Chapter 1 Introduction Property Development ( 6 th Edition)

1. Chapter 1 Introduction Property Development(6th Edition) Publisher: Routledgewww.routledge.com Authors: Professor R.G. Reed and Dr S. Sims

2. 1.1 INTRODUCTIONWhat is property development? ‘a process that involves changing or intensifying the use of land to produce buildings for’ • Components of property development include the building materials, labour, infrastructure, financial capital and professional services. • Property development is a global activity. • Property development is an exciting and occasionally frustrating activity often involving the use of scarce resources and large sums of money to develop a product which is largely indivisible and illiquid.

3. What is property development? • At times property development is a high risk activity involving a high level of planning and co-ordination to maximise the use of limited resources. • As the development process is often lengthy and can take years from initial conception until completion, the performance of external factors, such as the broader economies at the local and national levels, are an important consideration. • Assumptions made at the start of the property development may have dramatically changed by completion. • Success often depends on attention to the detail of the process although success is not always judged in terms of profit and loss. For some it is measured in social, emotional or aesthetic terms. • Property development is, for many, a worthwhile and very rewarding discipline.

4. 1.2 THE PROCESS OF DEVELOPMENT • Undertaking a property development is largely about the ‘process’ of developing a property. • Although the underlying concept is similar, each parcel of land is different which ensures every property development has its own unique aspects and interesting development challenges. • A completed property development is the result of a change of land use and/or a new or altered building in a process which combines the factors of land, labour, materials and finance to produce a varying level of profit and risk. • In practice the successful implementation of this framework ensures the process can be very complex if poorly understood, especially since a development often takes place over a considerable time period, usually years. • When the property development is completed the end product is then unique, either in terms of its physical characteristics, its location or both. • No other process operates under such constant public attention, nor in recent times has received so much interest in broader society.

5. 1.2 THE PROCESS OF DEVELOPMENT The development process can be sequentially divided into these major stages: • Initiation • Investigation and analysis of viability • Acquisition • Design and costing • Consent and permission • Commitment • Implementation • Leasing/managing/disposal.

6. 1.2.1 Initiation The first stage of development process typically occurs when either: • A parcel of land or site is considered suitable for a different or more intensive use than its existing use; or • There is an increased level of demand for a particular land use, which in turn leads to a search for a suitable site. • With reference to improving land, the amount of resources needed can vary from minimal structural improvements relative to the substantial land component in rural land, to major structural improvement in comparison to a minor land component in a city centre high density land use – for example, an office building. • There are a range of land uses between these two extremes including residential, industrial, retail and office. • Von Thunen’s original model (1826) provides a broad framework for understanding variations in highest and best land uses based on limited supply in the city centre and the hierarchy of higher yet diminishing returns for office, then retail, industrial and so forth (Figure 1.1).

7. Figure 1.1 Relationship between land uses (Source: adapted from Von Thunen 1826)

8. 350 A 1.2.1 Initiation 300 Main street A in city centre C 250 B • Figure 1.2 has been adapted from a landmark rent-bid model for the high density Chicago office market which closely examines actual property location and the rent per unit of measure. Main street B in city centre Rent per square metre/square foot 200 Figure 1.2 Office rent in the Chicago CBD 150 + 4 100 + 2 Number of blocks east of street A 0 Main street B in city centre + 2 - 2 0 Main street A in city centre - 2 Number of blocks north of street A - 4 (Source: adapted from Alonso 1964)

9. 1.2.1 Initiation • The starting point for the property development itself can vary. A stakeholder in the property development could be looking for an appropriate new site to meet their needs, or a stakeholder may be looking to redevelop or expand an existing site, such as a retail shopping centre, and need to acquire neighbouring residential houses for land required for a retail extension. • The factors which negatively affecting an existing land use or development use are usually referred to as a form of obsolescence such as economic, social, environmental, physical, legal, historical and so forth. • It an essential concept in property and real estate markets for every parcel of land, in addition to any improvements which are affixed to and form part of the land, to be at its ‘highest and best (legal) use’. • Due to gradual change over time, the ‘highest and best’ land use for a particular area may change over many years. • This trend must be acknowledged by the property developer as soon as possible, otherwise a new development may become obsolete relatively quickly, e.g. within 5 years.

10. 1.2.2 Investigation and Analysis of Viability • The evaluation stage is arguably the most important part of the property development process:'failing to plan is planning to fail'. • The real estate market works largely on the premise that 'knowledge is power'so reliable and detailed property data is commonly not typically available for free– networking is important. • The evaluation process may also be used to assess the market value of a vacant site which has the potential to be developed. • The investigation and analysis of viability phase must be conducted prior to committing to the property development. This stage also allows the developer to factor in any number of hypothetical scenarios which allows the developer to retain a degree of flexibility. • This stage is usually approached using the combined resources of the developer’s professional team including architects, quantity surveyors, accountants, planners and valuers/appraisers. • The final decision to proceed with the associated risk is always with the developer, based on the findings from the detailed investigation and viability analysis. • Preparation prior to acquisition should include the following stages as shown in Figure 1.3.

