International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 9, September (2014), pp. 49-56 IAEME
49
TENDED ABSTAR TENDED ABSTARCT TEMPLATE (SAMPLE)
RISK DISCERNMENT OF CLIENTS IN REAL ESTATES: AN EMPIRICAL ANALYSIS
Hemant Chauhan 1 , Prof. Pankaj Shah 2
1 Research Scholar, Uttarakhand Technical University, Dehradun, Uttarakhand 2 Professor, Amrapali Institute Haldwani, Uttarakhand
ABSTRACT
Real estate sector is the backbone of any industrial economy; with the growing demand of real estate projects the opportunities are immense in this field. However with changing economic scenario and changing supply-demand equilibrium this sector is exposed to various types of risk. The real estate development business requires a great awareness of risk and its management. However despite of having high risk exposure the risk evaluation and control process is far behind then other sectors. In present research, the researchers tried to identify the various risk factors of real estate development by analyzing the perceptions of customers in industrial estates of Uttarakhand. Important risks were identified through systemic literature review. Survey questionnaire were used to collect the data from the customer. A scale is developed to measure the risk perception of real estate customers. Various statistical techniques like factor analysis, reliability test etc. were used in different phases of scale development, chi-square test are applied to check stated hypothetical relation. The developed scale can be used as a measuring instrument which may assess the risk perception of the real estate customers.
Keywords: Risk, Investors, Real Estate Development.
INTRODUCTION
Real estate development is considered to be one of the riskiest corporate activities (Barkham, 1997; Byrne, 1996) as the creation of real estate products is speculative in many cases and therefore in anticipation of an unknown future demand, risk and uncertainty are key elements of real estate development (Byrne, 1996; Fisher and Robson, 2006; Ratcliffe, et. al., 2009). According to Gehner (2008), real estate development is knowingly taking risk. Real estate development is subject to a number of risk factors (Cadman and Topping, 1995; Morley, 2002; Fisher and Robinson, 2006). INTERNATIONAL JOURNAL OF MANAGEMENT (IJM)
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Successful development depends on bringing the adequate real estate product to the market at the right time at the right price. Development is fixed both in time and space constraints. It involves relatively large amounts of capital (Zani, 1993). Furthermore, real estate development is a very complex and cross- disciplinary task as it typically demands a dedicated team including skilled people and expertise and the co-ordination of a wide range of interrelated activities. Local authorities, legal requirements, residents and neighbors to be satisfied, design teams and contractors to be managed, time scales, costs and contingencies to be monitored are some of the key activities. In addition, real estate developers are often faced with considerable changes in their environment and new challenges driven by the macro-economic, social, urban-planning, political-legal, regulatory, environmental and technological framework conditions. However, in spite of the high risk factors, the real estate development industry lags behind other industries in its sophistication and application of risk identification, evaluation, and control (Schulte, et al., 2005; Gimpelevich, 2011). Wilkinson and Reed (2008) mentioned that developers are often criticized for not sufficiently understanding and analyzing risk. The real estate development business requires a great awareness of risk and its management. This not only stems from the risky nature of the development process and involved complexity but also from the regulatory, capital market and stakeholders pressures which call for great awareness of risk management.
