The process of changing and intensifying the use of land to product buildings for occupation can be known as property development. It is a high risk activity as it involves large amounts of money tied up in the process of production and providing a product that is relatively indivisible. In the development process, each stage are consists variety of important actors who contributes to the outcome of the property process and they may have different perspectives and expectations.
Landowner can be actively or passively in the development process. The landowner may actively initiate development to improve the value of their land. For the not active initiator, they may become the crucial hurdle to the development. Three board categories of land ownership which are traditional, industrial and financial. Traditional landowners include the church and landed aristocracy who are significant owner in term of area and capital value. Industrial landowner include farmer, manufacturing and other service industries who have their own purpose which may be some form of production or service provision. Financial landowner may be financial institution who have clear financial motivates. They may own a great proportion of land by capital value and investing in property investment.
Planner is another parties involved in property development. It can be divided into two categories which are politician planner and professional planner. Political planner are responsible for approve the development plans make up by the professional with the advice of professional employee. The other responsible of them is determining whether applications for permission for development proposals can be approval or refused. The main purpose of planning is to encourage development and avoid undesirable development. The policies of planning authorities are widely differ in development. Activity carry out in the area of low economic typically wishes to encourage development activities otherwise activity carry out in area high economic is imposing higher standard and improving design of building.
Financial institution include pension fund which called EPF in Malaysia, insurance companies and commercial banks. They provide two type of money required for development which are short term money and long term money. Short term money is used to cover the cost during development process, it also known as development finance. Long term also known as funding, it usually uses to cover the cost of holding the completed development as an investment. In Malaysia, developer must use the property as security when they make loan form bank.
Building contractor is employed by a developer and their responsibility is to provide labour, material, equipment and service to complete the construction project. He carry out a specialist activity within the development process, commencing at a time if maximum commitment and the risk of developer. In Malaysia, the majority of housing developments do not involve in housing construction. This is because construction industry is competitive therefore developers do not find it profitable to construction the project themselves.
Agent such as professional valuer and real estate agents may be instrumental in initiating the development process or bringing together some of the main actors in the process. Agent has detailed knowledge of property market in term of demand and current price. Agent can make profit from the fees charged to their client when they carry out a professional service. Developer requires the knowledge of agent to help them in securing the necessary finance for development scheme.
(b) Discuss who should be included into the team if the out-of-town retail development carries greater risks than a residential development.
A large-scale, out of town retail development required a consulting team to reduce the risk. The following consultant is required to do market research during the initial stage.
Professional marketer is people who identify the strategies and attract customers to a business by using techniques. They have to do research, market analysis to understand consumer behaviour and market strategy. Professional marketer has to evaluate the demand and supply of the shopping complex at out of town. Assume that the shopping mall is targeting of female customer, a professional marketer can give suggestion such as having a child care centre in the shopping mall so that female customer can leave their kids there and focus on purchasing goods they need in the shopping mall.
Experienced valuer is one of the consultants required. He will provide guidance to the developer on the fair market price of the land in a written survey of report. Therefore the developer will not buy the piece of land with higher price. Developer has more capital to spend in other activity such as marketing.
Urban economist is assisting developer in identify structural issue and objective of territory for the next ten year. They will study on employment growth, firm opening in the town and effect of infrastructure investment on region to find out the pattern of future growth. At the same time, the barrier of economic development can be identified, the solution plan need to be prepared by urban economist.
Real estate agent
Real estate agent can help in researching the local real estate market. They may have access to promote the shop lot in shopping central to the potential retailers with reasonable price. The different categories of shop lots will be given more options to the customer. This will attract more customers to the shopping central.
Commercial complex property manager
Commercial complex property manager is the one who assist in preparation of the annual budget, tenant relation and also maintenance and repair of building. They have to take care of all the important detail to run a shopping central. They have to prepare the preventive maintenance schedule for all the equipment and system of the building. Therefore the shopping central has its own maintenance system. This will help to improve the equipment life and reduce the need for capital replacement.
(a). Assess base on Mr Alex’s understanding that economic cycle is not moving in tandem with the property cycle when business improves.
As a registered valuer, I will further discuss with Mr. Alex Pang on the understanding of economic cycle and property cycle.
