Real Estate Investor Magazine South Africa October 2013 | Page 41

COMMERCIAL
require a given amount of Rands per month,
most investors require a specific rate of return
and these yield rates can be based on
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a required rate of return on total capital
invested, or
a required rate of return on equity, or an
anticipated internal rate of return.

The internal rate of return is the annual
amount earned on each rand of the investor’s
equity while it is invested in the particular
project. However, the norm is that investors
require a certain after tax internal rate of return
on the equity invested in a property. It is,
therefore, assumed that the investor wishes to
legally own the subject property for a specific
time period and that the benefits such as income
stream, capital growth, financing possibilities
and tax benefits will be taken into account when
the after tax internal rate of return is calculated.

Liquidity
Liquidity refers to the ease with which an
investment can be converted into money.
Although fixed property is not very liquid, it
need not necessarily be sold in order to obtain
money but can serve as security to borrow money.

Risk
Risk will always be with us. However, risk is
very personal and the manner in which risk
is dealt with differs according to factors such
an individual’s propensity to take a risk, the
financial backing and expertise available, the
education of the individual, the cultural and
religious background as well as the individual’s
personality. Other factors affecting the manner
in which we perceive risk include socio-political
and economic factors. In addition, the approach
to risk would differ as to whether the property
to be developed is owned, or whether a property
is required to be purchased for development of
a need. Furthermore, throughout the decisionmaking and the property development process
we are faced with a variety of risks.
These risks can be avoided, transferred to
insurance policies and managed. The perceived
magnitude of the risk is, therefore, important
and a rational approach to decision-making
is thus required. This requires a thorough
analysis of the array of alternatives available
to the developer / contractor based on good
information so that an educated decision can be
taken within a minimum time period.
www.reimag.co.za

In addition, risk can be described as the
possibility of there being a difference between
the investor’s expectations and that which he
actually realises from the property. Risk can be
classified into 2 categories namely: business risk
and financial risk.
These categories of risk are discussed below.
Business risk is the difference between the
productiv it y (y ield) expectations of the
investor and that which comes true; it reflects
the net income of the property without use of
borrowed capital and it reflects an investor’s
uncer taint y regarding the reliabilit y of
estimates of a property’s future productivity.
Furthermore, it is quite clear that if there is
a relatively safe yield from a subject property
the owner will not expect an excessively high
rate of return. However, as an integral part of
the investor’s decision-making the following
aspects have to be considered, namely:

Fluctuations in interest rates can affect changes
in the value of a propert