The Application of Probabilistic Methods of Risk Analysis in the Investment Appraisal of Residential Properties in Enugu Metropolis, Nigeria

Obinna Collins Nnamani

ERES from European Real Estate Society (ERES)

Abstract: Residential property investments are frequently subjected to unpredictablefuture, encompassing uncertainties and various forms of risks which impactthe anticipated level of returns that should compensate for the risks takenby the investors. There are cases where appraised property investmentprojects were abandoned before completion and some investors lose theirinvestments due to inability to repay loans sourced from credit institutions.These issues have been as a result of the Estate Surveying and ValuationFirms not employing probabilistic techniques in the appraisal of residentialproperty investment risks. The study appraised the factors influencing theapplication or otherwise of probabilistic methods of risk analysis inresidential property investment with the view to proffer workable solutions.The objectives of the study are: to ascertain if Estate Surveying andValuation Firms in Enugu metropolis are applying these techniques forresidential property investment appraisal; to analyse the factors influencingthe application of probabilistic methods of risk analysis. Survey researchdesign was adopted for the study. The population of the study comprised 49Estate Surveying and Valuation Firms in Enugu Metropolis. A demographicformula was used to determine a sample size of 44 firms which wereselected by purposive sampling technique. Data collected were analysedusing mean and standard deviation; hypothesis was tested using logisticregression analysis. Findings from the study show that the Firms do notadopt probabilistic methods of risk analysis; methods mostly applied wererisk adjusted discount rate (RADR) and sensitivity analysis. The degree ofsophistication involved with the methods and lack of computer softwarepackages are the factors influencing the non-application of probabilisticmethods of risk analysis. The Application of probabilistic methods of riskanalysis in residential property investment decision making will provide asubstantial level of professional shielding of investors from the ravages ofrisks and uncertainties.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2016-01-01
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