Investment Valuation: Risk and Uncertainty Incorporation in Reports; A Study of Benin City
Abstract
This study investigated investment valuation: risk and uncertainty incorporation in reports. A study of Benin City. Specific objectives of this study included the degree of risk analysis knowledge, awareness, use among real estate valuers in Benin City, the risk factors influencing real estate investments in Benin City and the methods real estate valuers in Benin City use to account for risk and uncertainty in their appraisals. A survey research design was adopted for this study. A questionnaire was designed to obtain the qualitative and quantitative information concerning the stated objectives of this study from a host of respondents the data collected from the research participants were coded into SPSS23 and analyzed appropriately. The collected information/data were presented in frequency tables and percentages for easy interpretation. Empirical evaluation in this study showed that 72% of respondents agreed and strongly agreed that neighbourhood tension is a risk to be considered when investing in real estate in Benin City. This analysis suggests that purchasing property in Benin City entails a risk of hostility in the neighbourhood. According to the findings of this study, 67.4% of respondents agreed and strongly agreed that knowing the real land owner is a risk element that affects real estate investment in Benin City, This analysis demonstrates that determining the true landowner in Benin City is a risk factor affecting real estate investment. Findings also revealed that 63.9% of real estate valuers affirmed that inexperienced building contractors, pose risks for real estate investment in Benin City. This research claims that the unskilled building contractors in Benin City make real estate investment risky. The use of inferior building materials is a risk that has an impact on real estate investment in Benin City, according to 59.3% of respondents who agreed and strongly agreed with this notion. This analysis suggests that employing inferior building materials carries a risk that has an impact on real estate investment in Benin City. Poor access to the project site is a risk factor that affects real estate investment, according to empirical findings in this study, 60.4% of respondents agreed and strongly agreed, This analysis demonstrates that a risk factor affecting real estate investment is limited access to the project site. Findings in this study showed that 17.4% of respondents agreed and strongly agreed that they compare similar projects under similar conditions when evaluating estate risk, 26.7% said they base their decisions on intuition, experience, and subjectivity, 17.4% say they use the internal rate of return, 12.8% say they use the risk-adjusted discount rate, and 18.6% say they use net present value. This analysis demonstrates that the majority of real estate brokers in Benin City employ the method of Comparing Like Projects under Similar Conditions when assessing risk in the real estate business. According to the study’s findings, investments without a risk component may not be worthwhile because taking on risk could propel a company beyond previously unheard-of levels of success. Depending on the investor’s attitude towards risk, it may or may not serve as a deterrent to investing. It was concluded that when making any kind of real estate investment, risk is a crucial element that must be taken into account. The ideal real estate investor views pricing certainty as a crucial economic aspect because every risk factor affects the project’s financial budget, whether it be during the planning stages or throughout construction, delivery, or occupancy. Recommendations were made based on the conclusion reached.
CHAPTER ONE
INTRODUCTION
Background of the Study
Calculating a price in the market is the process of valuation. Uncertainties will have an impact on this estimation. Uncertainty regarding the comparative data that is accessible, the present and upcoming market conditions, and the specific inputs for the subject property. These input ambiguities will result in ambiguity regarding the outcome number and valuation (AbouRizk, 2017). The words “development valuation” and “development appraisal” relate to expert assessments carried out to ascertain the viability and feasibility of the proposed improvement on land. Such evaluations, according to (Ajayi, 2018), are pre-development feasibility/viability studies that give a customer an idea of the expected project costs, revenues, and profitability associated with pursuing a development scheme.
It is widely accepted that a lack of knowledge and inaccurate or incomplete information about all the inputs that might be employed in the valuation analysis are the main causes of uncertainty (Robinson, 2018). Risk and uncertainty are words that are frequently used interchangeably. Risk is frequently used as a synonym for uncertainty. Yet, this informal usage of the terminology makes it difficult to pinpoint the key problems at hand. It is crucial to provide a clearer definition of these terms. The foundation of many papers and books is the definition and discussion of risk and uncertainty (Baum & Crosby, 2018).
