MANAGEMENT RESERVE VALUATION FOR REAL ESTATE DEVELOPMENT PROJECTS IN EGYPT

Abstract

The increase of competition in the real estate market nowadays forces the real estate developers to exert great efforts to maximize their market share besides developing their financial positions. Accurate feasibility study is essential for achieving the organization goals; mainly the total project budget which consists of three main items; the total project cost, contingency reserve amount, and management reserve amount (MR). Many research efforts addressed first two items. On the contrary, there is a lack of efforts that have addressed the estimation of MR, and mostly calculated using the fixed percentage methodology, which have contributed to the failure of projects’ cost performance. Over-estimating MR amount increases the total project budget and may lead to rejecting the project and consequently loss of an investment opportunity. On the other hand, under-estimating the MR amount will develop an unrealistic project budget and may mislead the organization to proceed towards a false investment causing budgeting problems over the project’s life cycle. Accordingly, this research proposes a new framework that consists of three stages to increase the estimation accuracy of MR amount: 1) Risk identification stage which is responsible for identifying a risk register list and gathering the probability and impact for each predefined risk, 2) uncertainty treatment stage to quantify and rank risks using an integrated system that combines fuzzy logic and monte Carlo simulation technique and 3) MR Quantification stage which select the top ranked risks for further analysis to compute MR value using monte Carlo simulation along with the expected monetary value as a base calculation. Using a real case study for real estate project in Egypt, the framework proved its ability to produce realistic MRs. Thus, the proposed framework used as a useful analytical tool to revisit risk assessment policies when estimating the MR in upcoming projects and thus, it can help with the decision making in the real estate development sector to maximize investment opportunities.