Economic or business does not grow in a straight line. It is fluctuating between the periods of positive growth and negative growth, which is known as economic growth or business cycle.
The economic cycle or business cycle is based on the relationship between supply and demand level, and economic activity while the demand level is affected by the factors such as fluctuating prices of shop rental. This statement is proved by Richard Barras and is shown in the figure below.
Figure?Barras’ (1994) model on economic analysis
From Barras’ (1994) model on economic analysis, there is a relationship between property cycles and business cycles. However, business cycle will not moving in tandem with property cycle. This is due to the nature of property development. The property developments and investments are related to the economic and business frameworks.
Figure: Barras’ (1994) six stage model
The Barras’ (1994) six stage model analysis is the simplified version of explanation. It is beginning with the upturn business or economic activities. This cause an increase of employment rate. In short run, the demand for the property will be increase rapidly cause the rental price rising due to higher employment rate or any business activities.
When business growth is achieved peak in economy, the property demand is also strengthen and receive the peak but the supply will remain fairly tight. In this situation, the property value will continue to increase due to the long lead times in bringing forward a new development. However, the supply of property in real estate will lag far behind as longer time is needed to supply the properties. The property growth is unable to catch up with the business growth.
When the property supply achieves peak in economy, the business will start to turn weak. Business will be turn into the recession stage and usually accompanied by a tightening of monetary policy to against the inflationary effect. When the economy turns weak, the demand will be decrease follow by the fall in rental price and property value.
Thus, the demand of properties is a reflection of the short term and long term changes in the economy. The economic cycle is not moving in tandem with the property cycle when business improves.
2.(b). Assess market analysis required for the out-of-town retail development.
In this case study, the demand of proposed out-of-town retail development need to be identify through the access of market analysis. There are 7 steps to the market analysis which are required for the out-of town retail development. The sevens steps are listed below with the explanation.
Property productivity analysis
In this step, the features of the proposed property development which are affect the productive capabilities and the potential use of land will be identify. The features can be in term of physical characteristics, legal characteristics and locational.
There are some example of criteria which can be used for property productivity analysis which are demographics, economics health indicators and commercial property overview. These analysis can quantifies the potential demand and the position of a property.
Market Delineation is that market segment identified to be most likely interested in the subject real estate and the services it provides. Thus, market analysis combines market segmentation and product disaggregation. (The Appraisal of Real Estate,2010)
Market delineation consist the consideration of the most suitable development plan throughout several research and analysis of neighbourhood continuity and environment features. For example, what form of development can be considered, whether is residential or commercial development and who is the target market.
There are 3 common techniques which have been used which are catchment areas, gravitational models and customer spotting. The catchment area boundary is adjusted according to the specific geographic, demographic and economics characteristics of community in Jalan Kuala Langgat. The gravitational models is a variation of a catchment area circles which determine the effects and impacts of the neighbour of existing retail center. Customer spotting is a more specific form of catchment areas method to determine the distances and linkages by doing survey.
Forecast demand can use the economic base analysis as the basis in order to anticipate market demand. The population can be established as base analysis . For instance, more population will demand for more houses. Besides that, segment demand also can be analysis throughout the household income level and employment opportunities which means that more employment will increase the household income and people will have more effort and more savings to buy house.
In the case study, there are some forecast demand factors need to be determine:
Proposed Area of Population and Households
Mean Income per Household in Proposed Area
Income Spent on Retail Goods ; Services
Most Probable Percentage of Retail Expenditures for Subject-Center type goods
Competitive supply analysis
Identify all competitive retail space in the subject’s trade area is important to achieve a good market analysis process. The number of existing competitors may affect the number of properties supply and price. The competitive supply analysis consist the research of resale market which include existing and vacant houses, new houses for sale, current lot supply and unrecorded lot supply. Catalogue all key physical, location, and economic characteristics for each comparable. These analysis is important for Mr Alex Pang to planned the type of proposed development.
Equilibrium or residual analysis
This is a hard task. In this task, the existing demand and supply have to be estimated, including the future demand and supply. Estimate of the amount of excess demand or supply of space in the trade area for which the retail property will compete to estimate the additional space needed. For example, the future market conditions can be estimate and current surplus of retail space may be absorbed in the future.
