A risk management model of apartment development projects using system dynamics

Abstract

Apartment development projects have steadily emerged in Korea. For a successful project, the developer must manage the economic risk factors that directly influence the project profit. In this respect, the main economic risk factors are sales price, sales ratio, land cost, construction cost, and financial cost. These factors have a causal relationship and create a complex profit structure and flow of funds as simulated in a dynamic simulation model. Furthermore, these factors are highly influenced by the economic trend over time. The developer needs to manage these risks to avoid business failure and obtain optimum profit. Therefore, this study aims to develop a risk management model of apartment development projects using system dynamics. This study establishes strategy by setting the risk range limit: lower control limit and upper control limit of each risk factor. The developed model was verified by applying it to the actual case project. The key findings are: (1) the optimum profit is maintained as long as the value of risk factors are managed within the risk range limit, (2) the developer can readjust the risk range limit to maintain the optimum profit whenever there is changing economic conditions that influence the value of risk factors.