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- Risk Involved
Business Environment: The real estate market involves leasing, renting out properties which is depended on demand for it. This demand varies according to the business environment, a factor to need to be taken into consideration.
Time gap: The development of any property or project takes considerable time mostly in years. During this time phase the market conditions can change drastically affecting the rentals.
Cost and availability of capital: Real estate business is affected by the feasibility of capital. They also have to compete with other asset classes to source their funding.
Inflation: The construction cost of real estate is depended on inflation, with an increase in inflation raw material cost increase and unexpectedly increases the cost of construction which affects the demand. Rent to somehow is inflation protected which increases with increase in inflation, but depends the ability to pass the general level of price increase to customers.
Demographics: Factors such as age, size of the population affects market for real estate
Liquidity: Real estate is considered as one of illiquid investment due to indivisibility, huge investment involved, time consuming and cost involved in purchasing a property.
Environmental issues: These issues can be on part of government, societies and public affected by the environment.
Information: The lack of information on real estate may involve huge cost and affect the investment decision made. Over a period of time the information data has improved substantially in the form of indices.
Management: Property management focuses specifically on real estate investments, involving day to day decisions, maintenance of the property. Management risk relates to manager's decision regarding operations such as leasing, maintaining, reconstruction and so on.
Leverage: Real estate business is highly leveraged as investments are funded through debt or loan. Leverage is generally evaluated through Loan to value ratio(LTV) which is borrowed funds to total purchase price. The higher the ratio indicates the high amount of leverage involved in purchasing a property. Leverage increases the return for equity holder but with that comes the risk as the lender has the first claim on the property.
Other types of risk can be physical defects, natural calamities or terrorism.