Risk management practices in the management of real property in kenya: a survey of commercial properties in Nairobi
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.