‘This is a great book to understand the complexity involved with real estate development.

In this
seventh edition the author has clearly captured the major issues to be aware of to mitigate the
uncertainty that goes along with investing in a real estate development.’
—Dr. Elaine Worzala, CRE, FRICS, Carter Real Estate Center, USA

‘This book is a very comprehensive coverage of all aspects of the property development process,
with international examples highlighting key issues. The new section on sustainability is a
welcome addition as an important ongoing element in property development.’
—Professor Graeme Newell, Western Sydney University, Australia
Property Development

This fully revised seventh edition of Property Development has been completely updated to reflect
ongoing changes in the property field and maintain the direct relevance of the text to all stakeholders
involved in studying the property development process. This text has been in high demand since the
first edition was published over 40 years ago.
The successful style and proven format of the highly popular text has been retained to assist the
readership to understand this complex discipline. The readership typically includes anyone with an
interest in property including aspiring property developers, established property developers, property
stakeholders involved in the property development process, as well as any interested parties. In
addition this new edition of the standard text is ideally suited for all property development and real
estate students and will also be of interest to early career professionals and those pursuing similar
professional degrees in the industry and in wider built environment courses.
This new edition includes new content discussing the rise and significance of PropTech with all
chapters updated and enhanced to also assist lecturers and students in their teaching, reading and
studying. The book focuses specifically on development and outlines the entire comprehensive process
from inception, financing, planning and development stages within the context of sustainability and
urban global challenges. The chapters include introductions with chapter objectives, discussion points,
reflective summaries and case studies.

Richard Reed (PhD) has extensive experience in property and real estate in both the private and
public sectors. He has conducted research at many universities up to the level of professor including
the University of Melbourne, University of Queensland and Deakin University. He is the founder and
editor of the International Journal of Housing Markets and Analysis and currently is a director of
Reed Property Insights.
Property Development

Seventh edition

Richard Reed
Seventh edition published 2021
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
52 Vanderbilt Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2021 Richard Reed
The right of Richard Reed to be identified as author of this work has been asserted by him in accordance with
sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any
electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording,
or in any information storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for
identification and explanation without intent to infringe.
First edition published 1978
Sixth edition published by Routledge 2015
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record has been requested for this book
ISBN: 978-0-367-85833-9 (hbk)
ISBN: 978-0-367-85835-3 (pbk)
ISBN: 978-1-003-01530-7 (ebk)
Typeset in Sabon
by codeMantra
For my parents
Contents

List of figures
List of tables and examples
Foreword to the seventh edition
Preface
Acknowledgements

1 Introduction

2 Land for development

3 Development appraisal and risk

4 Development finance

5 Property cycles

6 Planning

7 Construction

8 Market research

9 PropTech

10 Marketing and sales

11 Sustainable development

12 Emerging markets

Appendix: CPI by country, 2010–19

Index
Figures

1.1 The real estate process

1.2 Relationship between land use and proximity to the city centre
1.3 Rent-bid relationship between location and land use
1.4 Conventional decision tree process
2.1 Part of the Armstrong Creek East Precinct Structure Plan highlighting the project
2.2 Initial masterplan including HVOTL and easement
2.3 Updated masterplan without the HVOTL easement
3.1 Development timeline
3.2 Timeline of events
3.3 Status in 2003
3.4 Status in 2006
3.5 Status in 2012
3.6 Status in 2013
3.7 Status in 2014
3.8 Status in 2016
4.1 Global House Price Index (1980 = 100)
4.2 Global Industrial Capital Value Index (Q1 2003 = 100)
4.3 MSCI Annual Property Index: residential vs total returns (UK) 1990–2019
4.4 MSCI Annual Property Index: retail vs office vs industrial returns (UK), 1981–2019
4.5 MSCI Annual Property Index: hotel vs other vs all segments (UK), 1981–2019
4.6 Accumulated Annual Property Index (UK), 1980–2019
5.1 Characteristics of a typical cycle phase
5.2 Combination of varying length cycles affecting a single market
5.3 Property market, financial and economic framework
5.4 The concept of equilibrium in a real estate market
5.5 External shifts in demand for real estate
5.6 Over-supply scenario due to decreased demand
5.7 US house price cycles
5.8 Construction phases
5.9 Empire State Building: aerial view
6.1 Example of the UK planning process
6.2 Castle Towers Food Court
6.3 Castle Towers retail development
7.1 Hypothetical development project via bar or Gantt chart
 7.2 Cash-flow: fees/construction
7.3 Financial report: building costs
7.4 Checklist to monitor primary activities
7.5 Petronas twin towers
7.6 Twin towers retail shopping
8.1 Market research approach from broad to specific
8.2 Relationship between market research areas
8.3 Cross-tabulation based on land use by geographical location
8.4 Site of Watergardens retail centre
8.5 Watergardens internal design
9.1 PropTech conceptual diagram
11.1 ‘Three pillars’ model of sustainable development based on triple bottom line accounting
11.2 Four pillars model of sustainability
11.3 CSR pyramid
11.4 Evolution of rating tools
11.5 Canary Wharf
11.6 Canary Wharf construction
12.1 Construct for combining global, multinational and regional strategies
12.2 Steps in international strategy formation
12.3 Wuhan Huoshenshan hospital under construction
12.4 Wuhan Huoshenshan hospital construction site
Tables and examples

