Systematic and Unsystematic Risk in Real Estate Development: A Theoretical Based Analysis

Abstract

The real estate development industry includes a wide range of organizations and individuals and, it is inherently risky, with high barriers to entry reflecting the cyclic and capital-intensive nature of the sector, and the typically slow payback period. In certain cases, risk includes the prospect of losing the original investment. The risk is classified into different categories among them, systematic risks and unsystematic risks is one important category for an investor. Moreover, systematic risk is the type of risk caused by external factors that affect all investments and, systematic risk is the probability of a loss associated with the entire market or the segment and cannot be controlled whereas unsystematic risk is associated with a specific industry as well as it is controllable. In Sri Lankan context, though there are few researches on identifying the risk factors, but not explained what is systematic and what is unsystematic. Therefore, this research focus to categorize the already identified risk factors in to two areas as systematic and unsystematic. The data collection is based on the past literature and 25 published articles in indexed Journals, conference papers and reports relating real estate development risk factors up to 2020 were identified. Accordingly altogether 35 risk factors were identified and , ten risk factors which were recognized as most significant to the commercial real estate developments were selected for the purpose of the analysis. Results emphasized that climate changes, natural disaster, pandemic risk, council approval process and changes of tax policies as systematic risk factors. On the other hand, the community acceptability, duration, facility management, brand visibility as well as workforce availability as unsystematic risk factors. Hence having identified the risk factors on this basis will help to measure the beta coefficient of the systematic risk in commercial real estate developments to take better investment decisions while increasing the satisfaction of long-term investment goals as well as contribute to improve the risk management strategies in the real estate industry. Measures should be taken to eliminate the unsystematic risk thus the losses from systematic risk may automatically mitigate.

Keywords: Systematic Risk, Unsystematic Risk, Risk Management, Real Estate Development