11. Legal investigation – have all legal issues been addressed? Figure 1.3 Decision pathway Yes No Ground investigation – have all physical issues been addressed? Yes No Finance – has approval been confirmed? No Yes

12. 1.2.3 Acquisition • Legal Investigation • Prior to purchasing the site, the developer (i.e. the prospective purchaser) should fully examine all legal and planning aspects of the site. • Investigate the type of ownership or tenure of the site, including the nature of the owners and their background, e.g. if they are located overseas or in the same locality. • Identify any easements, outstanding encumbrances or liens on the title which could be potentially transferred to an unsuspecting new purchaser as they are often attached to the land itself. • If a site is being acquired by the public sector for the benefit of society, it may be acquired using compulsory purchase powers. • Although the use of such powers can be time consuming and costly, the vast majority of property developments which involve compulsory acquisition are completed with the co-operation of the original site owners. • The public sector may become involved in the initial acquisition stage – for example to assemble a large site with many occupiers and landowners as they can use their legal powers of compulsory purchase to ensure the tenure to the land is secured.

13. 1.2.3 Acquisition (b) Physical Inspection and Examination • A comprehensive on-site physical inspection of the site and all structural improvements (if any) is essential. • This includes an examination and physical assessment of the capability of the site to accommodate the proposed redevelopment for an existing use or development for a new land use. • Factors to consider include a detailed assessment of the site’s load-bearing capacity (i.e. the potential foundations for a multi-level building), access (i.e. ingress and egress to and from the site), natural drainage and proximity to services (e.g. gas, electricity, water and sewerage) if not already in situ. • If there is a defined gap between (i) existing services and (ii) the level of services required for the development, the cost and relevant steps required to overcome this shortfall should be estimated and built into the development plan. • The characteristics of each individual site will vary considerably but there should be an awareness of the potential presence of other factors.

14. 1.2.3 Acquisition (c) Finance • Unless the developer is in the rare position of using their own cash and equity to fund 100% of the project over the development period, there will be a need to borrow funds to finance the cost of the development. • Costs associated with servicing the finance loan will have a major bearing on the overall viability of the property development, especially for projects conducted over an extended time period, e.g. a number of years. • The terms and conditions associated with obtaining finance must be on the most favourable terms available in the marketplace for the developer before deciding to proceed. • Short-term finance is required to pay for costs expended before and during the development process itself. • Long-term finance is needed to cover the costs associated with retaining ownership of the development after completion. • The availability and conditions attached to finance provided by lenders varies, largely due to the risk associated with each developer’s application and also the state of the financial market at that particular point in time.

15. 1.2.4 Design and Costing • In the preliminary stages of the property development process it is commonplace to consider some basic aspects of design and costing. • The design of each development is influenced by a number of factors, the client’s brief, public perception and current architectural styles, but the aim of the developer is traditionally to maximise profit by maximising the development potential of the site. • Design is an almost continuous process throughout the property development and runs parallel with other stages, becoming progressively more detailed as the development proposal increases in certainty. • The preliminary design stages should be kept relatively brief in order to keep costs down before the developer is committed to the scheme. • In due course a decision will possibly be made to submit a detailed planning application for the proposed scheme which will require a full set of comprehensive plans showing the final layout, elevations, cross-section of the building and detailed design specifications. • Design and costing stages typically involve contributions from all members of the professional team with input at times from stakeholders such as the real estate agents and financiers. In most cases the final design will be very different to the initial design concept, often having been through many design changes and alternations/modifications before the final drawings are complete.

16. 1.2.5 Consent and Permission • A new development on a certain site may require a change of use from the previous land use. Since every proposed property development requires planning consent or permission from the local planning authority, a change of use is dealt with at this stage prior to commencing the property development. • The developer will often rely on previous experiences to make realistic initial estimates of the likely timeframe and costs associated with obtaining the appropriate permission during the evaluation stage. 1.2.6 Commitment • Prior to making a substantial commitment to the development, the developer must be completely satisfied that all the necessary preliminary work has been completed. • The developer will endeavour to keep outlay or sunk costs to a minimum until all permissions are granted and the actual title (freehold or leasehold) has been transferred giving full access to the site. • The next stage is for all parties to sign contracts for the property development.

17. 1.2.7 Implementation • Throughout the implementation stage the primary aim is to ensure that the completion of the development and handover is within both (a) the allocated timeframe and (b) the financial budget as produced in the proposal. • It is commonplace for the developer to take substantial interest in both the running of the project and its overall promotion. 1.2.8 Leasing/Management/Disposal • These steps must be at the forefront of the developer’s thoughts from the initiation of the scheme since the development will have no value unless it is sold or leased. It has become common for the lenders to insist on a set level of pre-commitment to the total scheme. • During the evaluation stage the letting and/or sales promotion strategy should be included in the development planning as early as possible and continually updated during each stage. • To ensure the complete of the project runs as smoothly as possibly, it is commonplace for the developer to engage the services of a real estate agent or a realtor to secure a sale of the property.

18. Discussion points: How do the individual stages in the property development process relate to each other? What is the sequence of events in a typical property development process?