Tables
3.1 Investment yields and respective year’s purchase (YP)
3.2 Development timeline
3.3 Normal S-curve irregular pattern of expenditure
3.4 Sensitivity analysis and effect on adjusted developer’s profit
3.5 Level of developer’s profit expressed as a percentage (i.e. profit as a percentage of total
development value)
7.1 Advantages and disadvantages of design-bid-build procurement
7.2 Advantages and disadvantages of design and build procurement
7.3 Advantages and disadvantages of management contracting procurement
9.1 Horizontal and vertical PropTech sectors
11.1 Property development stages and the key potential sustainability issues

Examples
3.1 Residual valuation
3.2 Formulas for residual valuation
3.3 Alternative residual valuation
3.4 Cash-flow approach
3.5 Net terminal approach
3.6 Discounted cash-flow approach
4.1 Developer’s profit analysis
4.2 Developer’s profit analysis
Foreword to the seventh edition

The publication of this new edition of the standard text on Property Development is both timely and
welcome. The time since the previous edition has been characterised by ever stronger needs for
sustainability and governance, as well as sensitivity to an ever-increasing range of stakeholders. Major
changes to working and living practices are making the task of development more complex and riskier
than ever. In this context, the new edition of this book is most welcome, introducing new material that
responds to the recent changes in the way that the property market operates.
As well as clear explanations and useful approaches to analysis, the underlying concepts are
explored in order to provide the reader, whether student or practitioner, with a level of understanding
that will enable adaptation to continuously changing circumstances. This is essential reading for all
those involved in any aspect of property and construction. For undergraduate and postgraduate
students of property and construction, it is an indispensable guide and companion.
Will Hughes
Emeritus Professor of Construction Management and Economics School of
the Built Environment University of Reading, UK
Preface

The implications from continuing and unpredictable changes in the twenty-first century at the local,
regional and global levels present many challenges in the property development field. Reference to
COVID-19 and the GFC are two obvious yet unpredictable examples. Identifying and understanding
the opportunities and associated risks in every property development has never been associated with
so many different risks. Fortunately this task can be greatly assisted by the availability of knowledge
where this textbook has been specifically written to make this substantial contribution as a reference.
This is the seventh edition of this leading textbook that has been highly sought-after since the first
edition was published in the 1970s. Over time this popular textbook has been regularly updated to
reflect market changes including the increasing contribution of technology, the integral contribution of
sustainable practices and the importance of developing regions. The readership during these decades
has included a wide cross-section of stakeholders involved in the property development process
including students enrolled in university courses up to experienced and successful property
developers. In fact, anyone directly or indirectly involved in the property development process will
benefit from the contribution made by this textbook.
This edition includes 12 fully updated chapters based on feedback from industry stakeholders and
the readership. The successful chapter format has been retained including discussion points, case
studies and worked examples. The previous six editions have confirmed the success of this format and
readers of previous editions will benefit from the user-friendly nature of the layout.
The popularity of this textbook can also be linked to the direct relevance with stakeholders in the
property development process. The structure of the chapters and associated layout successfully
reduces a potentially complex topic into a straightforward and readable format. Following on from
earlier editions, this seventh edition retains the easy-to-read writing style where the use of jargon is
relatively minimal, however it also includes adequate detail where deemed necessary. This textbook
has reference to property development in most regions and countries since the proven principles are
directly applicable. Throughout the chapters there are examples and references to property
development on different continents to highlight the important relevance.
In this seventh edition there has been a focus on embedding sustainability throughout the textbook
as well as providing a separate chapter on ‘Sustainable Development’. Prior to the last edition there
was very limited reference to sustainability. Another expanded and renamed chapter is ‘PropTech’ and
clearly acknowledges the technological advances over the previous editions. In a similar manner to
many disciplines, property development is a process that is substantially assisted by computers as a
decision support system. The new case studies are designed to inspire the readership as well as provide
a practical aspect for the readership. As we continue to adapt to this rapidly changing world, other
chapters including ‘Property Cycles’ and ‘Emerging Markets’will assist to prepare for our
unpredictable future.
Acknowledgements

