Investment risk scoring model for commercial properties in India

Abstract

Purpose

There is significant research related to risk and uncertainty in valuation. Risk, in valuation, is mostly communicated to investors in qualitative terms. There has been some research in developed markets to communicate risk quantitatively to clients through property risk scores. However there is paucity of research on communicating risk in emerging markets where the valuation profession is still evolving. Indian property markets have emerged as one the fastest growing markets in the last five years. With the growth in Indian economy and the emergence of indirect property investment market, it is likely that domestic and international passive investors would play an important role in property investment in India. Valuation of assets in portfolio and communication of risk in appropriate way would gain utmost importance. The paper aims to discuss these issues.

Design/methodology/approach

This study uses analytical hierarchical process method to quantitatively assess risk to value for office properties in India. This study focuses on identifying principal elements of risk as perceived by key market players in an emerging economy like India. It identifies fundamentals of market, property and lease to determine valuation risk. It may be highlighted here that the risk that this paper is analysing is not the risk that is associated with the valuation for valuer who is conducting valuation but systematic and non-systematic risk associated with property. A two round of survey has been conducted to find various principal elements of valuation risk and sub criteria’s through an online survey conducted through survey monkey.

Findings

The study found that in an emerging market like India there are limited exit option for developers and investors due to absence of exit vehicle like REITs for office property. Principal element of risk considered is the resale of property, i.e. exit from an investment, followed by tenant and lease specific elements to be other principal elements of risk in the order tenant risk, lock-in duration, functional obsolescence and lease duration. Other market risks like yield movement, rental movement, occupier demand were not considered principal elements of risk.

Research limitations/implications

The study could be expanded further by increasing the sample size and as this study demonstrates present market sentiments. Study needs to be updated periodically to retain its practical importance and relevance to the industry.

Practical implications

Findings of this study could be used by valuers and investors investing in office properties in India.

Originality/value

This is the first paper on risk scoring for commercial properties in the Indian market. It has high importance as Indian market for office space will grow significantly with introduction of REITs.

Citation

Gupta, A. and Tiwari, P. (2016), "Investment risk scoring model for commercial properties in India", Journal of Property Investment & Finance, Vol. 34 No. 2, pp. 156-171. https://doi.org/10.1108/JPIF-05-2015-0031