Apartment project risk assessment under risky environment; a case study in Indonesia

Real estate is a capital-intensive asset with a long life-cycle, both in terms of investment and use; it implies various risks anduncertainties. The economic condition that causes property slow-down in Indonesia recently has led to some certain of stagnation, primarily in residential projects, of which impacts remain for years. In such condition, it is important to measure risks utilizing specific and adaptable tools before making an investment decision. Despite its beneficial aspects, the conventional assessment approach has some limitation when implemented in specific investment circumstances. This paper aimed to study the concept and application of alternative valuation tool for apartment project under risky environment. The selected approach consists of market risks and operating risks assess risks. Market risk is subdivided into capital market risk, valuation riskand market growth rate risk, while real estate operating risk is subdivided into operating risk, development risk, leasing risk, leasehold risk and leverage risk. The riskiness values are categorized into three classes: conservative, moderate and aggressive. A leased apartment development project in Surabaya, Indonesia, was selected as a case study. The project covered 8,773 square meters of land and consisted of one tower with total 31,829 square meters gross floor area. The result showed that most of the project riskiness values were in conservative category except leasing risk. This led to the conclusion that even though the net present value was positive and most of the riskiness were acceptable, considering the recent crisis and future uncertainty, the project was not risk free. Further investigation was advised to ensure the applicability of the approach for different environment.