Investment Valuation: Risk and Uncertainty Incorporation in Reports; A Study of Benin City
Chapter One
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.
CHAPTER TWO
REVIEW OF LITERATURE
Conceptual Framework
The Concept of Risk
It is widely accepted that every project has some level of risk, particularly building projects. What does “risk” actually mean? Only until the idea is fully grasped will it have more significance when examining how the construction industry approaches risk management, a topic that has now become utterly specialised. One of the fundamental advantages of risk management is the successful completion of projects’ objectives. According to Cheng & Li (2018), with proper risk management support, two key benefits can be realised, the expected project cost can be more confidently predicted, and profits can be maximised.
Like the idea itself, there are several vantage points on what the term “risk” means. The notion and definition of the word “risk” are seen from many different angles by academics, professional organisations, and standard institutions. It has been challenging to develop a single, consensus meaning of the term “risk” as a result. Nonetheless, despite the many perspectives, most definitions have some fundamental components. The term has traditionally been associated with the negative and uncertainty, according to standard dictionaries. According to Fisher (2017), the fact that multiple terms are used to characterise risk in literature speaks to the lack of agreement over its definition among professional bodies and standard institutions. “Exposure to economic loss or gain from involvement in the construction process” and “a consideration in the process of the construction project whose variation results in an uncertainty in the final cost, duration, and quality of the project” are two definitions given for risk about construction (Huffman, 2018). Similarly to this, risk has been described in the business community as “the probability of the occurrence of some uncertain, unpredictable, and even undesirable event(s) that would chance the prospects for the profitability on a given investment” and “the lack of predictability about structure, outcomes, or consequences in a planning and decision situation” (Simo, Houghton & Aquino, 2018).
Risk and Uncertainty
Uncertainty and risk frequently get confused with one another. As was mentioned above, uncertainty is typically included in definitions of risk, whether expressly or implicitly. Matysiak (2020) claimed that “uncertainty is related to the probability of the occurrence of an event; an event is assumed to be certain if the probability of its occurrence is 100% or uncertain if the probability of its occurrence is 0% where among these boundaries the uncertainty varies quite wisely” to separate two intertwined concepts.
Uncertainty regarding decision-making situations was defined by Newell, G., and Steglick (2018) as “situations in which there are no historical data or prior history relevant to the situation being examined by the decision-maker. To put it another way, it is unique. While risk, which lies somewhere between certainty and uncertainty, is regarded as a “risk” in terms of decision-making when a decision-maker can evaluate the likelihood of a specific occurrence occurring either intuitively or logically.
Uncertainty can make it difficult to predict future events due to its innate ambiguity and fluctuation. Variability describes the situation when a memorable factor can take one of a range of possible values while ambiguity is an uncertainty of meaning, according to Arnold, Benford & Sutton (2021). In other words, ambiguity can be used when a specific event may or may not happen at all, and sometimes when something else unexpected might happen.
In their analysis of the project life cycle, Buhman, Sunder, and Singhal (2019) argued that while “risk” is frequently perceived from a threat and event-based perspective, the uncertainty goes beyond that because it refers to a lack of knowledge about numerous things at any stage of the project life cycle. According to the definitions given above, risk has two main characteristics: it is linked to uncertainty and its impacts on the goals that must be achieved. To distinguish between the two notions, it can be argued that risk is naturally tied to objectives through consideration of its repercussions, whereas uncertainty does not take any preset aims into account.
Risk Management
Risks at both the corporate and project levels frequently need to be managed to, among other things, minimise their impact on success goals. Understanding what ideas imply to the sector and stakeholders is necessary for a thorough grasp of risk management. For a person in a casual situation, managing risk may simply mean using any techniques to reduce its impact on the goals and control its level. Any process used to manage risk and lessen its impact on the objectives might be considered this procedure. This process can just be instinctive based on prior experience, knowledge, or subjective feelings. This may be sufficient for an individual, but for a company and other project stakeholders, the risk management process must go beyond intuition and be more systematic to reflect corporate practice (Crown, 2020). Similar to this, more professional bodies and standards organisations are producing more material on guidance, manuals of procedures, etc. as a result of increased interest in the field of risk management.
If not eliminated, at least reduced to the lowest level too, among other things, to minimise its impact on the achievement of objectives, risk management is essentially a means to manage inherent risks associated with organisations from all perspectives and at both corporate and project levels. Yet, because “risk” has so many distinct connotations, risk management has many varied interpretations as well (Spaulding, 2018).
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter covers the research design, the study’s population, the sample size and technique, the instrument for data collection, the validity of the research instrument, the reliability of the research instrument method of data collection, and the method of data analysis.
