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xposed to the risks inherent to real estate: specific risks (e.g., vacancy risk) and systematic risk („real estate market risk“).  Banks have long concentrated on the management of specific risks and have developed many suitable instruments.  The real estate market risk, however, has been widely neglected by both practitioners and academics.

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 This is all the more surprising as its importance for financial institutions becomes painfully evident in every downturn of the real estate cycle, when falling real estate prices cause loans to default and banks to fail.
In the language of the Modern Portfolio Theory the market risk is that part of the total
risk that cannot be eliminated by diversification since it is caused by economic changes that
influence all investments.  Analogous to that definition, real estate market risk can be defined as
the non-diversifiable risk that can be attributed to the fluctuations of the real estate market.
A closer look reveals that the real estate market risk appears in several variations:
•  There is a direct real estate market risk if the value of an asset corresponds directly with the
real estate market—without anybody being able to influence this effect.
•  There is an indirect real estate market risk if the value of an asset corresponds only indirectly
with the real estate market since there are other factors that also exert an influence.  Four types of
indirect real estate market risk can be found: Credit risk is the danger that real estate market
fluctuations reduce the creditworthiness of a borrower.  A collateral risk exists if the value of
the secured property could be reduced by an adverse market trend.  If there is a profitability
risk, real estate market variations endanger the profitability of an investment, and if the real
estate market has a negative influence on other market prices, such as stock prices, there is a
price risk.
Figure 2 shows the effects of the different risks: If the real estate market fluctuates (gray
arrow), the value of a real estate-related asset directly (straight black arrow) or indirectly (broken
black arrows) also fluctuates.  The dotted black arrows indicate that there are still other factors not
mentioned here.
                                                

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  Especially in the US literature, several articles deal with or at least mention real estate market risk; see, for example,Froland/Gorlow/Sampson (1986). However, a comprehensive analysis of the topic and an application on banks is still missing.Figure 2: Effects and types and of the real estate market risk

This systematics is new.  Previously, when the real estate market risk was mentioned in the
literature on (real estate) Finance, it was generally without an explanation of the diverse effects of
that risk.  And when the literature on bank management or property management dealt with real
estate risks, it usually contained no explicit link to the real estate market.  Our classification
connects the cause-oriented wit本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。