Analysis of Risks in Residential Real Estate Development Projects of Addis Ababa

Abstract

Real estate development is considered as one of the sectors with transaction of billions of Birr in the market in Ethiopia. Real estate contributes to the economy of the country and in alleviating housing problems. However, real estate development in the country is facing different problems. Problems that exist in the real estate development make the business environment susceptible to uncertainty. This paper is aimed at identifying the risks in real estate development projects in Addis Ababa, assessing their impact on project schedule and cost, and the interrelationship between the risk factors. Risk factors which could possibly occur in real estate development projects were identified from previous research works on similar issue. In addition, risks included in real estate purchase agreements which are being used in the market were reviewed and these factors were measured with a questionnaire survey. The identified risk factors were threefold, namely economic and financial, technical and environmental, legal, contractual and political. Questionnaires were collected from private residential real estate development companies in Addis Ababa, Ethiopia in order to assess the likelihood of occurrence and impact of the identified risk factors. The significance of the interrelationship between these factors was also assessed. The risk impact assessment was conducted by developing a risk significance index and the significance interrelationship was identified by the use of correlation analysis. The results show that economic and financial factors have greater impact on project objectives. It was also found that Economic and financial risks have significant correlation with each other. Developers can foresee the occurrence of these risks and can assess their impact. This makes the risk response planning easier for developers. Therefore, it is recommended that developers plan ahead on how to respond towards such factors. Technical and environmental risks are also found to have a significant impact on project objectives. Most of these factors are internal factors for developers and the developers can foresee and control the possibility of their occurrence. Developers are responsible for these factors and they are obligated to absorb them. This will affect their schedule and will incur cost. Hence, developers should work towards minimizing the probability of occurrence and impact these factors. Developers are recommended to continuously identify and analyze possible risks to cope with the dynamic nature of the business and such projects, so that they could successfully deliver housing units to their clients.