Research Design
The research design is the general plan selected to integrate the several study components logically and coherently. It serves as a guide for data collecting, measurement, and analysis(Saunders, Lewis & Thornhill,2017). A descriptive survey research design was adopted for this study. In other words, information/data were collected from a host of respondents. This will be done to analyse the qualitative and quantitative information that was obtained.
Population of the Study
This is the summation of the characteristics that are of interest in a statistical investigation. It comprises every unit that can be used to apply research findings. In other words, a population is a grouping of all the units that have the variable attribute that is the subject of the study and for which general conclusions can be drawn (Mugenda & Mugenda, 2017). A target population size of 200 real estate personnel located in Benin City, Edo State was adopted for this study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
Data Presentation
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
Summary of Findings
Table 4.7 shows that 20.9% of the research participants encountered social risk elements when doing their real estate business, This investigation found that a sizable percentage of respondents experienced economic and environmental hazards as a result of their involvement in real estate-related activities. It was found that among the real estate agents in Benin City, 59.3% were familiar with quantitative risk assessment techniques. This analysis demonstrates that a significant portion of the real estate professionals sampled for this study was knowledgeable about quantitative risk assessment methodology.
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. According to the general adage “prevention is better than cure,” managers must use risk analysis techniques to anticipate risk and its consequences.
Accountants need to educate loan recipients on investment-related topics because doing so will make them more aware of the risks involved in any investments they make. The accountants should additionally ensure that the source of capital to the business is assessed concerning the interest rate associated with it, as well as the impact of inflation on the capital and the operations of the business, to substantially decrease risk. In conclusion, According to Withers (2009), the issue of risk necessitates an understanding of the main decision-makers and how risk affects such decisions. Using risk analysis techniques like sensitivity analysis, anticipated value approach, and a pay-back period, among others, proactive managers are needed to assess the effects of actions made, identify risks inherent, and manage the risks and challenges within.
In many Nigerian urban areas, risk has been perceived as an inherent component of all investment types. How investment decisions can be made without first assessing the level of risk associated with the project in question is one of the core issues with real estate investing. As a result, many sane investors never make an investment decision without first carefully reviewing, identifying, and evaluating the projected risk factors. This is so that an investor might expect some benefits in the form of uncertain returns when they participate in a project of any kind. These advantages are susceptible to the effects of risk factors, such as the risk of being deceived by phoney real estate agents, non-compliance with planning and building regulations, a lack of basic infrastructure at many project sites, difficulty accessing project financing, failure to use reliable building materials and qualified contractors, neglect of building maintenance, and failure of tenants to pay rent on time.
It is also common to note that, depending on forecasts made by investors and experts, the actual returns from any investment typically differ with specific projects. Nwokenkwo (2014) argues that a hazardous investment is one where the investor is unaware of the actual returns he would see from his investment. The degree to which the actual return differs from the anticipated return of investment and the potential for capital loss illustrates the risk components of investment (Ubom, 2010). This made it very evident that where there is a larger level of variability, there is undoubtedly a higher level of investment risk and vice versa. It has been noted that the impact of risk on real estate investment has compelled many investors to adopt incorrect development tactics, which have led to subpar construction and the collapse of numerous buildings and structures in various Nigerian urban centres.
Conclusion
When making any kind of real estate investment, the risk is a crucial element that must be taken into account. During project development and throughout the life of many projects, the impact of risk factors fluctuates, particularly as a result of site topography, planning regulations, fiscal policies, building materials and technology, and the state of the national economy. 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. Notwithstanding the difficulties of predicting the future performance of their chosen investment, many real estate investors take risk into account, either intuitively or by simply seeking a bigger return on their investment. The need for effective and efficient risk management strategies arises from the need for real estate investors, appraisers, and managers to be able to study the real estate market’s development trend to properly explain and counsel potential investors on how to identify investment outlets and their investment outcomes.
Recommendation
The following Recommendations were made in this study:
- Real estate investment advisers must be properly trained and kept on staff to keep up with market and industry changes. Only a property market that is driven by knowledge can support the real estate sector.
- Because each business is subject to a unique risk, consideration should be given to the nature of the business and the requirement to achieve organisational goals. Second, the government must slow down the pace at which it changes its policies, as this frequently results in pricing volatility and other detrimental effects on investment.
- To foster an environment that is favourable to investment, such as easy access to low-interest loans and tax holidays, regulatory bodies like the Central Bank and tax authorities are required. This is in contrast to Nigeria, where the Federal, State, and Local governments all impose taxes on roughly the same tax field.
References
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