Real Estate Investor Magazine South Africa June 2014 | Page 47

COMMERCIAL
Regrettably, our national gross domestic product
(“GDP”) is not growing at a rate conducive to enhanced
commercial property-demand. Throughout 2013, our
GDP grew at 1.9%.
All of this means that the identification, measurement
and management of risk is receiving increasing
attention as property investors seek to sweat their
assets and maintain the high returns being experienced
throughout the property sector of the recent past.
Indeed, the successful management of risk determines
the difference between a property’s success and failure,
as verified by the number of property developments
which have failed as a result of inadequate risk analysis
and management.
In a world of uncertainty (such as volatile interest
rates and unpredictable trading volumes – both
of which directly affect property investment), the
ability to accurately identify and measure risk (or the
uncertainty of a series of future benefits or liabilities) of
an investment can occasion the difference between the
success and failure of a property investor.
There are seven categories of risk which commercial
property investors face and each category has a few
components.
The following risks shall be prevalent within our
macro-economic and property-sector radar during the
next 12-15 months.

TYPE AND DESCRIPTION OF RISK
Insurable risk
(also known as operational risk)
This type of risk – which may be covered within an
insurance policy – includes fire risk, disaster risk,
political-act risk, riot risk, loss of income risk and
glass-breakage and the risk normally covered by
indemnity policies.
Business risk
This is the risk related to the tenants of a development:
it is the risk that they shall either not renew their leases
(expiry risk) or shall fail to pay their prescribed rental
(tenant risk).
Financial risk
This is the risk that rising interest rates or inflation
shall impact negatively upon a property’s cash
flow, resulting in the property-owning company
becoming insolvent.
Management risk
This is the risk that the managers responsible for
a property shall not manage the property in an
exemplary manner, resulting in a loss of revenue and
a consequent decline in value.
Environmental risk
This is the risk that the node surrounding a building
shall decline in value as a result of an environmental
impact or nodal obsolescence, resulting in the
building itself losing value.
Political and legal risk
This is the risk that government – at any of all three
levels of government – or the courts shall introduce
changes in legislation or case law that shall negatively
impact upon the value of a property development.
Construction and maintenance risk
This is the risk that a building has been poorly
designed or constructed or that the maintenance of
the building has, historically, been so poor that the
building faces risk of a technical nature.

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June 2014 SA Real Estate Investor

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