Sensitivity analysis is a technique used in financial modeling to assess how changes in key assumptions can impact the financial outcomes of a project. It helps you understand how "sensitive" your model is to different variables and identify potential risks and opportunities.

sensitivity analysis is the core for real estate projects in Georgia, because we sell flats during construction process and need of risk managment is crucial. most sensitive parameter is price per squre meter, as usual, but there are some very influencial parameters too, like time, margin, usable/total area ration and others... we also doo montecarlo simulation, based on sensitive items.

Real estate projects involve numerous assumptions about future events, such as rental rates, vacancy rates, construction costs, and interest rates. These assumptions can be uncertain, and their actual values may differ from what you initially project.

Sensitivity analysis helps you: Identify potential risks: By analyzing how different scenarios can impact your financial metrics, you can identify potential risks like declining rental income or rising construction costs. Make informed decisions: Understanding how sensitive your project is to different variables allows you to make informed decisions about resource allocation, risk mitigation strategies, and potential adjustments to your investment plan. Increase confidence in your model: Sensitivity analysis strengthens the robustness of your financial model by acknowledging uncertainties and demonstrating how the model reacts to various possibilities.

In 40 years of conducting both commercial and residential developments from duplex to 400 lot subdivisions I firmly believe the good old SA is by and far the very best tool we have for trying to project future returns By reworking the set variables this enables us to come up with a projected range that gives guidance and tolerance Certaintly far from infallible and only as good as the variables we plug in realistic realms But l would never consider a project with out running a hard and realistic SA Really a brilliant tool to be able to present to any other stakeholders financers or investors

Here's a common approach: Identify key assumptions: Determine the key variables (e.g., rental rates, vacancy rates, construction costs) that significantly impact your financial model. Define a range of values: For each key assumption, establish a realistic range of values, including a baseline (most likely), optimistic, and pessimistic scenario. Run the model for each scenario: Change the values of each key assumption one at a time, keeping all other assumptions constant, and run your financial model for each scenario. Analyze the results: Compare the resulting financial metrics across different scenarios. This will show you how sensitive your project's profitability is to changes in key assumptions.

The magnitude of changes: Pay attention to how much the financial metrics change as you adjust the key assumptions. Larger changes indicate greater sensitivity to a specific variable. The direction of changes: Analyze if the changes in financial metrics are positive or negative for each scenario. This helps you understand which variables will positively or negatively impact your project's performance. Patterns and trends: Look for any patterns or trends in how the financial metrics change across different scenarios. This can provide valuable insights into potential risks and opportunities.

Clearly we are always seeking to read from the midpoint of any SA Taking the highest points and lowest to arrive at the trajectories that will give us the Safe interpretation of all the fundamentals we have plugged into our analysis Like everything in life these SA are only as good as the input and the inputter😳 Way to often lve seen SA tabled that whilst showing certain tolerance levels,they have unfortunately been presented in far too favourable light in a effort to bring on greater and more robust participation by investors and stakeholders Combing presentations of SAs with sexy graphics and projections can sometimes be deceiving in some aspects Clearly everyone has a different idea about the future and this always needs to be tapered

You can use various tools like data tables, scenario manager tools in Excel, or dedicated software for sensitivity analysis. Conduct sensitivity analysis throughout the project lifecycle, as new information and market conditions emerge. Combine sensitivity analysis with other risk management techniques to create a comprehensive understanding of potential challenges and opportunities for your real estate project.

All the data is helpful amd they feel solid and that feels safe. But it's easy to get lost in all the numbers and forget about the people - the why. It's important to consider the human element and how it factors INTO and ALONG SIDE the data. As you analyze, include a column like: how will people react?, possible client/employee/vendor response, etc.

Don’t loose sight of good old intuition when considering the returns shown by any SA Wise and experienced operators should always run their own metrics across any of the fundamentals plugged into any SA Especially in a rapidly rising market here in Australia it’s easy to become carried away within the moment If it looks too good it probably is and don’t rely on someone else’s metrics Plug in your own Murphys Law waits for no one ⚡️✅🧐