REVIEW OF LITERATURE
1. DEFINITION OF REAL ESTATE DEVELOPMENT
There are various definition has been presented in the literature to define the real estate development. These definitions are different in part from each other. Most definitions refer to a sense of creativity and focus and coordination in order to realize real estate assets (Neary, 2009). According to draft real estate development bill 2011, real estate development has been defined in three parts (Muhpa, 2011): This classification of the real estate presents the wide reach of the real estate sector. According to Wilkinson (2008, p. 2), the definition of real estate development is a process that involves changing or intensifying the use of land to pro-duce buildings for occupation. However, all above explanation does not show the original character of the real estate sector and creativity is also an essential part of real estate development. The main objective of real estate development is to identify the potential opportunities to increase the cash flow that is integral part of that particular land (Baum and Mackmin, 1989). The prime objective of the real estate developer is to get the optimal benefit by the capital appreciation of the particular space by real estate development. According to Barkham (2002, p. 53) concludes, perhaps more than in any other industry the property development entrepreneur resembles the classic entrepreneur of economic history. This concept further supported by Darcy and Keogh (2002, p. 19). They said that the developer's role is essentially one of supplying a stream of entrepreneurial services to the property market through both the identification and activation of market opportunities. According to Geltner and Miller (2001) the real estate development industry assembles and applies the financial and physical resources to construct new built space in its role as a converter of financial capital into physical capital. This definition provides the differences between different real estate developments consist of project initiation and conceptual framework, development including both construction and the usage of the real estate development. International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 9, September (2014), pp. 49-56 IAEME 51
2. RISKY NATURE OF REAL ESTATE DEVELOPMENT
2.1 Real estate as a unique asset class Real estate should be addressed as a unique set of asset classes. It consists of various characteristics which differ from the other asset classes. The prominent feature of the real estate development is known as an investment good (Bone-winkel, 1994; Geschwender, 2010). Another important feature of the real estate is that it is fixed with its location, it is heterogeneous and scare in availability and have very limited amount of substitutability. These factors have their own specific legal, economic and social implications. The geographical location of the real estate development itself leads to determining its use and other physical and structural possibilities and the value of real estate development highly depends up on external factors like condition and the possible usage of the nearby properties along with the infrastructural facility provided by the government. Finally, development of real estate sector also comes with its long life cycle and useful life. Based on the purpose of development, its potential of being used by third parties and its usage concept, the economic life of real estate development remains in the range between 20 and 100 years. In this tenure, properties need maintenance, refurnishing and another investment.
2.2 Specific characteristics of the real estate market Due to certain unique features of real estate as an asset class, real estate market is defined as a mechanism by which real estate related assets and services are exchanged (Jaffe and Sirman, 1995). It contains certain specific features in comparison to other commodity markets. These specific features of the real estate development are lead to the development of further sub-markets, the dependence of and interaction with upstream and downstream markets, in transparency and government influence (Schutle and Volger, 1998). The cyclical character of the real estate market needs proper strategic planning and strong market analysis. Risk management being an important part of each business should be done in a proper manner during all the phase of the market cycle. However, long development period of real estate development comes in the various phases, there is always a realistic possibility that the completed real estate product will be delivered to the (tenancy and investment) market in a changing phase within the cycle. Analyzing and planning for the different phases within the cycle is therefore a key activity and risk management tool for developers. It is beyond the scope of this dissertation to examine the variables that drive real estate prices but it is necessary to note that real estate markets have always been characterized by cyclical market fluctuations.
3. TYPES OF REAL ESTATE DEVELOPERS
There are different types of developers and an all-encompassing definition is thus hard to present (Ratcliffe, et al., 2009; Neary, 2009). Real estate Developers may have an independent setting but are also often affiliated to financial or construction mother organizations. The classification of developers may be based on their strategic capital role, geographical coverage, ownership structure, and type of the product.
3.1 Trader-developers typically assume the entire risk until completion of the relevant property, which is then sold together with the land (property and land may even be sold in an earlier development phase in way of forward sales). Their main corporate goal concentrates on exploiting the profit margins throughout the various phases both prior and after the actual construction work in International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 9, September (2014), pp. 49-56 IAEME 52
the form of development gains. At the end of the development, the trader developer formally decides to sell the property to an investor.
3.2 Investor developers carry out projects to establish a portfolio or for use as owner-occupiers (Isenhofer and Vath, 1998) and are liable for the overall project, from its conception to its completion, and then transfer the real estate into their own portfolio. By combining property development with portfolio investment activities, organization management can use the steady cash flow from investment properties to finance developments even in times when capital markets are generally not concentrated on real estate projects or the specific project does not match the financing partner criteria. Thus investor-developers do - in addition to development profits - capitalize on capital appreciation.
3.3 Service developers render specific real estate development services as a service provider for third parties in the name and for the account of the client without assuming a majority of risks themselves. This role is often assumed by large, mostly international agency firms or specialist management consultancy firms. Service developers typically focus on the process between project conception and planning stage or, respectively, completion of the building permit process. This is often followed by coordination, project management and coaching tasks (Kalusche, 2002). Financially, service developers commit themselves to the extent that they bear the ongoing costs of preliminary analytical and planning work in relation with the relevant project. Service developers are typically investing only very limited capital at risk into project schemes and seeks to generate fee income. Therefore they bear an operating risk role rather than a capital risk role.
