Risk response in commercial properties

Abstract

Commercial properties are exposed to financial, physical and legal risks that affect the profitability and the value of the property once they occur. The losses that result from these risks are direct, indirect and consequential. For the property owner to meet his objective of wealth maximisation these losses must be eliminated or mitigated. It is therefore important for all the risks to be responded to by controlling and financing them. The objectives of this study are to identify risks that commercial properties are exposed to; to establish ways of responding to risks identified; to determine the factors that influence selection of risk response tools and; to recommend the most effective tools of risk response in commercial properties. The study hypothesizes that the choice of risk response tools is directly influenced by its cost. Primary and secondary data collected was geared towards meeting the objectives of the study. Primary data was collected through administering of questionnaires to property managers and discussions held with the property managers and persons in the risk and insurance industry. Secondary data for the purposes of this study was obtained from books, journals, research papers and documented reports. The data collected was analyzed by use of descriptive and inferential statistics. Frequency distribution was used to establish the risk response tools while the risks with the highest frequency of occurrence were identified as the risks vi cdmmercial properties were exposed to. Frequency of occurrence was also used to determine the criteria of selecting the response tools. The correlation between the factors influencing selection of risk response tools was also determined. The information was presented in text, charts and tables. Once the risks were identified the study went further to explore into ways of responding to these risks and the factors that influence the choice of the risk response tools used. The criterion used by property managers to select response tools is an important lead to establishing why some response tools are preferred to others. This study found that cost is the main factor influencing the choice of risk response tools used. The risks identified were grouped into two. These are risks specific to individual properties and risks common to all properties. Those common to all properties are: physical risks caused by perils such as fire, floods and natural calamities; financial risks such as taxation, economic recession and voids among others and legal risks resulting from statutes, agreements, contracts and law of tort. The risks that are property specific include those associated which the tenant mix, location, lease structure and the building installations and structure. The overall objective of the study is to recommend the most effective tools of risk response. The tools used in risk response are insurance, retention, prevention, loss control, transfer and avoidance. Effectiveness being in terms of cost of the tools selected and their ability to eliminate or mitigate risk and losses resulting Vll from an occurrence. All tools of risk response were found to be of importance in risk response and therefore should be combined in a way that they complement each other. The use of the loss matrix method in selecting combinations of risk response tools was recommended. The property owner who possesses the duty of care towards his tenants and other users of his property should have risk response tools in place to control risks and to finance them once they occur. The property owner is further responsible for ensuring that these risks do not occur in the first place. The study recommends the use of the minimum expected total loss approach, which is part of loss matrix method for selecting the combination of risk response tools that may be used to respond to risks. This approach considers the cost of various risk response tools used to minimise the occurrence of risk and the loss that upon an occurrence. Further recommendations have been made towards the practice of risk response in commercial properties and the contribution of professional bodies such as the Institute of Surveyors of Kenya (15K)and institutions of higher learning such as the University of Nairobi on the importance of teaching risk management. Recommendations have been made on areas of further study in the field of risk management that will assist in building a body of knowledge in a subject that is still considered new.