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EASTERN ACADEMIC FORUM
Research on the Pricing Risk Control of the Real Estate Development
Projects
LIN Haiying
Inner Mongolia University of Finance and Economics, Hohhot, China, 010070
[email protected]
Abstract: With the development of market economy, the status of the real estate economy in the
national economy has become increasingly prominent, the whole process of real estate development
with all the attendant risks, the price risk and control of real estate development project becomes more
and more important. Therefore, the paper will find the risk factors of pricing for real estate development
projects, give countermeasures of specific control pricing risk.
Keywords: Real estate development projects, The pricing risk, Countermeasures
1 Introduction
China's real estate development from the market to now after twenty, thirty years, which experienced the
real estate market ups and downs. A large-scale real estate fever (1992 - 1993), in the Pearl River Delta,
Hainan, the beihai of Guangxi, the real estate have serious real estate bubble, latter entering a relatively
long period of adjustment, to 1999 it reached the bottom, now it is currently in a new round of real estate
development cycle. In early 90, a direct result of the real estate bubble economy forms a large number of
vacant rooms and a large number of bank bad debts, which causes large waste of scarce capital and
resources in china, until the recent years, the real estate market began to boom, many places still have
adverse consequences which bubble brought.
In the marketing mix of the enterprise, price is the only marketing factor to generate revenue, other
factors were cost. The highest price of products depends on the market demand, the lowest price
depends on the cost of product. The price of product has greater uncertainty between the highest value
and the lowest value, the profitability of products depends on this part higher than the cost of all parts,
thus it is important to determine a reasonable pricing particularly.
With the development of market economy, the status of the real estate economy in the national economy
has become increasingly prominent, the price risk and control of real estate development project
becomes more and more important. The whole process of real estate development with all the attendant
risks, the enterprise development must be treated with caution. Therefore the price risk and control
problems of real estate development projects has become the main problem that whether the real estate
development process can achieve the desired goal.
2 The Concept and Type Real Estate Pricing Risk
2.1 The concept real estate pricing risk
The pricing risk of real estate project refers that due to the affecting factors such as the uncertainty of the
real estate projects environment and conditions, the project owners, customer, project organization or
other project stakeholder subjective cannot be accurately foreseen or controlled, the final result of real
estate projects pricing and the expectation pricing of this person produce deviation, thus bringing the
possibility of losses for this person.
2.2 Type of the risk of real estate pricing
Management of the risk of real estate pricing refers the process of achieving the overall project with the
lowest cost. We can see the risk by risk identification and risk assessment, then we can control the risk
through all kinds management methods, and properly handle the outcome of risk.
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So we can see that the real estate risk embodies in many aspects. The real estate pricing should think
about not only the factors of pricing, but also market risk, marketing risk and after-sales manage risk.
All the risks are characterized as bellowed:
2.2.1 Objectivity
Pricing risk is a kind of objective existence, not the subjective imagine in people's mind. It refers to the
possibility of leading to misfortune because of the existence of the uncertain factor, which is the
characteristic in the changing process of objective things. People can change the formation and
development condition of risk within limit to reduce the loss rate. Risk can’t be eliminated totally.
2.2.2 Uncertainty
For those particular individuals, price risk happens by chance. The Randomness of pricing risk
determines the uncertainty, which means whether to happen, when to happen and the degree of damage
are all uncertain.
2.2.3 Potentiality
Pricing risk exists always and everywhere, and potentiality is the basic form. As a kind of possibility of
potential loss, it is conditional for pricing risk. So, with the change of risk-factors, pricing risk has not
only the quantitative increase or decrease, but also qualitative change. Otherwise, with the extinction of
old risks, the new ones come out.
2.2.4 Predictability
Uncertainty is the nature of pricing risk, but people can make judgment for the frequency and degree of
the risks through analyzing the similar events.
2.2.5 Duality
The result of pricing risk has duality, which means the risks may bring damage, but once the venture
succeeds, people can get paid for taking risk.
3 The Pricing of Risks of Real Estate Projects
After real estate development projects completed, the real estate developers face the major task is the
realization of the real estate commodity transformation, to achieve recovery of investment and profit as
soon as possible. On the contrary, the completed the real estate cannot be video out because of all sorts
of reasons, it will lead to real estate backlog, bring the developers’ financial crisis, affecting its operation
and development. The core work of real estate project pricing is to evaluate and control these risks
including market risk, price risk and marketing risk.
