MCDM Approaches in Property Investments: An AHP Model for Risk Assessment

When the future is uncertain and investments are durable and illiquid the decision to invest at a certain time contingent to new information to come as well as the correct assessment of risks are a key issues especially in times of global financial crisis. The existence of a well-functioning capital market allows investors with different time patterns of income and desired consumption to agree on whether real estate investment projects should be undertaken. In order to make the decision, investors need to measure risks and identify the relationship between risks borne and risk premiums demanded: developers have to determine how much risk they can tolerate, the return they need and its timing. Real estate development is de facto a dynamic multiphase process involving land development, followed by residential and/or commercial development, ending with the eventual marketing phase through the sale or leasing of the completed site. The three phases of the housing industry are interrelated, and each stage involves various risks, differently allocated between landowners, land developers, and homebuilders. The aim of this paper is to provide an operational framework to address risk and uncertainty by an integrated approach. More precisely, the paper proposes a procedure for a synthetic risks assessment that, based on the AHP model, will help investors to manage risk exposure and opportunities in property investments. Numerical examples on urban development projects are presented in order to test the effectiveness of the AHP model in supporting decisions and adapting strategies to a permanently changing environment.