Management Reserve Estimation Model for Real Estate Development Projects: Fid-Bau Portal

Management Reserve Estimation Model for Real Estate Development Projects

Yahia, Muhammad / Saad, Dina / El-Behairy, Hatem / El-Said, Moheeb

The increasing competition in the real estate market nowadays forces real estate developers to exert great efforts to maximize their market share. Accordingly to maintain their competitiveness, accurate estimation of the total project budget is necessary including both contingency reserve (CR) and management reserve (MR). CR is often used to cover known-unknown risk events that can occur in a given project, while MR is often used to cover unknown-unknown risk events. Many research efforts tackled CR estimation, yet there is a lack of efforts that have addressed MR estimation. Overestimating MR increases the total project budget, and thus increases the chances of rejecting the project due to its infeasibility, which subsequently leads to losing investment opportunities. On the other hand, underestimating MR may mislead the organization to proceed towards a false investment causing budgeting problems. This is due to the absence of a proper estimation method for MR. Accordingly, this research proposes a new management reserve estimation (MRE) model to compute near-actual MR amount, considering the uncertainties associated with its estimation. The MRE model consists of three modules: 1) risk identification, 2) risk uncertainty treatment using a hybrid system that combines fuzzy logic and Monte Carlo simulation techniques, and 3) MR quantification using an integration of Monte Carlo simulation and the expected monetary value. The model has been validated using a real estate development project. In essence, the proposed model addresses the shortage in MR estimation, helps policy makers in the real estate development sector take correct investment decisions, and minimizes the chance of incurring financial losses.