Rmax=60%
Rmin=4%
Variety
of the Sensibility concept using
– One-parameter methods
• Sensibility analysis and ranking,
• Boundaries and Extreme data definition,
• Sensibility lines and Spider characteristics
•
– Two-parameter methods
• Pairs comparing,
• Compensation opportunity seeking
(invariants)
– Multi-parameter methods
• Scenarios analysis,
• Multi-parameter compensations seeking
Positive and negative properties
of the Sensibility Methods
++
• effectiveness and variety of practical using,
• simplicity, operative and visual results
presentation
-- probability component is absent - risk factor
had already taken place: р=1.0
- indefiniteness modeling only through static
coefficient ranges (p=1.0)
Stochastic Risk-Analysis:
Monte Carlo Concept
∆Y (∆Xi) – probable characteristics
of the results’ deviation
xim
WAITED RESULTS
Y=Y(xi, … xj)
xjm
Ym
Ym
MODEL of Interacting
FACTORS of INFLUENCE: probable
distribution
Stochastic Risk-Analysis:
Monte Carlo information base
& results
Information base includes probability
characteristics on the model input
Modeling results are output probability
characteristics (e.g. as the probable density
distribution)
Input data
Stochastic alters
xi
Risk probability
measure
Risk probability measure is connected with
the probability density characteristics as
the 2nd moment (Dispersion – D, or Average
Quadratic Deviation - σ²)
σ² = Σ[(xi – x*)²] / n
i={1,n},
x*– current meaning,
xi – average (arithmetic) meaning.
MULTI-MODAL probability distribution function for NPV
Non-Symmetry NPV function
Project 1
Project 2
Probable image of different projects NPV
Risk policy and regulations
Risk Avoiding
Risk Decreasing
→0
→min
Probability
Losses
Development projects’ (profitability)
risk influence fields & risk policy
Operation incomes
Operation expenditures
Building process
Developer expenditures
…
Better Marketing
Outsourcing
Best contracting
Economy
…
ПРОБЛЕМЫ ЭКОЛОГИИ: СОЧИ-2014
Risk avoiding: Ecology
problems
РАЗМЕЩЕНИЕ ОЛИМПИЙСКОЙ ДЕРЕВНИ, САННО-БОБСЛЕЙНОЙ ТРАССЫ И
solvingБИАТЛОННОГО
by Olympic
Replacing
КОМПЛЕКСАobjects
НА ТЕРРИТОРИИ
ГРУШЕВОГО ХРЕБТА
Mountain Olympic objects*
To Coastal Cluster
Caucasus
Biosphere
Reserve
ГРУШЕВЫЙ ХРЕБЕТ
Replaced objects
Mountain
Olympic
objects**
Replacing number of
objects from protected zone6
Earthquakes danger &
Transcontinental Pipeline
“East Siberia – Pacific Ocean”
Trajectory Variants
Lake Baikal
Seismic
zones
Strategic Alternative for Direction
of the Transcontinental Pipelines
Arctic
Ocean
The East Siberia
Oil-Gas provinces
Risks value and regulations in
the management of organization
•
Development risks take place among other
acts & decision making of the organization.
So:
• Development risks are regulated together
with other activities` risks.
• Development risk policy is chosen and
realized together with other policies of the
organization such as: economy policy, social
responsibility, innovation strategy, etc.
Pass to Business Game “Auction: Land
Site purchase for its Development”
Decision making in the market environment.
Land site Auction
– Win for development project realization
– Providing the project efficiency.
So:
• Choice and following to own “risk / economy”
policy in the Action competition.
• Decision making as the bidding price argued
choice on the project efficiency value basis.