Market risk is a possibility of an occurrence where an investment value may change due to the unfavourable market events, i.e., macro and microeconomic shocks, political and/or social instability, irrational behaviour of investors etc. These events may lead to fluctuations in real estate prices, volatility and market indexes. The risk can be reduced by diversifying the investment portfolio into various asset classes, industries and regions of the economy.
Liquidity risk refers to an adverse situation where the legal person may be unable to meet its short-term financial demands at the time of the liquidation of investment. For instance, there may be not enough buyers of real estate at the existing time or at the price level which is expected by the seller. Liquidity risk may lead to the extended exit period.
However, if the investor is forced to exit the investment, it could lead to the reduction in expected returns as well as to occurrence of direct loss. Liquidity risk may also lead to unexpected additional costs, i.e., extraordinary real estate evaluations, additional sales costs etc.
Currency risk refers to an occurrence when an investor is investing in another country or in another currency and consequently may suffer losses due to unfavourable changes in currency exchange rates. Currency risk can easily be hedged using various risk management methods and instruments.
Inflation risk is a situation where the inflation rate reduces the real rate of return or real value of the investment.
Legal or regulatory risk arises from legislative acts regulating the asset, investment activities or taxation of earned income that may change during the investment period. For instance, the government may change the tax laws that govern the taxation of income earned by the investor in that particular country.
Political risk or country risk is the chance of investment value changing due to the political changes or instability in the country. Radical changes in economic or legal environment (such as nationalisation), internal political affairs or social crisis situations (such as civil unrest) are all examples of political risk.
Interest rate risk
Changes in interest rates may significantly affect the value of real estate investments. High interest rates have generally adverse effects on real estate prices, and vice versa.