Abstract
Abstract Under the provisions of the standard Valuation to Secure Debt made by the Polish Federation of Valuers’ Associations, in preparing the appraisal report for this purpose, the valuer, among other things, is “obligated to identify risk areas related to the property concerned, including the anticipated changes in the property market and the risk related to how the property is assessed by investors”. The article discusses the assessment of the risk of incomes generated by a commercial property which is to constitute loan security. Factors influencing the variability of incomes taken into consideration in the income approach to property valuation are subject to detailed analysis. The article analyses the assessment of the risk of earning income different from that expected from the property constituting loan security with the use of statistical measures. The main purpose of the article is to propose the application of statistical measures for income risk assessment. Auxiliary goals are listing the factors which influence the variability of incomes in property valuation and characteristic features of modern office space in the Polish Tricity (i.e. Gdansk, Sopot, Gdynia) near the Baltic Sea, with the analysis of rents and vacancies. The article analyzes data from the Tricity property market over the period 2009 – 2016.
Highlights
Following the 2007-2008 global crisis related to property financing, the awareness of banks has increased (AEBI et al 2012, p. 3213)
The article analyses the assessment of the risk of earning income different from that expected from a property being used as loan security with the use of statistical measures
Assuming that a given commercial real property has a finite number of variations of forecast net incomes, and we are familiar with the probability distribution of their occurrence under the anticipated economic conditions, the risk in real estate valuation may be quantified with the use of probabilistic methods
Summary
Following the 2007-2008 global crisis related to property financing, the awareness of banks has increased (AEBI et al 2012, p. 3213). Loan applications for financing property development projects, as well as projects where the already-existing property constitutes loan security, are thoroughly analyzed and assessed. When making loan decisions secured by real property, the value of this property has to be determined. Real property is a capital-intensive commodity, and the volume of capital engaged in the property makes it an important element of the economy and a significant element in the investors’ portfolios. It should be stressed that, as far as the number of concluded loan agreements is concerned, the residential mortgage market is the largest. As far as the value of loans granted is concerned, the commercial property market is predominant These incomes can come from rent paid by tenants or the share of the landlord in the operational income generated by business activities carried out with the use of the property (TROJANOWSKI 2002, p. 31)
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