According to Baum and Crosby (2018), the primary emphasis of contemporary investment analysis is risk/return. Sophisticated investors increasingly request downside risk analysis and adjustment from valuers/appraisers in valuation and investment analysis, particularly in more developed property markets like those in the US and UK. 2017 (Ogunba, Ojo, & Boyd). Because the valuer is unable to describe and price properly all present and upcoming influences on the value of the asset, risk and uncertainty are fundamental aspects of the valuation process (Adair, Berry & McGreal, 2018). Hence, a valuation estimate has been likened to a “snapshot” in time that shows the market price at a certain moment in time. It is a hunch, and a hunch is always iffy (Crossland, 2020). Due to incomplete knowledge of all the inputs needed to derive the estimate of value or imprecise information, there is uncertainty in property valuation. Hence, eliminating uncertainty from property valuation will not be achievable because no valuer has complete knowledge of all the factors that could affect the result of the exercise at his disposal. Every estimate is dubious until the property is sold to determine the market price (Fisher et al., 2018).
Several people are frequently involved in a project’s risk and uncertainty. Each participant employs unique techniques for identifying and controlling the risk items that are pertinent to his or her scope. Whichever approach is taken, it should objectively and quantitatively describe the project’s risk and offer a quantifiable way to diversify or distribute the risk among the involved parties. A participant’s readiness to take risks frequently reflects both his propensity for taking risks and his level of professional expertise. Conflict arises amongst the participants since everyone often attempts to reduce their risk, and this conflict can occasionally be harmful to the enterprise (Fisher et al., 2018).
Statement of the Problem
The need to assess the viability of proposed development projects, attract development finance, convince a joint developer that investing in the development will be profitable, enable the developer to choose between two or more alternative investments, and assess the type of development that could profitably be done on a specific plot of land as well as the intensity of usability are all reasons for the importance of development/investment appraisal (Ogunba, Ojo & Boyd, 2017). The meticulous estimate of every element that contributes to value is real estate investment valuation and appraisal. Consequently, if the value (benefit) concerning the cost is positive, the project is viable or lucrative (Ezeokoli et al., 2020). Incorporating risk into real estate appraisals, according to Ajayi (2018), is essential in real estate development projects because it aids the decision-maker in the overall risk management process by identifying such factors that have the potential to have an impact on the conceived project and may affect the expected income, timely completion, and successful execution of the project. So, it will be impossible to respond to and control a danger without first assessing or analysing it. To reduce the exposure of financiers and end users of development evaluation (estate surveyors & valuers, developers, and development financiers), the study is designed to identify how property development appraisal might be improved.
Particularly for private investors whose primary goal is to maximise profit, the financial assessment of capital investment decisions is an important component of feasibility and viability studies (Khumpaisal, Ross & Abdulai, 2020). Given that risk occurrence in real estate valuation and appraisal influences project management, financing, and the development process in terms of project management, delay, project cost overrun, and product quality, it must be taken into account and should not be underestimated (Khumpaisal, Ross & Abdulai, 2020). Thus, sophisticated risk modelling is needed to account for the interplay of various parties and the multitude of factors involved in real estate investments. This modelling would also aid developers in structuring their decision-making processes (Khumpaisal, Ross & Abdulai, 2020). In real estate investment, decisions once taken may be irreversible or at least costly to amend. Hence, it is crucial to evaluate investment decisions, and the need for a trustworthy method for valuing real estate investments cannot be overstated (Khumpaisal & Chen, 2018). These underlying assumptions serve as the foundation for the researcher’s investigation of Investment valuation: Risk and uncertainty inclusion in reports, a Benin city case study.
The objectivation of the Study
The main objective of this study is to investigate investment valuation: Risk and uncertainty incorporation in reports. A study of Benin city. Specific Objectives of this study include to :
- Investigate the degree of risk analysis knowledge, awareness, and use among real estate valuers in Benin City.
- Explore the risk factors influencing real estate investments in Benin City.
- Investigate the methods real estate valuers in Benin City use to account for risk and uncertainty in their appraisals.
Research Questions
The following research questions were investigated in this study:
- What are the degree of risk analysis knowledge, awareness, and use among real estate valuers in Benin City?
- What are the risk factors influencing real estate investments in Benin City?
- What are the methods real estate valuers in Benin City use to account for risk and uncertainty in their appraisals?