The following individuals and organisations are acknowledged for this invaluable assistance and
contributions.
Professor David Cadman for the unparalleled contribution and belief in the discipline of ‘Property
Development’ with the publication of the first (and subsequent) edition all those decades ago.
Ed Needle for his long-term support and encouragement in his role as Commissioning Editor for
Routledge Construction and Real Estate. Also Patrick Hetherington for his excellent assistance in his
role as Senior Editorial Assistant.
Andrea Ahearn (Brookfield Properties), Leanne Peters (Canary Wharf Group PLC) and Howard
Dawber (Canary Wharf Group PLC) for their contribution to the Canary Wharf case study.
Grant Brady and Marc Joshi (Queensland Investment Corporation Global Real Estate QICGRE) for
their contribution to the Castle Towers case study and the Watergardens case study.
Richard Nguyen and Liz Ronson (Jinding Developments) for their contribution to the Armstrong
Creek case study.
Vivian Leung (MRICS) – MSCI, Hong Kong.
Professor Will Hughes – University of Reading, UK.
Professor Elaine Worzala – College of Charleston, USA.
Professor Graeme Newell – Western Sydney University, Australia.
Dr Sally Sims – Oxford Brookes University, UK.
Chapter 1

Introduction

1.1 Introduction

Property or real estate development is an inevitable and unavoidable process undertaken in the
vast majority of locations throughout the world where there is freehold or leasehold ownership
held by private or government entities. Some exceptions do exist, for example when property is
preserved as vacant undeveloped natural land or buildings allocated a historical or heritage
designation. Often the reference to ‘property development’ is relatively broad and encompasses
practically any form of change to the property. In some instances this can equate to a very minor
development of the property to increase its value and retain the existing use, e.g. minor
refurbishment such as updating and painting. In other examples it will involve a material change
of use (e.g. from industrial or rural use to residential use) along with the associated processes to
ensure this will be a viable course of action.
The demand for continual property development is based on the premise that everything (and
everyone) is in an individual cycle and also has a defined life. For example the residents within
each home will continually change over time: no one lives forever. This process is often
accompanied by a change of ownership and potentially also a change of land use to ensure the
highest and best use (as opposed to current or existing use) is achieved. Hence property
development is an ongoing organic process that (a) surrounds us and (b) is perpetual. Most
importantly, real estate development shapes the way that people live and work, while in this
process it determines and enables human activity to evolve (Squires and Heurkens 2015).
Considering the in-use life of a structure can cover many decades and at times even many
centuries, ensuring the correct property development process is undertaken at the outset is
essential. However the process of property development is a mixture of both scientific elements
where striking an optimal balance will equate to a successful property development track record
(Lausberg and Viruly 2019).
This is the seventh edition of this very popular book that has been globally accepted over the
past 35 years as the leading text on the discipline of ‘property development’. The contents outline
and detail the theoretical concepts and explains the individual processes involved when
undertaking the many different forms of property development. At the same time it is also a
practical book that describes the process of property development and enables the reader to gain a
comprehensive understanding of both the fundamental concepts and the underlying conceptual
framework required for undertaking a successful property development in the ‘real world’. The
audience for this book is broad and encompasses a wide range of stakeholders.
From a readership perspective the content of this text is relevant for new property developers
and students who are seeking to identify and understand the important components and
actors/stakeholders when undertaking a property development. Equally important, this book has
also been written for experienced property developers desiring to revisit the theoretical concepts
underpinning this exciting discipline. Anyone with an interest in undertaking property
development will find this book to be informative. Included in the reference section, especially
for this introductory chapter, are numerous websites relating to examples of property
development organisations in order to provide information about property development. To
achieve success in this networking focused industry, membership of professional bodies and
attendance at their industry events and conferences is considered as practically mandatory.
During the period of time since the previous sixth edition of Property Development was
published there have been many global changes and challenges affecting the property
development environment and associated stakeholders. In a similar manner to many other areas
of business activity, there has been a substantial move towards globalisation and the property
development market is now undertaken on a global as well as on a national and local scale (Reed
2015). In addition there have been unforeseen economic challenges such as the COVID-19
pandemic and the preceding GFC (global financial crisis). Nevertheless the concepts and
