IMPACT OF FORECAST ERRORS ON PROPERTY RETURNS

Abstract

The real estate industry is highly volatile in responding to the conditions governing the local and global economy. As such, any real estate development must only be undertaken after much deliberation. The profitability of the investment in substitution for all the risks borne should be guaranteed before the commencement of the project. Market and financial analyses should be conducted to determine the viability of the project. In reality, the yield for a completed development, does not always meet the forecast yield. In this study, it is found to be true, especially when the development did not progress as planned. This deviation of the yield for the completed schedule from that planned arose due to various factors. The more significant ones are highlighted here. Firstly, there was a long delay in the superstructure work which resulted from a dispute between the developer and the main contractor. As such, higher building costs were incurred. Secondly, the actual rental growth rates were not as high as that expected initially. Thirdly the realisable capital gains will also fall short of that anticipated at the beginning of the project due to rising capitalisation rates. However, the accuracy of the deviations are affected by the inaccessibility to certain data of a confidential nature and the reliability of the forecast over the long term.