RISK ANALYSIS
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The risk analysis indicates the level of adverse impact each stated aspect has, or (based on information that is common knowledge and/or readily ascertainable in the market and reasonably foreseeable events), in the near future, might have on the property's value and marketability. Each risk rating is presented in a combined numerical and graphical format aimed at providing a bold, clear caution indicator to the lender. In the case of higher level ratings, it also provides an indicator of the presence of relevant comments in the Additional Comments' section on the following page .

RISK RATINGS

Risk Ratings under propertypro focus on four property specific aspects and four market related aspects. Each of these aspects can involve consideration of a range of elements relative to it. Any other significant risks identified, which do not come under these aspects, should also be commented upon in “Additional Comments' .

NOT A HIGHLY TECHNICAL ANALYSIS

It is not intended that the valuer would conduct a highly technical analysis. Provided the valuer has adequate experience in the type of property and the particular market, reliance may be placed on up to date, broad knowledge of the dynamics of the market in which the property is situated. Otherwise, a valuer with that experience should supervise the valuer's work or sufficient research should be carried out to provide an informed opinion.

LEVEL OF ADVERSE IMPACT OR RISK

It is accepted that each aspect is likely to have some possibility of adverse impact or risk, however low or nominal. Therefore, low or nominal adverse impacts or risks are rated as "1" and are graphically depicted as a short bar.

High adverse impacts or high risks are rated as "5" and are graphically depicted as a long bar. The ratings are approximate only. It is not intended that ratings be given other than in whole numbers .

THE RISK RATINGS

The ratings which are outlined below the bar graphs are:

"1 "   Low
"2"   Low to Medium
"3"   Medium
"4"   Medium to High
"5"   High.

Any Risk Ratings of 4 or 5 or the existence of three or more "3" Risk Ratings MUST BE EXPLAINED in the "Additional Comments" section. Ratings of "3' or below may be commented on.

For the purpose of these reports, the risk rating reflects:

ADVERSE IMPACT

Adverse impact in relation to a property can arise from such things as:

EXTENT OF IMPACT

The extent of the impact needs to be seen in terms of the local market and the effects on marketability and value. What may cause a significant adverse impact in one market may have low impact in another. The extent of their individual adverse impact can vary significantly, so no attempt is made in this memorandum to provide a standard grading for various impacts .


ADVERSE AND FAVOURABLE IMPACTS OFFSET

The rating adopted for each of the listed aspects requires a balanced overview for that aspect. Properties often have many beneficial features. Adverse impacts need to be weighed against strengths or favourable impacts under the same aspect.

EXAMPLE: When considering the aspect 'Location & Neighbourhood', a significant adverse impact may result from being adjacent a petrol station. However, across the road is parkland lined with Norfolk pines and beyond that a surf beach, all of which can be seen from the subject property. In the local market, the benefits of the latter far outweigh the adverse impact of the petrol station and the overall rating adopted is "2"   Low to Medium .

COMMENT ON HIGH INDIVIDUAL ADVERSE IMPACTS

The valuer is not required to provide additional comment for overall ratings below "4". However a comment would be warranted on a significant adverse impact (that individually would rate "4" or "5" but is off set by strong beneficial impacts in the same aspect to produce an overall rating below "4") .

CUMULATI VE IMPACTS

While there can be offsets in the overall rating for an aspect heading such as the above, there may also be cumulative effects from several adverse impacts. For example, the location may be 10 km from the CBD, there are no neighbourhood shops nearby and properties nearby are generally old and poorly maintained. Individually these might be rated at "2", but the cumulative effect may warrant a rating of say "4" for the 'Location & Neighbourhood' aspect overall .

COMMON KNOWLEDGE AND REASONABLY FORESEEABLE EVENTS

The basis of any "forward looking" element of a rating is restricted to information that is currently common knowledge and/or readily ascertainable in the market and to events that are reasonably foreseeable. Information which is "privileged" cannot be reflected in the rating .

EFFECT OF HIGHER LEVEL RISK RATINGS

Higher level Risk Ratings of 4 or 5 do not necessarily mean that a property is not suitable security, though they may influence the lenders' decision on the amount loaned or the LVR

LEVEL OF LENDING

The ratings themselves do not reflect the intended level of lending, as this is a decision for the lender.

PROPERTY RISK RATINGS

LOCATION & NEIGHBOURHOOD

This Risk Rating reflects an overall rating for these two aspects. Refer to comments below in section 4 of the report for details on 'Location & Neighbourhood'.

EXAMPLE: The neighbourhood is on the fringe of town, very near an area under investigation for rezoning to industrial use and is considered likely to result in a change of zoning to industrial. This possibility has not had any significant impact on prices at this stage.

The likelihood of a change to the neighbourhood is seen as posing a medium to high risk of an adverse impact on the value and marketability of the property in the next few years. 'Location & Neighbourhood' is given a Risk Rating of 4 and must be explained in the "Additional Comments" section.

LAND (INCLUDING PLANNING, TITLE)

Land in this instance refers not only to the land physically, but also to access, services, planning and title.

EXAMPLE

The land is steep requiring a particularly steep driveway. This is considered to have a low to medium impact on the value and marketability of the property and 'Land' is given a Risk Rating of 2. No comment is required but nevertheless it may be provided in the Comments section if not already noted under 'Site Description & Access'.