Figure: Example of Steps in Residual Demand Analysis
Forecast subject capture
This step is to make a comparison between the product of proposed property and other property development. The estimation can be calculated by accessing the market share or location and amenity rating. Forecast subject capture is important to compare performance of the most comparable competition and also compare average performance of competitive subdivision.
Below is the example of calculation of subject capture.
Share of Market
Based on size of the Center
•Example: 5-acre in subject center,
4-acre iin existing competitors,
9-acre total SF in trade area,
•Subject Capture is 5/9 or 55.56%
This is the final step in market analysis. This is considered as financial feasibility study. Financial modelling consists of financial statement forecasting which is usually the preparation of detailed company-specific models. These are very important for decision making purposes and also financial analysis. Mr Alex Pand has to consider various type of development for his land based on his financial feasibility study.
3. (a) Examine the principles of good property investment with respect to the out-of-town retail development.
Regular and Secure Income
Regular and secure income is important for the investors. In this case, the location is an important aspect. Although the development is located out-of-town, but the location is strategic because it is nearby to the town, for example Klang. For the retail development, when the retailer is renting a shop, he or she will only spend a lesser amount of money compared to the town area. This can help them to save their cost, resulting in more profit. It can also be their advantage to sell their products or services cheaper, attracting more people to visit their shop. For Mr Alex Pang, it is a good thing because this could attract more retailer and thus make sure that the income is regular and secure. He does not need to worry about the other existing retail centre, since there is demand because of the growth in economy.
Future Income and Capital Growth
In the case, as an area nearby to the town, the out-of-town retail development is consider a good choice and have huge potential in the future. It is because the area is located nearby to several important places. It can be a benefit for the retailer because their product might be delivered through Port Klang or airport. This is also an attraction to the retailer. When there is demand from the retailer, future income will be secured as many will grab the chance to rent the retail developed by him. As for capital growth, it can be defined as increase in the value of asset over time. This can be guaranteed as mentioned above, the rental will be increased since the demand is high. The value of the land of the area will increase when the economy of the area become better.
Protection Against Inflation
Inflation happens where the price for goods and services is increasing. In this case, the retail development is not directly affected by inflation. Normally, the rental of the retail center will increase following the increase of price of good. As mentioned above, when the price of products and services that the retailer provided is lower than the town, then people will still and continue to come despite of inflation since it is nearby to the town. Mr Alex Pang could also increase the rental reasonably, helping the retailer in the other way.
3. (b) Demonstrate your understanding of the concept of yield for the proposed out-of-town retail development by giving an example.
Yield is the most important in any investment. It is the solely reason an investor invest in a project or a development, looking for the return in long haul. It is the net annual income return which expressed in the form of percentage of the market price of the asset. In the other word, yield is the return of an investment.
The significant difference between prime and secondary location is the rental and asset value which affect the yield greatly. Let us see the difference of prime and secondary location based on the examples, the figures stated below is just an assumption.
Yield =(Annual Rental)/(Asset Value) x 100%
Rental : RM 12,000.00 per month
Asset Value : RM 4,000,000.00
Yield = (RM 12,000 x 12)/(RM 4,000,000) x 100%
Rental : RM 9,500.00 per month
Asset Value : RM 1,500,000.00
Yield = (RM 9,500 x 12)/(RM 1,500,000) x 100%
There are several factors that could affect the yield. It includes purchase price, current rent, expected rise in rent as a result of rise in demand, rent review frequency, condition of the property, development possibility and so on. As you can see from the example above, the yield is affected by the rental and the asset value. Although the rental is higher at the prime location, but it does not mean that yield will be higher in prime location. It is because the value of asset is also high at prime location. At the prime location, the shop is nearby to the main road which can be seen and reached easily. It makes the asset value higher, the investor will need to pay more money compared to secondary location. The asset value could be increased when the retail center is having a good image because of the good business. When we are calculating the yield, it will be lower in prime location. Although the increase in rental could also increase the yield, but it could cause bad effect to the investor. It is because the retailer will not renew the contract once it end.
4. Interpret the statement that “most of Mr Alex Pang’s friends appear to have ignored the effect of agglomeration of industry”.