discussions in this text are applicable in many different regions and countries where developed
markets are linked to a high level of property development activity. Importantly the emerging
markets have the largest amount of potential change, as well as future property development, so
are discussed in the final chapter.
Since the last century the trend towards adopting sustainability in development has continued
and arguably both indirectly and directly affects most types of property developments and real
estate analysis (Kauko 2019). This perception is linked to the higher profile of climate change in
wider society and the need to protect the current resources for use by future generations. Another
example is the ongoing popularity of green-related political parties, providing additional evidence
of this heightened awareness in many western societies. With most property development
approvals requiring some form of government input, sustainability is therefore embedded
throughout this text in addition to the dedicated chapter on ‘sustainability’.
The appropriate starting point is to define the term ‘property development’ for reference in this
book, however this definition can be slightly ambiguous and also varies depending on each
stakeholder’s perspective. This discussion commences with the understanding that no two parcels
of land are identical as each has its own unique set of attributes and accordingly requiring a
unique type of property development at a specific point in time. Therefore the definition adopted
in this text for property development is ‘a process that involves changing or intensifying the
material use of land to produce structural improvements for’. Hence it is not focused specifically
on the buying or selling of land for financial gain when all over variables (e.g. land area, existing
land use) are held constant, since the land itself is only one of the many essential components of a
successful property development. Other variables are numerous; for example including the
building materials, labour, infrastructure, financial capital and professional services. Today’s
property developers can benefit substantially from an ‘economies of scale’ approach and are no
longer limited to a specific local geographical location. Since property development is now
widely accepted as a global activity, this text therefore has an international perspective including
relevance to the property development processes in the UK, Europe, USA, Asia-Pacific and the
rest of the world. The varying locations of the case studies also reflect this high level of
globalisation in property development.
Property development is often incorrectly perceived from the outside as a glamorous and
sought-after occupation in comparison to a career in a traditional discipline, e.g. planning,
services. However little mention is given of the irregular hours and associated risk (and stress)
levels being intrinsic to the development process. Nevertheless property development is an
exciting and occasionally frustrating activity. At times it involves the use of scarce resources and
 large sums of money to develop a product that is largely indivisible and illiquid. Generally
speaking it can be a high-risk activity but does involve a high level of planning and co-ordination
to maximise the use of limited resources, primarily the limited supply of land. 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 important considerations in the successful completion of a development. This can be
further compounded since the assumptions made at the outset may have dramatically changed by
the final completion. A successful development often depends on the level of attention to detail in
the process although success is not always judged in terms of profit and loss; for some it is
measured in social, emotional and/or aesthetic terms for example. Above all, property
development is, for many, a worthwhile, rewarding and exciting discipline that can be viewed as
a long-term career.
Due to the broad nature of property development and the many individual disciplines (e.g.
planning, finance, architecture, construction) that collectively fall under the umbrella of ‘property
development’, the reader is directed to each individual discipline to gain further detailed insights.
The ongoing popularity and success of the previous six editions of Property Development have
been founded on successfully striking a realistic balance between a broad overview of property
development and insights into the role of each discipline in the development process. The
emphasis in the text is on the practical application of property development where the reader is
taken through each stage (i.e. consisting of these individual disciplines) involved in the process.
In each chapter a series of discussion points are provided to prompt the reader to reflect on the
content of the previous section. These are also accompanied by ‘real life’ case studies included to
demonstrate the application of the various development stages covered in the various chapters.
Consequently this text is intended for both (a) those who already practice in this field and also (b)
as an introductory guide to students and those not fully established in the field. The reader should
be able to use this book as a reference text and benefit from the insights and feedback received
over the past 30 years covered by the previous six editions. Above all, the aim of this book is to
provide a proven framework for undertaking successful property development.

