Hedging against Property Contingencies

Property investment creates risks as well as opportunities.

Future risks and fortuitous events (including force majeure) are particularly difficult to assess. Such events impact on:

  • Market conditions and general conditions
  • Property prices
  • Property management
  • Amortisation
  • Liquidity (Illiquidity risks)

The following changes may create uncertain situations:

  • Market value of property
    • Market prices on the construction, portfolio, housing and investment markets
    • Changes to the fabric
      • Ageing
      • Destruction
    • Unexpected expenditure
      • Soil remediation
      • Development zoning contributions
      • and so on
    • Capitalisation rates
    • Valuation methods
    • Different needs and habits of property users
      • Residential property
        • Larger windows
        • Larger apartments (several children)
        • Larger floor space
        • Floor plan configuration (spatial planning, open plan areas)
      • Office properties
        • Technical innovation, functional requirements, work processes, occupational health and safety, environmental aspects
        • Compliance with the requirements for conventional types of office buildings
          • Linear form
          • Rectangular form
          • One-room cluster type or two-room cluster type
          • Atrium structure
          • Point block
          • Oval type
          • Campus
        • Efficient use of space
        • Office designs
          • Facilitation of individual floor plan systems
          • Open plan office
      • Commercial property
        • Open plan halls that facilitate individual interior work (e.g. high-bay warehouses, workshop equipment, production lines), rather than (brick-walled) areas
  • Property Expenses
    • Maintenance costs
    • Operating costs
    • Interest rates
    • Taxes
  • Property income
    • Gross income

 Hedging against contingencies is only possible to a limited extent, in particular through:

  • Buildings insurance
    • Fire, storm and tempest, water damage and breakage of glass
  • Earthquake insurance
    • Consequential or actual damage from earthquakes
  • Cost stabilisation
    • Financing with fixed interest rate (fixed-rate mortgages)
    • Market-oriented interest rate (LIBOR mortgages)
    • Interest rate derivate (cap / floor)
    • Repayment options
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