4. DEFINITION OF RISK
Before the assessment of risk management in the real estate development it is necessary to define and have the proper interpretation of risk. The concept of risk is very complex in nature and it varies with the variation in application and the situational context. Therefore, a discussion of the various aspect of the term risk is imperative in order to pinpoint the nature and amount of risk in the development of real estate asset. The definition of risk is confined to the risk of loss and therefore it lacks the present scenarios understanding of a risk concept (Duncan, 2002). As only losses constitute a serious threat to the continued survival of an organization, the risk concept is often restricted to being a downside risk. The probability of a positive discrepancy between the actual value and the expected value (a profit, for example) can therefore be explained as an opportunity or upside potential (Lewin, 2001). Accordingly, both positive and negative deviations from a pre-defined objective with uncertainty of outcome, whether positive opportunity or negative threat (RICS, 2003) are conceivable. Vaugham (1996, p. 8) also defined Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.
RESEARCH SPACE AND RESEARCH PROBLEM
As discussed in earlier section that awareness of risk factors in real estate development is very crucial. The research in this field of study is very limited especially in the context of developing economies like India. Graaskamp (1977) discussed the importance of the risk management structure in the real estate development sector. While literature exists on risk, and general risk management but there is a less amount of empirical data available on risk and risk management for real estate International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 9, September (2014), pp. 49-56 IAEME 53
development projects. The research in this context specifically addressing risk management approaches in real estate development from stakeholders point of view is very limited. Customer is an important stakeholder of every industry. It is necessary for each and every organization to develop the strategy according to customers need and interest. Success of any product depends on the customers interest in that product. Same is the case with the real estate development. Real estate development is also highly dependent on the perception of the customer. Therefore, it is imperative for every real estate developer to assess the customers risk perception. Literature shows a lack of studies based on the customers risk perception in the real estate development sector. How customer perceives particular risk and which risk factor is more important for the customer, this needs an in-depth research in this field of study. Although some research on risk management have been conducted in developed countries but its generalization to developing countries is not advisable due to variation in social and cultural setup along with lack of technological advancement. Thus, present study is an attempt to evaluate the customers perception towards the various risk factors in the real estate development sector.
OBJECTIVES OF THE STUDY
The main objectives of the study in the context of real estate organizations are as follows:
To analyze the customer risk related issues in context of real estate. The aim of this objective is to analyze various aspects of customer experience in real estate industry. To develop a scale for measuring the risks perceived by customers while investing in real estate projects. This objective aims to make an instrument for the measurement aspect of various types of risks of real estate development. To compare various industrial estates of Uttrakhand in terms of demographics of their investors. To investigate the impact of various types of risks on investment decisions of customers of real estate sector in India.
RESEARCH METHODOLOGY
This section provides information on methodology and design of present study. It includes:
Research Method: According to Salkind (2003) quantitative research is based on the statistical analysis of data from the research subjects. Unlike qualitative methods, quantitative inquiry relies on the logical analysis of the collected data. Therefore, quantitative research approach has been taken for this research. Research Design: To achieve the research objectives of this proposed research, a mixed research design has been applied. Sample: Salkind (2003) defines a sample as a subset of the population. The sample should represent the larger population, and the results of the research are intended to be generalizable to the population. Customers of real estate industry belonging to various industrial estates of Uttarakhand were selected as sample to be included in present study. Sampling Technique: According to Neuman (2006), cluster sampling should be done by gathering surveys based on clusters of individuals, as opposed to choosing the individuals themselves. This sampling technique is preferred for geographically dispersed populations. It is also less expensive, yet it is a less accurate manner of selection. So, it is done in present research.
International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 9, September (2014), pp. 49-56 IAEME 54
Measures: The entire questionnaire consisted of two sections. The respondents initially were asked about their risk perceptions of various factors. Second section deals with their demographics. Tools & Techniques: In different phases of scale development, different techniques were applied like factor analysis, cronbachs alpha test, etc. Data is analyzed through SPSS where descriptive analysis is done via cross tabulation and chi-square test is applied to check stated hypothetical relation.