1.2 The development process

As indicated in the title, undertaking a property development is largely about the ‘process’ of
developing a heterogeneous and unique property in a series of different stages over time. A starting
point to understanding property development is to consider the direct and indirect relationships
surrounding ‘site’ and ‘improvements’ (see Figure 1.1) and the synergy between both. Many variables
are incorporated in the process commencing with this reference to ‘stages’ and ‘time’. There is no
generic approach here; property development is tailor-made and undertaken on a case-by-case
approach. Also considering the subjective input from the decisions made by humans, quite often the
decisions by two different property developers about how they would develop the same property will
differ. At the same time there are varying perceptions about what the property development process
actually involves, which is due in part to the region or country within which a property development is
occurring and also the specific location. A major property development in Paris or Tokyo, for example,
will be considerably different in many aspects from an alternative property development in a regional
town. Whilst the overall theory is generally similar, no two parcels of land are identical, therefore
ensuring each property development has its own unique aspects and development challenges.
Figure 1.1 The real estate process (Source: Graaskamp 1981)

From a basic perspective the process involved in property development has similarities with other
industrial production processes. It involves the combination of various inputs at specific timings in
order to achieve a desired output or final product. In the case of a successfully completed property
development, the final product is the result of a change of land use and/or a new or altered structure in
multiple stages combining the factors of land, labour, materials and finance to produce a varying level
of profit and risk, however this is dependent on the amount of financial outlay allocated to the other
preceding components. The synergy between land and improvement is the focus here. It must be noted
that, in actual practice, the successful implementation of this framework also ensures the process can
become complex if poorly understood, especially since a development often is undertaken over a
considerable amount of time, i.e. years.
When the property development is completed then the final end product can never be exactly
replicated, either in terms of its physical characteristics, the location, or both. Arguably no other
process operates under such constant and visible public attention, nor in recent times have varying
property developments received so much interest in broader society. For example the international
quest to construct the world’s tallest building over time is clear evidence of the interest in new
property developments, with this view further supported by a high international interest and demand
by individuals to visit such properties.
The overall development process can be generally broken down into eight separate stages:

1. initiation
2. investigation and analysis of viability
3. acquisition
4. design and costing
5. consent and permission
6. commitment
7. implementation
8. leasing/managing/disposal.

Note that each individual stage may not always be used and also they may not follow this specific
sequence and/or at times may overlap or be repeated. For example the commitment stage (stage 6) may
occur in an earlier stage where the purchase contract is subject to planning consent and permission
(stage 5) that may be formally confirmed in a later stage. There are many other factors affecting the
sequence and timing of the stages. Another consideration is whether the development is either a
speculative project or a design-and-build project. The sequence listed in the above scenario is typical
of a speculative development where an occupier had not been identified at the time when the
commitment phase (stage 6) of the property development was undertaken. Alternatively if the
development was undertaken based on a design-and-build approach and then pre-sold to an occupier
or alternatively was pre-let to a long-term tenant, then stage (8) would precede stages (2) to (7).

1.2.1 Initiation
The initial first stage of the property development process usually begins when either one of two
events occurs. It may commence when a parcel of land or site is identified and considered suitable for
a different or more intensive use than its current or existing use. Alternatively the second event that
may occur is when there is an observed increased level of demand for a specific land use, such as
increased population growth that in turn may cause higher demand for housing. Therefore this shift
leads to a search for a suitable site in a specific area.
Prior to commencement there must be careful consideration given and important questions asked.
For example ‘why has this development not been previously undertaken by another party?’ and ‘is
there a missing variable that has not been taken into consideration in the hypothetical analysis?’ If the
profit margin appears to be extremely high and all other factors are held constant (and all information
is freely available in the marketplace), the proposed development is perceived as high risk. Referring
to the laws of property economics, the level of risk for a property is generally commensurate with the
level of return and vice versa. For example a low-risk development will only have a relatively low
profit/loss profile; in contrast for a risk positive development there will be a high level of profit or loss.
The property market is relatively efficient in this respect and is assisted nowadays by the widespread
and instant availability of market information.
Acquiring detailed knowledge and a thorough understanding will allow the developer to make an
informed decision and estimate the appropriate level of risk/return. There are underlying fundamentals
behind the property development process being commonplace across different land use types. With
reference to improving vacant or undeveloped land, the amount of resources needed can range from
minimal structural improvements (for example to convert existing rural land to future residential land)
to major structural improvement in a city centre with accompanying higher density land use (for
example constructing an office building in a city centre). Note there are a large range of land uses in
existence somewhere between these two including residential, industrial, retail and office land use.
The location for each of these types of development is often largely driven by their proximity to cities,
towns and transport networks, which is linked to the level of demand. For example the requirement for
additional office space is closely associated with the number of white-collar office workers.
Refer to Figure 1.2 for the underlying proven rationale for the location of each land use where Von
Thunen’s original 1826 model provides an accepted and somewhat broad framework for
understanding variations in highest and best land uses based on limited supply in the city centre and
the hierarchy of higher returns for office, then retail, industrial and so forth. Note this model is very
theoretical (i.e. not 100% practical due to the perfect concentric circles ignoring geographical
constraints) and also ignores any limitations imposed by legal or planning regulations designed to
protect against non-conforming uses. Nevertheless it provides a useful starting point for a broader
understanding about the property development process.

