Abstract
Apartment projects are developed based on a set of assumptions; therefore they have to face risks and uncertainties. One of the most important risks is the uncertainty of the market. The economic condition that causes market slow-down in Indonesia recently has led to some certain of stagnation of apartment development, of which impacts remain for years. In such condition, it is necessary to understand how to measure risks before making a decision. The objective of this paper is to assess risk in apartment project under market uncertainty, using quantitative tools selected from the theory associated with the investment decision. The parameters are market risks and operating risks. Market risk is subdivided into capital market risk(CMr), valuation risk (Vr) and market growth rate risk (MGRr), while real estate operating risk is subdivided into operating risk (Or), development risk (Dr), leasing risk (Lr), leasehold risk (LHr) and leverage risk (LVr). The riskiness values are categorized into three classes: conservative, moderate and aggressive. A leased apartment development project in Wonokromo, Surabaya was selected as a case study. The project covered 8,773 square meters of land and consisted of one tower with total 31,829 square meters gross floor area, equipped with parking lots and amenities. The study found out that The CMr was 36%, Vr was 13 %, MGRr was 50%, Or was 112%, Dr was 47%, Lr was 215%, LHr was 61% and LVr was 156%. Although the overall project risk values lie in conservative category, since the level of leasing risk is in aggresive range, more comprehensive investigation should be carried out during a decision-making to reduce the negative impact of risks.
Highlights
Property sector, and apartment projects in particular, had been experiencing tough years during 2007-2009, soon after the eruption of 2006 financial crisis in The United States
The main objective of this paper is to provide risk assessment tools to addressing risk and uncertainty in residential investment decision in times of economic volatility, and to enrich the understanding of risk management and risk assessment in particular, in residential development industry, by conducting empirical research in apartment development project in Surabaya
That the value of the project is IDR 820.6 billion and the net operating income is IDR 271,4 billion, we obtain that the asset capitalization rate (ACR) was 33%, and at the first year of the project, the capital market risk is 36%, which means that the risk is conservative and acceptable
Summary
Apartment projects in particular, had been experiencing tough years during 2007-2009, soon after the eruption of 2006 financial crisis in The United States. The slow-down continued until the third quarter of 2009 when the banks started to lower their mortgage rate policy from the average of 14 % during the crisis In this regard, one puzzling evidence in the residential housing market is that, on the one hand, potential buyers are reluctant to buy because of the lack of financial resources and the credit crunch, but on the other hand owners are reluctant to sell due to the so–called “hold out phenomenon”. The main objective of this paper is to provide risk assessment tools to addressing risk and uncertainty in residential investment decision in times of economic volatility, and to enrich the understanding of risk management and risk assessment in particular, in residential development industry, by conducting empirical research in apartment development project in Surabaya
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