Risk discernment of clients in real estates an empirical analysis

International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 9, September (2014), pp. 49-56 © IAEME
INTERNATIONAL JOURNAL OF MANAGEMENT (IJM)
ISSN 0976-6502 (Print)
ISSN 0976-6510 (Online)
Volume 5, Issue 9, September (2014), pp. 49-56
© IAEME: http://www.iaeme.com/IJM.asp
Journal Impact Factor (2014): 7.2230 (Calculated by GISI)
www.jifactor.com
49

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RISK DISCERNMENT OF CLIENTS IN REAL ESTATES:
AN EMPIRICAL ANALYSIS
Hemant Chauhan1, Prof. Pankaj Shah2
1Research Scholar, Uttarakhand Technical University, Dehradun, Uttarakhand
2Professor, 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).

Successful development depends on bringing the adequate real estate product to the market at the
right time at the right price.
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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 D’arcy 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.

2. RISKY NATURE OF REAL ESTATE DEVELOPMENT
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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

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.
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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
scenario’s 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

development projects. The research in this context specifically addressing risk management
approaches in real estate development from stakeholder’s point of view is very limited.
53

Customer is an important stakeholder of every industry. It is necessary for each and every
organization to develop the strategy according to customer’s 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 customer’s risk perception.
Literature shows a lack of studies based on the customer’s 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 customer’s 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.

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, cronbach’s 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.
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DATA ANALYSIS AND RESULTS

The factor analysis and cronbach’s 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 Bertlett’s 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 Bertlett’s 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
.872
Availability
2.736
11.90%
Multiple Functionality .938
Constructability .911
Amendments .890
Facility Management .881
Accessibility Evacuation .921
Durability .854
Adverse Env. Impact .645
2.007
8.73%
Pollution -.591
Climate Change .684
Interest Rate -.462
1.538
6.689%
Property Type -.464
Currency Conversion .904
Demand Supply -.493

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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 H0 3, H0 4 and H0 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 H0 1: There is no significant association
between the business types in different
industrial estates of Uttarakhand.
18.750 .000 Rejected
between the gender of investors in
different industrial estates of
Uttarakhand.
6.257 .024 Rejected
between the marital status of investors in
Uttarakhand.
2.827 .243 Accepted
between the age of investors in different
industrial estates of Uttarakhand.
3.927 .687 Accepted
between the education level of investors
in different industrial estates of
Uttarakhand.
10.225 .250 Accepted
between the locality of investors in
Uttarakhand.
between the income level of investors in
Uttarakhand.

CONCLUSION AND IMPLICATIONS OF THE STUDY
56

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 customer’s
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
[1] Aaker, D.A. and Jacobson, R. (1987), “The role of risk in explaining differences in
profitability, Academy of Management Journal, Vol. 30 No. 2, pp. 277-296.
[2] Fisher, P. and Robson, S. (2006), “The perception and management of risk in UK office
property development”, Journal of Property Research, Vol. 23 No.2, pp. 135-161.
[3] Gehner, E (2008). Knowingly taking risk - Investment decision making in real estate
development, Eburon.
[4] 4.Neary, N. (2009), “Growth strategies for real estate developers - Motives, experiences and
strategies in entering foreign markets”, MSRE Master Thesis, Amsterdam School of Real
Estate, May 2009..
[5] Schulte, K.W. Rottke, N. and Pitschke, C. (2005). “Transparency in the German real estate
market”, Journal of Property Investment Finance, 23 (1): 90-108.
[6] Zani, W. M. (1993): Reducing the cyclical volatility of real estate development, in: Real
Estate Review, 22 (4): 76-82.
[7] Purnashree Das and Saurabhi Borthakur, “Common Property Resources and Their Pricing
Mechanism in India”, International Journal of Management (IJM), Volume 5, Issue 4, 2014,
pp. 152 - 159, ISSN Print: 0976-6502, ISSN Online: 0976-6510.
[8] Dr. N. Kannan, “Empirical Evidnence on Perception of Risk About Investments”,
International Journal of Management (IJM), Volume 1, Issue 1, 2010, pp. 33 - 42,
ISSN Print: 0976-6502, ISSN Online: 0976-6510.

Risk discernment of clients in real estates an empirical analysis

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