Significance of the Study
The need to assess the viability of proposed development projects, attract development finance, convince a joint developer that investing in the development will be profitable, enable the developer to choose between two or more alternative investments, and assess the type of development that could profitably be done on a specific plot of land as well as the intensity of usability are all reasons for the importance of development/investment appraisal (Ogunba, Ojo & Boyd, 2017). The meticulous estimate of every element that contributes to value is real estate investment valuation and appraisal. Consequently, if the value (benefit) about the cost is positive, the project is viable or lucrative (Ezeokoli et al., 2020). Incorporating risk into real estate appraisals, according to Ajayi (2018), is essential in real estate development projects because it aids the decision-maker in the overall risk management process by identifying such factors that have the potential to have an impact on the conceived project and may affect the expected income, timely completion, and successful execution of the project. So, it will be impossible to respond to and control a danger without first assessing or analysing it. Therefore the study is conceived to determine how property development appraisal can be improved upon to minimize the exposure of financiers and end users of development appraisal (estate surveyors & valuers, developers, and development financiers) from downside risk in property development.
Particularly for private investors whose primary goal is to maximise profit, the financial assessment of capital investment decisions is an important component of feasibility and viability studies (Ibiranke, 1998). Given that risk occurrence in real estate valuation and appraisal influences project management, financing, and the development process in terms of project management, delay, project cost overrun, and product quality, it must be taken into account and should not be underestimated (Khumpaisal & Chen, 2018).
Scope of the Study
The study focused on selected real estate firms that operate in Benin City, Edo State. The study also discusses the level of knowledge, awareness, and application of risk analysis among real estate valuers in Benin City, as well as the risk factors influencing real estate investments in Benin City and the techniques used by real estate valuers in Benin City to account for risk and uncertainty in their appraisals.
Limitations of the Study
There were several limitations the researcher had to operate within when analysing this research project. The amount of ground the researcher could cover in the period allotted for this study’s completion. Also, the lack of relevant material both online and offline had a substantial impact on the quantity and quality of our study. So, it was a setback that some of the key data/information needed to finish this study was not provided by the sampled research participants.
Definition of Terms
Real estate: a piece of real property, structures or housing in general. The property consists of land and the buildings on it, along with its natural resources such as crops, minerals, or water.
Investment: commitment of resources for future gains. An investment is a “commitment of money to obtain more money later” if money is involved.
Risk management: the process of identifying, assessing, and prioritising risks, followed by the coordinated and cost-effective use of resources to reduce, monitor, and manage the likelihood or impact of unpleasant events or to maximise the realisation of opportunities.
Management: the management of organisations, whether they are commercial, charitable, or governmental bodies. It is both the science and the art of managing a company’s resources.
Uncertainty: scenarios where the information is incomplete or unknown. It applies to physical measurements that have previously been performed, to the unknown, and projections of future events.
Organisations of the Study
This research work is structured into chapters. Chapter one is made up of an introduction, background to the study, statement of the research problem, research objective, research questions, significance of the study, the scope of the study, limitation of the study and definition of terms. Chapter two is a literature review under which the following are contained: conceptual, review, theoretical review and empirical review. Chapter three is the research methodology. This chapter consists of the research design, population of the study, sampling technique and sample size, method and source of data collection, reliability and validity of the study and method of data analysis. Chapter four encompasses data presentation analysis and discussion of results. Chapter five covers the summary of findings, conclusion and recommendations.
References
- Koontz, H. & Weihrich, H (2016). Essential of management; an international perspective. (8th ed.), New Delhi: Tata McGraw Hill Education Private Limited.
- Khumpaisal & Chen, (2018). Risk Assessment in Real Estate Development: An Application of Analytic Network Process. Journal of Construction Engineering and Management, 131(1), 92 101.
- Khumpaisal, S. Ross, A. & Abdulai, R. (2020). An examination of Thai practitioner’s Perceptions of risk assessment techniques in real estate development projects. Journal of Retail & Leisure Property 9(2) 151–174.
- Kokli c, M.K., & Vida, I. (2019). A Strategic Household Purchase: Consumer House Buying Behavior. Managing Global Transitions, 7(1): 75-96.
- Kothari, C. R. (2018). Research Methodology: Methods and Techniques (5th Ed.)’. New Delhi: New Age International Limited.
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