The real estate sector, like any other business area, evolves, changes and transforms based on structural changes, the economic-political situation, consumer confidence, and the evolution of the market itself and its most relevant indicators.
Risks are lurking around us and we cannot ignore them. Given this situation, in which we cannot live oblivious to the risks that affect us, what is essential is not to fall into inaction or paralysis in our agency’s decision-making.
Learning to live with business stress and accepting the existence of risks is a natural part of managing any business, whether it is a small agency or a large company. Therefore, detecting risks and analysing them properly is essential for correct decision-making from the point of view of efficiency and strategy.
There are different types of risks in real estate products and our objective is to try to minimize the impact of these risks through processes, tools and/or models that serve to identify and address them.
When we talk about managing risks, we are referring to a systematic process in several stages:
- Risk identification
- Analysis and evaluation
- Planning strategies and implementing action plans to address them by either transferring, avoiding or reducing their negative impact
Types of risks in the real estate sector
There are many of them and they are very diverse, so the classification, beyond being a closed or exhaustive list, is more of a guide to take into account when identifying them and being alert. The same risk factor can be included in several categories simultaneously. Let’s look at the most significant groups.
Market risks
Here we will place those risks derived from the activity of the investors and financial institutions themselves in the sector’s activity. A significant example would be how variations in interest rates affect the cost of mortgage loans.
Other risk factors are related to liquidity, as they directly affect the expansion or contraction of the number of transactions and their nature. On the other hand, we would also find in this group the risks derived from certain indicators such as, for example, the exchange rate. Finally, we could also include in this group the risks derived from the cycles of the real estate sector itself.
Demand risks
Sometimes, demand for real estate is concentrated in certain points or geographic areas, which poses a risk for those operators who are not established in those places. Another factor that has to do with demand is consumer confidence and their habits, which range from buying and selling to renting, or from homes with specific characteristics to other new needs.
Supply risks
The volume of marketable housing fluctuates. And this difference is accentuated positively or negatively depending on the characteristics of the property. For example, there may be a lack of supply of exterior housing with elevators and large common areas in the historic centres of cities, or an excess of single-family homes in developments scattered in some population centres on the outskirts of large cities.
Conjunctural
This group includes changes attributed to the political, legal, financial, social, technological, etc. context. The fluctuations in economic indicators derived from decisions of national and international bodies (for example, increases in the Euribor, the price of money, exchange rates, conditions for access to financing, etc.), together with the legislative activity of the different administrations: local, regional, state and international (for example, environmental laws, taxation, regulation of free or protected housing, etc.).
Naturally, the list of possible risks and their classification can be as extensive and detailed as one wishes; the important thing is not so much the typology of the risk as the need to identify and analyze it.
Finally, facing the threats that may affect us slowly but surely is a constant task in the management of the business that we are responsible for. Making decisions is a constant task for the businessman, entrepreneur or business manager, so situational analysis should be one more tool to add to their agenda.
The fear of error or failure due to a wrong decision must be overcome with analysis, a global vision and professionalism, and always assuming that we are not infallible. What we cannot allow ourselves in any way is inaction, since not making decisions in the face of a risky situation is already a decision in itself: the decision to do nothing.
And it will always be worse to face the consequences of having done nothing than those of having done something, as long as we do it judiciously, even if we make mistakes.