ENVIRONMENTAL ISSUES

This aspect of the Risk Analysis covers a range of environmental issues including contamination (refer environmental Issues heading above).

EXAMPLE

A property may be in an area mildly affected by a 1:100 year flood event that may warrant a "3" Risk Rating for the current adverse impact on marketability and value. In addition however; a new jet standard airport is under construction nearby and the property is under the flight path. This alone warrants a "Medium to High" or "4" Risk Rating. The cumulative effect of this with the rating for the flood situation warrants a "5" rating overall for this aspect. Comment is required.

IMPROVEMENTS

This aspect refers to all improvements, whether the main building or ancillary improvements (and for a TBE   Proposed Dwelling, Extensions or Renovations, would include concerns about aspects of the project or tender).

EXAMPLE: There may be evidence of old, minor White ant damage that justifies a pest report as a precaution. White ants are known to be a common problem in the general neighbourhood. A Risk Rating of "4" may be warranted pending a satisfactory report (requiring comment). There would obviously be an on going risk which in itself may be rated at "3" and may warrant a recommendation for an annual pest inspection report.

EXAMPLE: A 1.8 metre high retaining wall beside an in ground pool is badly cracked and has bowed out considerably. A neighbour's garage is close by and could be endangered if there is a collapse. This has a significant adverse impact on the value of the property due to the cost to make good and the risk that it could collapse beforehand, taking the neighbour's garage with it. Due to the potential seriousness and urgency, a Risk Rating of "5" may be warranted (requiring comment), and a recommendation for an engineer's report.

Yet again, the improvements ray not be in keeping with the expectation for the locality. This could increase the risk by reducing its marketability and increasing the selling period.

MARKET RISK RATINGS

REDUCED VALUE NEXT 2 3 YRS

This Risk Rating is an indication of the level of risk of this property reducing in value over the next 2 3 years. It is a forward looking summary rating taking into account aspects affecting, or likely to affect, the value of the property. The assessment is made on the basis of information that is common knowledge and/or readily ascertainable in the market and having regard to reasonably foreseeable events as at the date of the assessment.

The rating cannot be expected to reflect information that was not common knowledge, or conditions, events or circumstances that occur subsequently or unexpectedly.

MARKET VOLATILITY

This aspect reflects the risk of the market changing direction rapidly and having a significant adverse impact on the value of the property. While this will reflect historical performance, reasonably foreseeable events should also be taken into account if they are likely to change the pattern of volatility.

EXAMPLE: An area has tended to experience moderate "boom   bust" cycles. It may warrant a Risk Rating of 4 if the next "bust" could happen in the next 2 3 years (which must be explained in the Comments section). The more severe the likely bust could be and the sooner it might occur, the higher the risk rating. Prospects of an imminent, sharp and severe bust could be a "5".

LOCAL ECONOMY IMPACT

This aspect reflects the extent to which a significant change in the local economy is impacting adversely and/or the risk that it may impact adversely on the value of the property in the 2 3 year time frame.

EXAMPLE

In a small town, there may be the prospect of a major business or industry closure or downsizing, though it has not been confirmed or happened yet. A Risk Rating of 4 may be warranted at this stage (which must be explained in the Comments section).

Lenders and related third parties should note that the global economy impact on the Australian market generally is not addressed unless it specifically impacts on the particular local economy. A market with significant foreign investment could warrant a higher rating and comment if conditions overseas meant foreign investors were starting or likely to sell out or withdraw interest in the market.

MARKET SEGMENT

This aspect reflects the extent to which the condition(s) of the market segment is impacting or may impact adversely on the property.

EXAMPLE

The market for inner city medium quality residential units may currently be strong, however a significant over supply is emerging. A Risk Rating of 4 or even 5 may be appropriate (which must be explained in the Comments section).


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RISK ANALYSIS – PROPERTY INVESTMENT

The IRR is a quick and approximate indicator of riskiness for property investments. Other measures used for risk analysis include:

MONTE CARLO TECHNIQUE

This is a procedure to establish an expected NPV of a project based on a probability distribution of all the potential project outcomes. It is employed when the number of uncertain variables are too large for a meaningful judgment about the real riskiness of the project to be reached with the aid of sensitivity analysis. In particular, the output will provide the mean (AVG) and standard deviation (STD) of the distribution of NPVs - see diagram 1. In addition, a cumulative probability distribution may be displayed, showing, for example, that there is an approximately 25% probability that option A's NPV falls below zero whereas the comparable probability for option B is about 15% - see diagram 2.

DIAGRAM 1 THE DISTRIBUTION OF THE NPV OF 2 PROJECTS
 
DIAGRAM 2 THE CUMULATIVE PROBABILITY OF THE NPV OF 2 PROJECTS

The main defect of the method is that variables which in the real world are closely correlated will be uncorrelated in the simulation. One way to overcome this problem is to aggregate variables (to include the product or sum of the correlated variables) as the independent uncertain variable in the analysis, rather than the correlated variables. It is a matter for judgment whether the loss of detail which this approach entails is a greater disadvantage than the potential inaccuracy resulting from the independence of variables which in reality are correlated. This is an example, of an important subjective input into what is claimed to be an "objective" method.
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