Figure 1.2 Relationship between land use and proximity to the city centre (Source: based on Von
Thunen 1826)

The main focus in this book is alignment towards the more intensive land uses in Figure 1.2, where
there is increased pressure to develop the land to its optimal capacity. Accordingly this emphasis is
placed on the land uses where future property development is most likely to occur. For example, retail
land use has a relatively high level of obsolescence partly due to changing demand trends and
consumer tastes, which in turn ensures the continual development or redevelopment of retail property
including shopping centres. In this book there are references to examples of higher intensity land uses
such as retail, office and industrial property as well as lower intensity land use including broad scale
residential development. For example the diagram in Figure 1.3 highlights the globally accepted
landmark rent-bid model for the high-density Chicago office market and closely examines the actual
property locations and the rents per unit of area. Reference to this model can be made for many high-
density areas and therefore can greatly assist property developers to analyse the levels of demand for
various land uses in areas such as a city centre. Caution must be exercised from a practical perspective
due to the unique locational variables intrinsic to each city. Note that individual land uses actually vary
in their geographical or spatial layout in each town/city and are not always distributed in a purely
theoretical or simplistic pattern as shown in Figure 1.2. For example if this model were transferred to a
residential development then it would be affected by other variables such as access to or views of
water (e.g. ocean, lake) and location to transport, schools and retail facilities. More recently many city
centres have evolved into mixed-use locations combining office, retail and residential land uses.
Taking this concept one step further, it is now commonplace for a property development to contain
various land uses, such as a single office building incorporating ground level retail and a combination
of office and residential levels, or alternatively an industrial building with partitioned office space.

Figure 1.3 Rent-bid relationship between location and land use (Source: based on Alonso 1964)

Other trends in new mixed-use property developments include the use of creative planning and
design strategies to harmoniously combine multiple land uses then benefit from their synergy.
Relevant examples include:

Office/retail/residential: office buildings being predominantly office space although with a large
proportion of retail on the lower levels with residential accommodation or a school located on
the upper levels.
Large format retail (or bulky goods warehouses) being often located in close proximity to a retail
shopping centre but that have an industrial design and construction.
Hotel/residential: multi-level buildings with the lower half as a hotel and the upper half allocated
to private residential, where both land uses have full access to all amenities including pool, gym
and common areas.
Retail/office/residential: regional shopping centres containing predominantly retail space
accompanied by a substantial office component and also a large medium density residential
component.
Residential/retail: especially with reference to inner-city multi-level developments the bottom
levels can include restaurants and retail outlets to cater for the residents living in the building.