3.1 Market risk
The real estate market is a regional market, there are many factors mainly affected on the real estate
development projects, such as the supply and demand situation of real estate, real local consumer
purchasing power and consumer preferences, the competition of real estate market scale and competition,
the real estate market properties, structure and development degree. At present, China's real estate
market is not perfect, the risk of market supply and demand is an important risk of real estate investment
that real estate developers must be taken seriously.
3.1.1 The risk of real estate supply
The supply of real estate refers to the real estate developers are willing and able to provide the number
of real estate commodity in a given period of time and in a certain price level. The main factors as
follows: the real estate prices, the price of land and city land supply, tax policy, the supply ability of
building materials, construction ability and the developer's expectations for the future. When the above
factors caused the real estate supply exceeds demand, supply risk occurs, leading to difficult real estate
rental, falling prices and the developers losses.
3.1.2 The risk of real estate demand
Real estate demand is refers to the consumers are willing and able to buy the amount of real estate
commodity in a specified time and at a certain price level, that is effective demand. The main factors
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affecting the demand for real estate are as followings: the level of economic development, urbanization,
real estate prices, consumer income levels, consumption structure and future expectations, the relevant
national economic policies. When these factors take effect, it will cause the real estate demand decline.
And if the demand is less than supply, it will bring about demand risk, which will lead to difficulties in
real estate sales and leasing, the price decline, and ultimately makes real estate investors suffer losses.
3.2 Price risk
In the real estate marketing process, to determine real estate prices scientific and reasonable are real the
most sensitive, the most important thing to estate developers, it directly determines the real estate
investment income. Price risk refers to the developers to due to market research does not adequately, the
positioning market is not accurate, pricing strategy unscientific as well as can’t be timely reflect price's
fluctuations in, etc. lead to Real Estate pricing unreasonable, bring to its loss of revenue. High priced, it
seems on the surface to increase revenue, but its price may not be accepted by the market, leading to real
estate unmarketable, its total revenue is decline. Contrary, low price leads to lost revenue though real
estate sales gratifying. In addition, low price in the minds of consumers is always associated with quality,
could seriously damage the developers in the market image and credibility.
Many factors affect real estate prices, they are supply and demand conditions, physical factors,
environmental factors, administrative factors, economic factors, population factors, social factors,
psychological factors, etc. all of them influenced on the direction and degrees of real estate prices, Real
estate prices are the result of their combined effects.
3.3 Marketing risk
Real estate marketing refers to the real estate developers determine the real estate marketing strategy
and real estate rental behavior according to the market conditions, property location and consumer
preferences, charging levels, the risks include the risk of marketing channel and marketing mode.
3.3.1 The marketing channel risk
Real estate marketing channel includes optional and agent sale and rental. If the selection marketing
channel is not correct, it will enable the real estate sales is not smooth, the backlog of funds, increase the
sales cost and reduce the investment profit. Real estate developers use their own marketing person to
sale their own real estate development, which is the main channel of real estate rental at present in china
and it has the advantages of low cost of sales. But developers must have its own marketing team, must
invest some money for market research, while that increases the cost of development, but also must face
the sales price risk due to non professional marketing. The agency video refers to the real estate
developers pay fees to commission real estate intermediary agent to rent and sale the completed
development project of real estate. The video mode has the advantages, such as agency is familiar with
the real estate marketing strategy and into the real estate market, rich marketing experience and
knowledge of the marketing personnel, extensive sales channels, professional services, it will make for
speeding up the real estate sales, but it will have sales risk if a select agent inappropriate.
3.3.2 The way of marketing risk
The ways of real estate marketing are mainly through various media publicity and marketing direct
marketing. The first one refers to the real estate developers use the media advertising, mailing
promotional materials, brochures, on-site billboards and model display room and other media
propaganda and so on, due to those improper ways, it will give the developers bring the risk of rising
costs and declining sales. Developers should pay special attention to the reasonable selection of
advertising and the advertisers, emphasize the relationship between the cost and effect, avoid total
revenue declining in investment. The direct risk of marketing personnel refers to the real estate
developers part-time marketing personnel target customers directly to sale real estate. The common form
is field sales, telephone sales and door-to-door sales. Direct selling is an effective means of promoting
consumer preference, decision and action, the utility model has the advantages of low cost, clear sales
goal, high turnover rate, but not easy to expand the visibility of real estate, to stimulate the potential
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desire for buying of consumer, as well as by the quality and responsibility of sales staff, thus it has
influence on the sales risk.
