Risk management practices in the management of real property in kenya: a survey of commercial properties in Nairobi
Abstract
An investment in real property is undertaken for its ability to produce returns. The
achieved returns may not equal the projected returns due to the existence of risks. To
minimise the variations in the returns, the risks must be identified, defined, assessed
and managed. The management of risk has in the recent past acquired new
significance in property management (Louargand, 1992). In Kenya, there have been
minimal attempts to identify and measure risks and employ the recommended risk
management practices. This work is therefore a study of property risks in Kenya and
how their frequency of occurrence, level of severity and their management affect
property investment parameters of rent collection and level of occupancy. The study
ranks the frequency of occurrence of property risks and the level of severity, and
compares the current risk management practices with the recommended practices. An
examination to test whether there is a relationship between frequency of occurrence
and level of severity of property risks on one hand, and the current percentage of rent
arrears and levels of occupancy on the other hand is finally undertaken.
The property risks selected for this study were tenant, legislation, legal, financial and
pure risks. These.risks are defined and classified by their source. The data for the
study was collected by use of questionnaires administered to property managers of 55
selected buildings in Nairobi City. A response of 67% was achieved with majority
being buildings in the Central Business District (CBD). Descriptive statistics were
used to make conclusions on the frequency of occurrence and severity of loss of
property risks in Kenya. Frequency tables were used to describe the state of risk
management practices m Kenya. The hypothesis was tested by use of bi variate
correlation.
It was found that financial risk was the most frequently occurring risk and occurred in
67% of the buildings sampled for the study. Other risks of high frequency of
. occurrence among the sampled buildings were tenant risk, legal risk and pure risk.
Legislation risk was the least occurring. On the whole, it was found that risks have
high frequency of occurrence in commercial properties sampled for the study. 55% of
the properties recorded high frequency of occurrence of the risks selected for the
study.
It was found that risks in commercial real properties resulted in high severity of loss.
The risk with the highest loss was financial risk while the risk that resulted in the least
loss was legislation risk. Pure risk was ranked second in terms of severity. The events
that caused the highest loss were fire and theft in the buildings. It was the findings of
the study that risks with high frequency of occurrence resulted in high severity of loss.
This was particularly the case for financial risk, which recorded the highest frequency
of occurrence and resulted in the highest severity of loss.
Property risk management is an orderly process that involves three mam steps
namely: risk identification, risk measurement and selection and implementation of
risk response tools. The study found that the recommended risk management
procedures were not comprehensively carried out in Kenya. The information collected
was not enough to adequately identify all the risks. The risk measurement methods
were mainly subjective and inaccurate and as such did not accurately quantify the
actual and potential loss. The risk response tools were appropriately selected based on
the ranking of the risks in the study. However since the risk identification and
measurement methods were found to be incorrect, it was the finding of this study that
the risk response tools were inappropriate to respond to the negative consequences of
the risks. On the whole, property managers did not. consider risk management as an
important function of property management and ranked it the last in order of
importance. However, most of the property managers (93.6%) were of the opinion
that proper execution of risk management functions might be a solution to current
problems of property management in Kenya.
The average rent collection was 86%, which was considered to be high collection.
The average occupancy was 92%, slightly above the threshold level required to keep
the property investment as a hedge against inflation. It was the findings of this study
that the high rent collection and high occupancy was directly related to the extreme
importance attached to the functions of rent collection and letting spaces.
It was found that risks had high frequency of occurrence and high severity in the
population from which the sample was selected. The frequency of occurrence and the
level of severity o(~isks selected for this study did not have a significant relationship
with the percentage of rent arrears and the levels of occupancy. This was attributed to
the existence of other variables that were not part of this study. It was the
recommendation of this study that property managers should continuously collect and
analyse property related information to enable them quantify and measure property
risks and make appropriate decisions for risk response. This would greatly contribute
to the timely achievement of property investment goals.
The thesis is divided into five chapters. Chapter One contains the introduction to the
study and comprises of the problem statement, study objectives and hypothesis, scope
and significance of the study and research methodology. Chapters Two and Three
present the theoretical framework of the study. Chapters Four and Five are the last
sections of the thesis and present the data, the findings and conclusions, study
recommendations, areas of further research and study limitations. The main attributes
of the data are presented and relevant conclusions are made.
Citation
Master of Arts in Housing AdministrationPublisher
University of Nairobi Department of Land Development