From the statement “most of Mr Alex Pang’s friends appear to have ignored the effect of agglomeration of industry”, we understand that Alex Pang’s friends ignored the effect of agglomeration because his friends discouraged him to obtain the land for retail development that is out-of-town. This is because there is highly competitive environment which the land is currently surrounded by two retail centres across the road. Mr Alex Pang’s friends are lack of knowledge on the benefits and effect of agglomeration of industry.
An agglomeration of industry refers to the concentration of several industries in an area or place. Such a concentration of several industries occurs since the area in question has the greatest location advantage compared other areas, including the benefits of accessibility to related industries. As a result of agglomeration, firms frequently centralize in an area or place which firms be inclined to close to each others. Agglomerative activity can apply many forms and is frequently considered to result in either “Localization or “Urbanization” economies dependent over the industrial composition of the cluster or complex. For Localization Economies, it basically involved economies which includes similar firms, whereas economies which includes different firms are known as Urbanization Economies. The latter form of agglomeration has received greater attention in the literature, frequently offering a mechanism for analyze of dissimilar urban growth and optimal city size. (Morgenroth, Edgar, 2018)
An consultation should be given to Mr Alex Pang to develop the 5-acre retail center development as there is much affirmative effects of the agglomeration of industry. There will be more people being attracted by this retail centers development, as there are already 2 existing retail centers along Jalan Kuala Langgat by referring to the site plan, by the affirmative effects of the agglomeration of industry. Mr Alex Pang will have a good revenue on his investment if he was to acquire and develop the 5-acre land for retail development. In fact that there is existing residential housing across the road and Mr Alex Pang also propose to develop the 200-acre residential housing in the same area, with this the 5-acre land for retail center development will have good revenue in return as the residents increased.
There are a few reasons for Agglomeration take places. There are many industrial strategies have obviously been attracted to the identical location and the system tends to be cumulative. The preliminary enchantment to industry, for example it might also have been the availability of strength resources or the existence of a material or a place, as a essential port or junction of routes to form agglomeration. (Jasson, 2009)
Town are financial engines in every places as they focus the social and economic activities that enables existence of financial of scale plus economies of agglomeration. Town preference productivity and facilitate the provision and trade of goods, lowering transaction costs. In addition, agglomeration economies have an influence on town development. The agglomeration economies represent benefits to corporations as result of clustering. There are two major consequences of the agglomeration economies on towns. It result in an accumulation of capital, reflected in economic growth and town size. Besides, it also affect the level of monetary specialisation, or monetary profile of each place or area. (Jasson, 2009)
There are many benefits for agglomeration of industry. The concentration allows personal corporations contract out certain essential components which they buy from some other corporations which specialized in the manufacturing of those part. The specialized corporations with its larger scale of manufacturing can use specialized equipment and limit its overhead costs. In a massive and developing industrial centre, there is also development and enlargement of many necessary or beneficial offerings e.g. trade journals, unique banking and insurance facilities, and so on. Small-scale and specialised industries on occasion also acquire excellent economies through concentrating their activities in a unique ‘quarter’ of a massive industrial centre e.g. they can buy and sell through local middleman who specialize in their requirement. (Gilles Duranton & William R.Kerr, 2015)
Agglomeration economies enhance the trade of thoughts producing innovation and enhancements in the manufacturing structures of corporations, growing productivity and consequently the capital accumulation of a town. The agglomeration economies enhance the productivity which lets in a quicker increase of corporations and physical and financial increase of the cities. (Jasson, 2009)
Agglomeration of retail center developments will fascinate more people to visit the 5-acre retail centers specifically the 200-acre residential housings’ residents and residents across the street. For example, if a resident can have anything he/she wants in agglomeration of retail center, he/she will choose to shop in the retail center rather than going far away to get what he/she wants. Therefore, Mr Alex Pang can proceed with the 5-acre land development on retail center beside his 200-acre land of residential housing development.
As a conclusion, as a registered valuer who worked in the Klang Valley for the past 10 years, I shall persuade Mr Alex Pang to acquire and invest this 5-acre land for retail development. This is because the effect of agglomeration will not only attract nearby residents but also to attract residents which are out-of-town.