Risk Analysis

The risk analysis plays an important role in property development for identifying, assessing, and
prioritizing potential risks and uncertainties circumstance. There are several methods to analyse
the risk that suitable to use in this project which are bivariate sensitivity analysis, scenario
modelling, and probability modelling.

Bivariate Sensitivity Analysis

Bivariate sensitivity analysis is a technique used to understand the interaction between two
variables and their impact on a specific outcome or result. The following table 7.4 show the
impact of changes in selling price and construction cost.

Table 7.4: Bivariate Sensitivity Analysis between Selling Price and Construction Cost.

Selling price (RM/sq ft)

55,927,822.00
344.00 394.00 444.00 494.00 544.00

1,300.00 42318365.00 49316696.00 56315025.00 63313356.00 70311687.00

1,400.00 42124763.00 49123094.00 56121424.00 63119753.00 70118084.00

Construction
1,500.00 41931161.00 48929492.00 55927822.00 62926152.00 69924483.00
cost (RM/m2)
1,600.00 41737560.00 48735891.00 55734221.00 62732551.00 69730881.00

1,700.00 41543958.00 48542289.00 55540619.00 62538948.00 69537279.00

The selling price per square feet is assumed changing at -RM100.00, -RM50.00, +RM50.00, and
+RM100.00, and the construction cost per meter square is assumed to be changed at -RM200.00,
-RM100.00, +RM100.00, and +RM200.00. According to the table above, it shows that when the
selling price per square feet is decreased, the residual site value also will be decreased. There is a
positive relationship between selling price per square feet and residual site value. On the other
hand, the higher construction cost per meter square, the lower residual site value. It indicates that
between the construction cost per meter square and residual site value have a negative
relationship. The increase in selling price per square feet and construction cost per meter square
will lead to the residual site value to drop. The higher selling price per square feet and the lower
construction cost per meter square will increase the residual site value.

Scenario Modelling

Scenario modelling is a strategic and analytical technique used to explore the residual land
values based on different conditions which include realistic, best, and worst. The summary for
scenario modelling is illustrated in table 7.5.

Table 7.5: Summary for Scenario Modelling.

Scenario Summary
Current
Realistic Best Worst
Values:
Changing Cells:
Selling_price 400.00 444.00 500.00 400.00
Construction_cost 1550.00 1500.00 1450.00 1550.00
Interest_rate 2.00% 1.88% 1.50% 2.00%
Developer_profit 10% 15% 20% 10%
Construction_period 36 30 24 36
Result Cells:
51,564,383. 55,927,822. 62,188,036. 51,564,383.
Residual_Site_Value
00 00 00 00

There are five variables used in this technique for risk analysis, which is selling price,
construction cost, interest rate, developer profit, and construction period. The scenarios are
included the realistic, best, and worst. The best scenario is increased for selling price and
developer profit, and decreased for construction cost, interest rate and construction period. It
brings a more higher residual site value which is RM 62,188,036.00. On the other hand, the worst
is decreased for selling price and developer profit, and increased for construction cost, interest
rate and construction period. It leads to the residual site value dropping, which is
RM51,564,383.00. Therefore, the residual site value will be enhanced in best scenario, and it will
be drop if the scenario become worst.
Probabilistic Modelling

Probabilistic modelling is a statistical approach used to represent uncertainty and variability in a

model or system. It incorporates the concept of randomness and variability by using probability
distributions to describe the possible range of outcomes. Table 7.6 is the estimated probability of
outcomes, and the probabilistic modelling summary is shown in table 7.7.

Table 7.6: Estimated Probability of Outcomes.

Probability
Variables
Original (-10%) Original value Original (+10%)
Construction
0.1 0.4 0.5
cost
Developer
0.1 0.5 0.4
profit

Table 7.7: Summary for Probabilistic Modelling.

Expected Standard Original Certainty

Variables Variance
value ã deviation value Equivalents
Construction
1560.00 9900.00 ± 105 1500.00 1659.50
cost (RM)
Developer
0.1545 0.00009224 ±0.009604 0.150 0.145
profit
Original site
55,927,822.00
value (RM)
Best bid site
55,907,234.00
value
Saving 20,588.00

The probability for construction cost is assumed 0.4 for original value, 0.1 for less than 10% of
original value, and 0.5 for more than 10% of original value. For the developer profit probability,
the original value is 0.5, less than 10% of original value is 0.1, and more than 10% of original
value is 0.4. The residual site value is decreased from RM55,927,822.00 to RM55,907,234.00 if
the value for certainty equivalents replaced to the original value. It brings a saving of 3.68%
compared to the original site value, which is RM 20,588.00. Hence, the best bid site value for
developer is RM55,907,234.00. There is 84% of chance for developer to get the better profit
compared to the suggestion in appraisal if the landowner agree the bid value. It means that the
16% of chance will be less than that profit.