**2. Method**

The categorization of risks in real estate according to the scheme below can be used as a basis for subsequent studies and implementations and it is a common scheme used in due diligence in private equity real estate that merges the guidelines by FINRA (Financial Industry Regulatory Authority) with the analysis of practices. The idea is starting from a common practice of the market in order to understand how selected drivers can impact the list.

**Table 1** illustrates, from the point of view of the financial implications only, how the forces coming from the macro-economy, finance, and micro-economy can impact the generic real estate risk, using a table in a due diligence department of a primary Investment Company. Now, a standard has not been formulated that fully considers all the components as the approach of the real estate world, due to structural deficiencies or a simple functional deficiency in the approach. The goal is to look for a compendium that can encompass different scales of analysis and that intercepts the complexity of the contingency to be able to organize it into a list of aspects to consider. The methodological process consists in observing trends considered in other sectors, but which could be considered significant in the observation of the real estate world without losing the needs for simplicity and agile approach needed in the company system.

The real estate development process constitutes an articulated activity, requiring a comprehensive integration of phases, processes, actors, and involving financial, urban planning, technical, and organizational skills.

A highly complex activity, quite similar to that which characterizes some industrial sectors; however, in the world of real estate development, risk analysis is not a common practice.

Only in real estate finance—when development operations are managed by real estate investment funds—risk analysis is adopted, partly because it is required by supervisory and control bodies; in addition, asset management companies are required to appoint a risk manager.


#### **Table 1.**

*Risk and scope in real estate (elaborated by the authors on origin investments basis).*

#### *Perspective Chapter: Minimizing Risk in Real Estate Development – An Industrial Approach DOI: http://dx.doi.org/10.5772/intechopen.112980*

Measurement methods can have different types of approaches:

Quantitative approach: Generally more analytical and numerical, it tends to assign a numerical index to each element of risk that should inherently represent the measure of risk itself. These numbers are then weighted by different coefficients to obtain as a result a number that can be defined as the overall risk rating of the investment fund or level of the risk profile of the fund.

Qualitative approach: This approach tends to define a process that starts with the analysis of each individual critical aspect and risk identified from the individual building and then is aggregated to the portfolio level. The approach is more descriptive than numerical in nature and is aimed at specifically understanding problems in order to describe their dynamics, highlight impacts, and define solutions.

Qualitative-quantitative approach: It represents the union of the previous approaches and is considered the most in-depth methodology and one that can return one or more synthetic numerical risk indices without losing the qualitative and illustrative level of risks necessary for the complete understanding of the risks themselves. It also makes it possible to associate risk, as mentioned often related to real estate issues (critical maintenance issues, regulatory non-compliance, real estate concentrations, etc.), with risk indices expressed by numerical coefficients.

Risk analysis in finance sees its completion in sensitivity analysis.

The drivers for the setting of sensitivity analysis must be identified in the context of existing critical issues and potential risks and can be strictly real estate in nature but also related to market and macroeconomic indices. By way of example:

financial and market variables; change in inflationary indices, change in the real estate market (particularly the negative change in market rent trends with impact on new trading assumptions), change in expected returns (increase in benchmark cap rates).

Drivers for setting sensitivity analyses must be identified in the context of existing critical issues and potential risks and can be strictly real estate in nature but also related to market and macroeconomic indices. The financial component, however, is only one of the areas that characterizes the real estate development process, and the co-presence of different professionalism, and phases require integration that cannot be limited to only one part of the process.
