Property is a seemingly endless topic of conversation, media articles and television programmes in the UK, with a recurring theme being how to make money from investing in it.
Risk application developer, RisqWorx, found an innovative way to help commercial property developers more accurately determine return on investment. Using Palisade’s @RISK (which is compatible with Microsoft Project and Excel), it has developed a model that provides buyers with easily-understood data that enables informed decisions to be made about property acquisitions.
The simple sum traditionally used to determine whether to buy a particular property uses the sale price, minus purchase price and renovation / alteration / building costs, to calculate profit. However, this level of decision evaluation does not account for variables that could substantially change, and potentially erode, the profit margins. For example, building costs might initially be factored in at £200 per square foot but rise to £400 per square foot during the project, thereby weakening the financially feasibility of the purchase. Equally, if the project is not completed within the scheduled time, bank interest on borrowings increases, again affecting overall profitability. These factors should be considered in a financial risk analysis.
Recognising that this was a potentially business-critical issue, the RiskWorx’s @RISK risk analysis model allows all the variables associated with property portfolios to be incorporated into the equation, using Monte Carlo simulation. Variables include the initial cost of the building, the construction and materials costs, the length of the building project, professional fees, interest rates and the sale price or rental yield (which is affected by the general economic climate and the commercial property market).
The resulting ‘due diligence’ provides board members of property companies with the information that they need to decide which properties will make the best investments.