Real Estate Investment business deals with immovable property, such as land, and everything else that is permanently attached to it, such as buildings. C.F. Sirmans et.al. 2003, in his paper observed that there has been a lot of efforts by researchers and academicians in studying and attempting to model the benefits of establishing diversification strategies for portfolio investments. All previous works concentrated on combination of different stocks into a single portfolio. With the passage of time research has been extended into analyzing individual factors (like bonds, currencies, real estate, international stocks); recently researchers did make some new in-roads in the potential benefits of real estate investment strategies.

In the same article the same authors cited the work of other researchers who have worked on Modern Portfolio Theory (MPT; see Markowitz, 1959), who have attempted to model the benefits of establishing diversification strategies for portfolio investments. Initial work only focused on potential gains from combining different stocks into a single portfolio. But research has been extended into bonds, currencies, real estate, international stocks and bonds.

According to Henderson Investors (2000), next frontier for the individual investor would be international real estate. Although microeconomic theory of consumer choice and decision-making under uncertainty is highly developed and finds much empirical support from stock market data, data providing similar evidence for direct, private investment in real property have not been easy to obtain. Accordingly, research in this area is scarce. Yet, many private investors prefer building a portfolio of real property investment, since it is believed that it offers a higher risk adjusted return than financial assets. The aim of the current research is to address the risk associated in real estate shared investment.

1.2 Background

Over the years, many tools, processes and regulations have been created to give investors assurances that investment managers are weighing risks and evaluating potential returns in a fashion that is acceptable to investors. A large proportion of these mechanisms involve government regulation which

defines and enforces rules for regulated financial firms. Commercial banks, thrifts, broker-dealer firms, mutual fund companies, and insurance companies each have their own regulatory bodies and rules. Internally, these firms maintain staff to monitor and assure that the rules are obeyed.

Risk managers are charged with understanding, monitoring and controlling the new world of financial complexity. The definition of risk management has two separate parts. The first part defines it organizationally and the second part defines it functionally. Through widespread research on real estate investment trends, the risks associated with investing and the long term returns have been studied extensively (Springer, et al, 2005). It is essential that a potential investor has a thorough knowledge of “how to manage” the potential risks associated with an investment in real estate when analyzing the benefits of the potential investment. The specific risk factor variables can be tuned to suit the requirements and the particular real estate climate of the particular investment. The management of risks includes analysis of portfolio diversification, property age, specific demographics of the property locality, portfolio size and others.

Risks in real estate projects must be considered and should never be underestimated, because those tend to affect the whole project management processes, in terms of project programme delay, project cost overrun etc.

However, there is also a potential risk management technique, which can potentially affect the profitability of an investment: risk sharing. While the other risk management techniques focus on a single investing individual acquiring real estate, a group of partner investors may also choose to acquire real estate, with each having an interest in their investment. This concept of risk sharing changes the scenario as the burden of overall risk is split into the respective investment of each partner. Furthermore, this concept is different from the other concepts, especially if the dynamic nature of the real estate business is adapted in the modeling process because of the advantage of the shared contribution in the investment by various investing partners.

When a person acquires real estate, she/he also acquires a set of rights, including possession, control and transfer rights. Investment in real estate involves the commitment of funds to property with an aim to generate income through rental or lease and to achieve capital appreciation. However, the real estate income can be highly unpredictable and consequently investment in real estate is very risky as it is the case with investment in equity. One of the main reasons for the collapse of even the largest financial institutions, in the recent times, leading to the recession of major economies of the world is due to the collapse of the real estate business. This global crisis could have been prevented if the potential risk factors leading up to it had been identified at an early stage. But the risk assessment associated with this strategic investment was not properly followed. Thus, in order to be able to increase chances of investments in real estate returning profitable margins, it is critical that risk factors are identified and a proper investment strategy put into place.

Since real estate business involves immense risk owing to the requirement of mammoth funds devotion, the long operation period and the volatile markets, Brown (2004) attempts to explain as to why a potential investor would still consider investing in private real estate properties within a portfolio as opposed to conventional methods such as through the vehicles of REITs and stocks. He investigates the possible reasons for the private investor, especially in Tier II Properties (generally being apartment buildings between 4 – 100 dwelling units) as opposed to an investing institution or a pension fund. He concludes that (a) the private real estate market for “Tier II Properties” is inefficient and that (b) applying portfolio theory to individual parcels of real estate is, at best, a challenging task. At the practical level, high down payments, high transaction costs and lack of liquidity usually place forming a portfolio of private real estate assets out of the individual’s reach. On theoretical grounds, forming efficient set portfolios implies perfect liquidity, perfect divisibility and perfect reversibility. Even if the first two of these requirements are somehow met, the construction of a short sale of an individual parcel of real estate is impossible. Thus, a central value of the Markowitz (1952) model—being able to diversify away nonsystematic risk—is essentially unavailable to the private real estate investor.”

Furthermore, Brown (2004) states that the Tier II real estate market is defined to be privately owned investment real estate, holding a combination of ownership and control. Private real estate investing permits investors to influence the outcome. Hence, for these investors, probability is not purely random. In contrast to investing in other markets where investment is converted to financial