3.4 Risk after rent and sale
Real estate investment is very competitive, not only consumers focus on the price and quality, but also
they pay great attention to the service after rent and sale, it is property management. It is that Real estate
developers commission a property management company, to manage real estate by means of business
and management, to provide efficient, economic and good quality services for owners and consumers, in
order to maximize the economic value and use value for property. The main risk after rent and sale as
follows:
3.4.1 Property Management Company choosing risk
Property Management Company is divided into two categories generally, they are the social professional
property management company and real estate investors affiliated property management company (or
property management department). No matter which kind of form, there is the condition of different
company stuff. If the choice is undeserved, will not only fail to the purpose of serve, even the value of
property will be decreased due to poor management, so that the real estate developers must suffer a great
risk.
3.4.2 Risk of charges
Property management fee refers that the property management unit routine maintenance projects, repair,
renovation services and the provision of other services fees, such as property and equipment, utilities,
green, hygiene, transport, security and environmental features. The risk of property management fees
comes from whether mainly making charging subject and standard, timely and full charging the property
management fees. If the fees are unreasonable and the standard is too high will harm the consumers’
interests, will affect the real estate developers on the sales of following development projects.
4 Countermeasures of Real Estate Program Pricing Risk
Real estate enterprises should recognize the existing pricing risks and evaluate the probability of the risk
as well as the degree of damages to control these risks effectively. Before pricing risks happened, they
can reduce the probability of occurrence and mitigate their effects after risks. Through the risk of pricing
control, enterprises keep the possible loss within tolerable bounds to realize marketing aims.
Countermeasures of real estate program pricing risks are as follows:
4.1 Creating modest profit as the basis for products pricing
In the process of real estate development, no matter what pricing strategies are adopted, should base on
creating modest profit. If pricing and profit are too low, it is bad for enterprises to survive and develop.
However, if the pricing is too high, it is also hard to obtain high profit because there are fewer buyers in
the market. Therefore, enterprises should make the right pricing after knowing more about markets,
consumers and competitors. Considering the interactions between the prices of real estate and sales
volumes, enterprises should seek the best condition between prices and sales. Considering the
interrelationships between the price of real estate and velocity of money, they should achieve business
goal by seeking the appropriate position.
4.2 Pricing aims at customers’ need
Enterprises should pay attention to market survey, base on the analysis of consumption motivation and
set the price from consumers’ or customers’ perspective. Generally speaking, consumers’ responses are
different according to different values of products. For those who frequently buying products are
sensitive to prices, but for those infrequently buying products, consumers pay close attention to what
kind of values the products can bring to themselves. It is right that real estate programs pricing should
base on high prices. Since low pricing is harmful for consumers and is refused by them.
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4.3 Pay close attention to competitors and price variation
In general, the ceiling of real estate businesses is market demands and the floor is unit costs. Within the
price variation, price setting depends on the extent of competence and the price of competitors. It is
worth noting that real estate enterprises impossibly spend a lot of time analyzing and taking measures in
the face of competitors’ variations. The only way to realize rapid response is to expect competitors’
possible price variations, and prepare proper measures in advance.
4.4 Establish mechanism of pricing risks precautions and treatments
Establishing the mechanism of real estate exploration program pricing risks precautions and treatments,
which should include the following aspects:
Firstly, systems and rules are established within real estate enterprises and urged to be carried out.
Secondly, researching relevant information, collecting and analyzing information about customers and
competitors as well as nation’s economic policies and laws is to evaluate pricing policy periodically.
Thirdly, doing pricing risks operational exercises in daily management is to improve coping capacity in
pricing risks. The strategic pricing issues can be thought automatically by staff and precaution
awareness can be strengthened. Fourthly, pricing risk events are uniformly processed by pricing risks
precaution and process organizations after pricing risks happened.
4.5 Implement different marketing strategies no competition is good competition
Implementing different marketing strategies, i.e. real estate exploiting markets belong to Heterogeneous
Markets, which means that real estate businesses have more choices to pricing policy and variation of
competitors in the market. Since when customers choose houses, they not only consider prices but also
qualities services, performances, appearances, reliabilities and so on. Therefore, customers don’t care
about smaller price differences. The strategy of product differentiation can be realized in terms of
qualities and patterns of houses. The service differentiation strategy can be realized by offering excellent
services that are different from competitors, and workers differentiation strategy can be reached by
employing and training better workers, and the image variation strategy can be achieved by shaping
different product images to receive different advantages. These differentiated marketing strategies will
translate into differentiate advantages and then into customer perceived values, which can avoid direct
price competition but turn into value competitions.
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