The importance of sustainability will continually be incorporated into the property development
process and also is a means of ‘future-proofing’ for the decades ahead. This integration commences
with the initiation phase and increases throughout the development until completion. When referring
to the design phase and incorporating sustainability, many stakeholders perceive sustainability as
reduced future risk and are looking for buildings considered ‘agile’ and that can be adaptive to future
changes in demand, as opposed to the traditional option of demolish and build. For example an agile
high-rise building can be converted from office to residential use or alternatively from industrial to
retail use. Therefore potential to ‘adapt’ the building from one land use to another, with relatively
minimal disruption and time delay, has become an important and sought-after design feature. This
process requires forethought in the design phase to ensure the structural features of the existing
building do not constrain the future use and prevent changes; for example changing from ‘office’ to
‘residential’ by locating services (e.g. water supply and sewerage) and placing supporting columns
where they will not have an adverse effect on the use. Agile buildings are particularly sought-after in
the inner-city areas where there are often multiple adjoining land uses, such as in a particular precinct
including office, retail and residential.
The initial catalyst for the property development itself can vary. At times it can be traced back to
one of the stakeholders in the property development looking for an appropriate new site to meet their
needs; for example a finance company seeking vacant land to construct a new office building so they
can amalgamate their inefficient smaller leases in multiple buildings. Alternatively a stakeholder could
be looking to redevelop or expand an existing site, such as a retail shopping centre, and therefore need
to acquire adjoining residential houses for land required for the retail extension. These changes in
demand may be due to any number of influencing factors and are influenced by the constant state of
change that occurs both directly and indirectly within the market. Typically the factors negatively
affecting an existing land use or development use are usually referred to as a type of obsolescence
such as economic, social, environmental, physical, legal, historical obsolescence and so forth.
Identifying and quantifying obsolescence is another challenge for every unique property development.
Often it is impossible to disentangle those forms of obsolescence affecting a specific property and to
what extent, as several factors may interact and negatively affect a property which in turn will cause a
decrease in value over time.
To ensure the highest amount of efficiency, it is an accepted theoretical concept in property and real
estate markets for the land (and any improvements that are affixed and now form part of the land) to
be at its ‘highest and best (legal) use’. Note in this context this reference to ‘legal’ use refers directly
to statutory planning authorities who seek to separate non-compatible uses and maximise efficiencies
in urban landscape through planning legislation. Of course this level of highest and best use may vary
substantially from the current use due to market inefficiencies. One example would be a residential
area that has gradually become predominantly changed to industrial use over time although a small
number of homes are still occupied. Due to this gradual change, the ‘highest and best’ land use for that
particular area has also changed. This type of trend should be acknowledged by the property developer
as soon as possible otherwise a new residential development may become obsolete soon after
completion. Hence many developers consider themselves to be ‘visionaries’ and provide a completed
property development that will be in demand well into the future.

1.2.2 Investigation and analysis of viability

In the preliminary stages of the property development it is essential for detailed market research to be
undertaken. With developments in technology and the widespread availability of decision-support
systems to assist the developer, such as GIS (geographical information science) and scenario
modelling software, the risk of not developing to ‘highest and best use’ in the current and foreseeable
market has been substantially reduced (Reed and Pettit 2018). Regardless of how much assistance is
available from decision-support software there remains a need for a successful developer to be
subjective and base their decisions on past experiences and their holistic knowledge of the market.
The stage of fully investigating, evaluating and modelling the detailed process of a property
development is fundamental to the successful completion of the project. It cannot be underestimated
and many proposed developments do not proceed further due to an identified exposure to unacceptable
risk. Any errors or misjudgements at this stage can have an adverse effect on the financial viability of
the project, potentially during an individual development phase or upon completion. It is accepted
there have been many property developments, at times being high profile and on an international scale,
which have made a substantial financial loss upon completion due to other mitigating circumstances.
Today the task of scenario planning for a hypothetical development has been substantially assisted by
computer software programs where detailed costings and potential scenarios can be closely examined
with an accompanying viability analysis. The critical importance of undertaking a rigorous
investigation and evaluation cannot be underestimated here, since losses due to poor planning or
undue haste can largely be avoided.
There is no doubt the evaluation stage is the single most important part of the property
development process and ultimately determines the success or failure of the project. In other words,
‘failing to plan is planning to fail’. This stage enables the developer to create the essential framework
for the project management of the development and then influences every decision made throughout
the entire development process. A comprehensive investigation and evaluation must include market
research, both in general and specific terms, and also examine in detail the bottom line financial
viability of the proposal. This approach is based on the proven methods for assessing the financial
viability of a property development (see Chapter 3), although the data input and reliability factor will
depend on the depth of the market research (see Chapter 8). The real estate market works largely on
the premise that ‘knowledge is power’ since not all reliable property data is commonly available for
free.
In many countries it is very expensive to gain access to accurate detailed information and it can be
very tempting here to forgo purchasing this data to save money. However selecting the option of not
purchasing the data would increase the potential for unknown factors in the proposed development,
thus increasing the level of risk. These risks are arguably higher for the less professional developer
who may be more inclined to cut corners to save money. One outcome from the process of
undertaking the assessment of financial viability is the level of assurance about the success of each
project if undertaken and completed. This evaluation should be approached using a minimum number
of assumptions, although all forecasts will incorporate some assumptions and judgements based on
limited known information and past experiences. There will also be a distinction here between
public/government and private development projects and their respective reasons for undertaking the
development in the first place. A proposed development in the public and/or not-for-profit sectors will
not likely have placed financial profit as the primary driver behind undertaking the development,
however they will be aiming to minimise development expenses and be cost-effective, accountable
and transparent. In contrast the private sector will be profit-seeking and aim to maximise the financial
return to shareholders whom they are directly accountable to.
The evaluation stage may also be used to assess the market value of a vacant site with the potential
to be developed either now or in the future. In any given market there is usually some availability of
vacant land or alternatively some land with under-utilised improvements. This approach is
commonplace and an evaluation of a particular site may occur on a regular basis, often with the
viability analysis concluding the development is not profitable at this point in time due to excessively
high exposure to risk. This may be due to external forces such as the high borrowing (holding) cost of
finance over the entire development period or a lower final sale price of the completed project due to a
projected depressed market upon completion in the property cycle. Timing is of paramount importance
here. Over time the market dynamics between supply/demand and the economic climate changes
ensure that most sites can be eventually developed in due course. A vacant undeveloped site is not
typically at its highest and best use.
It is accepted that the investigation and analysis of viability phase must be conducted before final
commitment to the property development. Overlap here is not possible and delaying completion of this
phase or underestimating its importance is the most common characteristic of a failed property
development. This stage also allows the developer to evaluate various hypothetical scenarios in turn
allowing the developer to retain a degree of in-built flexibility. The professional team assembled by
the developer usually includes architects, quantity surveyors, accountants, planners and valuers. The
final decision to proceed and accountability for the bottom line profit/risk evaluation always rests with
the developer, based on the findings from the detailed investigation and viability analysis. Note that
when/if a development is approved by the stakeholders and proceeds to the next stage, the viability
analysis must be continually re-evaluated and monitored throughout every stage of the property
development. This also will ensure that all stakeholders can be kept informed about all aspects of the
project as it progresses through each stage and that adjustments can be made where necessary. It is the
ability of the developer to be a visionary and problem solver to ensure the project is successful, as well
as adapting to change. The buildings and improvements that were sought after in the past will be
obsolete in the future. The development needs to be in demand from the time of completion.

