Site Overlay

Land development risk tool

Estimated reading time: 6 minutes

In the article about land development risk we explored how we estimate the financial risk in land development projects for municipalities and project developers. Let’s now look at the land development risk tool itself.

This tool contains a flexible interface that allows the user to obtain all relevant risk reports. The workflow guides the user through three simple steps that are needed to perform a full quantitative risk analysis for each development or subdivision. We summarise these steps below:

workflow of the tool
Figure 1: workflow of the tool

  1. load new data
  2. if needed: adjust the mappings
  3. calculate the risk

I: Clear workbook and load new data

The first step after clearing the workbook is to load new data from the source system that contains the revenue and cost items. We have created an automated interface to TotalLink, which is used in many municipalities. However we can adjust the interface to any other source system.

II: If needed: adjust mappings

IIa: Control mappings of new revenue or cost items

In some cases, the source system contains a new revenue or cost item (system ID) that was not yet mapped before to a broader existing category. To be able to calculate risks on such an item, the land development officer can map that item to the correct category.

Automated error reports help the user to identify items that have not yet been linked to a category.

mapping of revenue or cost items to broader categories
Figure 2: Mapping of cost and revenue items to categories

IIb: Control mappings to risk drivers

In some cases we might also want to create a new revenue or cost category. In this case we also want to assign it to a suitable risk factor. Many risk drivers are already available via our cloud API. Others are specifically created for the project.

mapping of categories to risk drivers
Figure 3: Mapping of categories to risk drivers

The land development has two broader category risk drivers on the revenue side: price and volume risk. Price risk is related to a decrease in the land price. And volume risk is related to a decrease in the number of units sold in a negative scenario.

On the cost side we find three main risk factors: site preparation, preparation for residential use, and planning costs. For each of them we can measure the associated price and volume risk. Price risk is related to a potential increase in the costs per unit built. Volume risk is coupled to the reduction in the total amount of lots that can be constructed in a negative scenario. In this case the volume risk has a decreasing (and therefore positive) effect on the costs.

III: Calculation of the risk

IIIa: Detailed risk report

The detailed risk report shows the future projection of the budget and the different scenario’s. It uses the applicable price and volume risk profiles. We estimate two risks: one relative to budget (Risk vs Budget), and one relative to the expected VaR50 scenario (Risk vs VaR50).

Additionally, we have included functionality to apply phasing (postponement in sales of the lots). This means that land can still be sold after the projected period in case a negative scenario materialises and unsold capacity remains. Therefore, we calculate the risk on postponed sales as well (risk vs maximum capacity).

It should be noted that the business logic remains visible to the end user. This means that the user can verify how the data is related. This is done in a controlled way to eliminate the risk of changing the business logic by mistake.

Land developmen risk tool - detailed risk report
Table 1: Detailed risk report (fictional data)

IIIb: Aggregate risk report

It is important to understand how risk changes if some of the assumptions change. We have included several fields with input parameters. For example, the end user can choose:

  • the risk appetite by selecting a given certainty percentile (e.g. 80%, 85% or 90%)
  • the option to include or exclude postponement of revenue and costs

Another feature is the ability to simulate price changes for both the cost and revenue-side items, as well as volume changes with a positive/negative tilt (distribution of exposure towards the beginning/end of the projected period).

The final risk report puts it all together to create a final view of all the revenues, costs, and results in the negative scenario.

It also displays the cumulative effect over the years and reports the results including correlation effects between the risk factors (as not all risks occur simultaneously).

Land development risk tool - aggregate risk report
Table 2: Aggregate risk report (fictional data)

Graphical presentation of the risks

In addition to the tables in the risk reports we also provide a graphical presentation of the risks for the income, costs and the net results.

Land development risk tool - cashflow of revenues
Figure 4: Projection of revenue (budget vs negative scenario)
Land development risk tool - cashflow of costs
Figure 5: Projection of costs (budget vs negative scenario)

Summary

The land development risk tool helps us to automate the creation of financial risk reports by providing automatic loading of source data, an easy mapping proces and various simulation parameters. This allows one to easily calculate and compare risks in a user-friendly interface.

The business logic remains available to the end user. This ensures that the user stays in charge while at the same time eliminating the risk of erroneously changing the formulas.

In addition, the risk profiles in the risk tool can be updated yearly via the Asset Mechanics Risk API. This enables us to have the best available and most up-to-date estimation of the current risks, under the ever changing macro-economic conditions.

If you also want to obtain a objective and statistical assessment of financial risks on land developments, pleasecontact us. We would be happy to show you how the land development risk tool can also help your organisation to obtain a data driven risk estimation.


×