19. 1.3 MAIN STAKEHOLDERS IN THE DEVELOPMENT PROCESS 1.3.1 Landowners • The landowner plays a critical role in the first stage of a development process. • Without the willingness of the landowner/s to sell their interest or participate in the development, no future development can take place unless it is possible to acquire the land through compulsory purchase powers • Landowners have historically played an important role in shaping the way land has been developed. They have influenced spatial layout, the type of buildings, infrastructure and the design of the landscape. 1.3.2 Developers • Private sector development companies come in a variety of forms and sizes ranging from single person entities up to global multi-nationals. • Developers primarily operate as either traders or investors. • Some developers operate only in specific geographical regions, others specialise in developing offices or retail schemes.

20. 1.3 MAIN STAKEHOLDERS IN THE DEVELOPMENT PROCESS 1.3.3 Public Sector and Government Agencies • Government organisations and the public sector are rarely directly involved in the development process. The degree and type of government participation will depend largely on whether the government seeks to (a) encourage development or (b) control development. • A government body will at times be able to assist developers with particular development roles including site identification, site reclamation, the provision of infrastructure and perhaps financial grants. 1.3.4 Planners • The underlying objective of most planning systems is to monitor and control the use of land in alignment with the public interest by encouraging development which is harmonious and to prevent ‘undesirable development’. • Generally speaking, planners can be divided into two broad categories: politicians and professionals. The underlying basis for determining planning applications is laid down by statute secondary legislation and supported by guidance notes and publically available local and regional plans.

21. 1.3 MAIN STAKEHOLDERS IN THE DEVELOPMENT PROCESS 1.3.5 Financial Institutions and Lenders • It is unusual for a development to be entirely financed with a developer’s own capital, therefore financial institutions have a critical role in the development process. • There are many different types of financial intermediaries who supply a large amount of money in return for a secure mortgage or lien over a property. • Unlike most developers, financiers usually take a long-term view and understand that investment in property is a relatively long-term investment. • Financiers need to achieve capital growth in order to meet their financial obligations to their shareholders so financiers seek to minimise risk and maximise future yields. • The availability and level of funding to the developer depends on factors including the risk profile of the developer, their accepted industry track record as well as the availability of funding in the marketplace at the time of the development.

22. 1.3 MAIN STAKEHOLDERS IN THE DEVELOPMENT PROCESS 1.3.6 Building Contractors • Building contractors undertake the task of physically constructing the development scheme and their prime objective is direct financial gain and profit. Some development companies employ their own building contractors. Alternatively a builder may also take on the role of developer. • Building contractors have a specialised role in the development process which commences at the time of both maximum commitment and maximum risk for the developer. 1.3.7 Real Estate Agents • An agent can be instrumental in initiating the development process and/or bringing together some of the main stakeholders in the process. • Agents bridge the gap between the developer and the occupier, unless the developer uses ‘in-house’ staff to perform the agent’s role and there is no need for the occupier to be represented by an agent.

23. 1.3 MAIN STAKEHOLDERS IN THE DEVELOPMENT PROCESS 1.3.8 Professional Team • Developers employ a range of professionals to advise them including: planning consultants; market research analysts/economic consultants/ valuation surveyors; architects; quantity surveyors; engineers; project managers; solicitorsand accountants. 1.3.9 Objectors • Objectors have the right to provide an input into the viability of the proposed development based on social and community considerations. • The developer must be aware of the interest (or likely interest) of objectors which are at times legitimate and well intended. • A large-scale or sensitive development may become part of a political discussion and receive substantial media attention, often resulting in intervention at government level in the development proposal.

24. 1.3 MAIN STAKEHOLDERS IN THE DEVELOPMENT PROCESS 1.3.10 Occupiers • The demand for accommodation triggers the development process and influences both land prices and rents, to which developers respond. • It is important to ensure that property development is viable and meets the needs of the future occupants, which in turn will lessen the exposure of the lender to risk. • Different occupiers have different real estate requirements and priorities, particularly in the case of office space, making the developer’s task of producing a building suitable for as many tenants as possible very challenging.

25. Discussion points: Who are the main actors in the property development process? For a large scale out of town retail development which parties do you think would need to be part of the developer’s team and why?

26. 1.4 ECONOMIC CONTEXT • Every property development is located within inter-related different markets based on geographical location and also economic considerations in local, regional, national and global markets. The demand by occupiers, either tenants or freehold ownership, is a factor of supply and demand interaction in the broader market. • The economic climate is important to developers as the local economy helps to determine the market for an individual scheme and the wider economy affects general property market conditions and the confidence of occupiers, investors and developers. 1.4.1 The Local Economy • Most demand is drawn from a small geographical area around the scheme. 1.4.2 The National Economy • The state of the national economy has a direct effect on the real estate market. 1.4.3 The Global Market • The global financial markets are now very closely related so uncertainty in one market can adversely affect other markets.

27. Discussion points: How has the economic context that property developers operate within changed over the past decade? Which of these drivers were within the control of a developer and which drivers were not?

28. Chapter 1 Introduction Property Development(6th Edition) Publisher: Routledgewww.routledge.com Authors: Professor R.G. Reed and Dr S. Sims