Risks Assessment in Real Estate Investments in Times of Global Crisis

Aim of the paper is to provide a novel valuation model to address risk and uncertainty in property investment decisions. When the future is uncertain and investments are durable and illiquid, the decision to invest at a certain point in time and the correct assessment of risks are key issues. In times of global financial crisis, investors need to know how to measure risks and identify the relationship between risks borne and risk premiums demanded. Increases in idiosyncratic and systematic risk lead developers to abandon/delay investments because de facto they feel not confident in projects riskiness and market values assessed by professionals. Risks evaluation is often left to the sensitivity and discretion of valuers. Rigorous risk assessment measures, based on mathematical algorithms, are here presented. We provide an operational framework to address risk and uncertainty by an integrated approach that can be easily understood by third parties and applied to different property types. The algorithms here proposed allow investors to evaluate risks and opportunities taking into consideration all the different phases of property investment projects and related risks. Investors, with different time patterns of income and desired consumption, will be therefore enabled to determine the risks they can tolerate, the return they need and its timing.