DATA ANALYSIS AND RESULTS
The factor analysis and cronbachs alpha tests were used to purify the scale items and to check their reliability. Exploratory Factor Analysis (EFA) was applied on remaining 25 items. The aim of using EFA is to determine the condition where links between the latent and observed variables are uncertain or unknown and Principal Component Analysis (PCA) along with Varimax rotation was executed for extracting factors (Costello and Osborne, 2005; Prasad et al., 2010) through SPSS 16.0 software. A minimum cut off criteria for the deletion of the items was: factor loadings (<0.40) (Karatepe et al., 2005), cross loadings (>0.40) or communalities (<0.30) (Hair et al., 1998). The appropriateness of the analysis was determined by the examination of Kaiser-Meyer- Olkin (KMO) statistic of sampling adequacy and Bertletts test. For good factor analysis, the value of KMO must be at least 0.60 and above (Tabachnick and Fidell, 2001) and significant chi-square value in Bertletts test. From the analysis it has been found that the Eigen value of various risk ranges from 6.15 for social risk to 1.416 for political risk and it is greater than 1 for all 5 factors therefore, none of the factors were eliminated from the study. A final 5 factor 25 items model was retained as shown in Table 1.
Table 1: Results of Factor Analysis Items and Factors Factor Loadings Eigen Values Percentage of Variance Work Force Availability .633 6.15
26.74%
Community Acceptability .717 Cultural Compatibility .699 Public Hygiene .433 Design & Constructer Availability .872 2.736
Property Type -.464 Currency Conversion .904 Demand & Supply -.493 International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 9, September (2014), pp. 49-56 IAEME 55
Market Liquidity .905 Area Accessibility .488 Investment Return .544 Political Group -.505 1.416
6.16%
Commercial Tax Policy -.485 Council Approval .445 Licensing -.424
From the analysis it reveals that all five factors and their 25 items accounted for 60.209% percent of total variance in the analyzed items and KMO measure was 0.766, indicated good factor analysis. All communalities ranged from 0.314 to 0.896. The reliability coefficients of all the factors ranged from 0.71 to 0.83 specifying good internal consistencies among all the items. Further, the combined reliability was computed for all the 25-items (Nunnally, 1978) and it was found to be quite high i.e. 0.77 which indicates that all these 25 items when used collectively will give reliable results.
Summary of Hypotheses Testing This section provides the summary of all hypotheses testing in Table 2. All the results can be summarized as shown below. This helps one to understand the whole section of hypotheses testing where some of the hypotheses, like H 0 3, H 0 4 and H 0 5 are accepted due to more p value than the critical value of (.05), while some of them were also rejected. So from the hypothesis testing significant association is found in between the gender, locality and income level of investors and also in business types whereas there is no significant association is reported in between the marital status, age and education level of the investors among various industrial estates of Uttarakhand.
Table 2: Summary of Hypotheses testing Sl. No. Hypothesis 2 Value P Value Result 1 H 0 1: There is no significant association between the business types in different industrial estates of Uttarakhand. 18.750 .000 Rejected 2 H 0 2: There is no significant association between the gender of investors in different industrial estates of Uttarakhand. 6.257 .024 Rejected 3 H 0 3: There is no significant association between the marital status of investors in different industrial estates of Uttarakhand. 2.827 .243 Accepted 4 H 0 4: There is no significant association between the age of investors in different industrial estates of Uttarakhand. 3.927 .687 Accepted 5 H 0 5: There is no significant association between the education level of investors in different industrial estates of Uttarakhand. 10.225 .250 Accepted 6 H 0 6: There is no significant association between the locality of investors in different industrial estates of Uttarakhand. 17.530 .002 Rejected 7 H 0 7: There is no significant association between the income level of investors in different industrial estates of Uttarakhand. 19.063 .015 Rejected International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 9, September (2014), pp. 49-56 IAEME 56
CONCLUSION AND IMPLICATIONS OF THE STUDY
Real estate development is prone to various types of risk. Identification, evaluation and control of these risk elements are quite vital for the growth of the real estate sector. From the existing study five risk (Social, technical, environmental, economic and political risks) were identified as major risk factors that have an impact on overall satisfaction of investors. Further variables were identified in each risk factor. Finally as an attempt to develop a measuring instrument a scale is developed, tested and then validate with 5 risk factors and 25 scale items which can be used to analyze the risk perception of customers in context of real estate development. The present research can be useful to real estate organizations, especially in industrial estates. The real estate developers may have an idea about various types of risk factors from the customers point of view. It also provides significant association among various industrial estates of Uttarakhand. Although, the scale developed in present research would be useful for further studies but it has its own limitations. The researchers strongly recommend its validity testing before used in different context.
REFERENCES
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