1.2.3 Acquisition
If the feedback from the investigation and viability analysis stage has been positive, the decision to
proceed is then usually made. There is a considerable amount of preparation required before the site
can be acquired and the development actually commences. Preparation prior to acquisition should
include the stages outlined in Figure 1.4.
Figure 1.4 Conventional decision tree process

(a) Legal investigation

In most cases the site will be identified and purchased with the specific intention of undertaking the
development project. One exception is when the site is already owned by the developer, although this
is rarely the case. Prior to purchasing the site the developer (i.e. taking the role of the prospective
purchaser) will conduct a detailed examination of all legal and planning aspects of the site. This
process will commence with analysing the type of ownership or tenure of the site including the nature
of the ownership rights, the characteristics of the owners/organisation and their background, e.g. if
they are located overseas or in the same locality. It is essential to identify any easements, outstanding
encumbrances or liens on the title, which could be potentially transferred to an unsuspecting new
purchaser as they are often permanently attached to the land itself and can adversely affect both use
and value. If the site is being acquired as a purchase in the open market between a willing buyer and a
willing seller, these factors may adversely affect the time period required to transfer ownership of the
land to the developer. Any complications here could substantially delay the commencement of work
on the scheme and extend the total development period by many months or even years, which in turn
often would result in additional holding costs. In addition any delays in this stage may also result in
the loss of a potential tenant (tenant risk) who will not remain committed to a property with a high
level of future uncertainty.
If the site is being acquired by the public sector for the benefit of society then it may be acquired
using compulsory purchase powers; therefore some of the details mentioned above (e.g. willingness of
a seller) will not be relevant. However, where land is compulsory purchased it is still essential to
examine the title deeds and identify any encumbrances and other characteristics that may impact the
future use or value of the land. The assessed value of the property to be paid for compensation
purposes will rely on this information. Although the use of such powers can be time-consuming and
costly, the vast majority of property developments involving compulsory acquisition are completed
with the co-operation of the original site owners, either by disposing of their interests through
negotiation or by remaining a stakeholder in the development. The public sector may become involved
in the initial acquisition stage; for example to assemble an aggregate large site with many occupiers
and landowners since they can use their legal powers of compulsory purchase to ensure the tenure to
the land is secured. Note that the importance of sustainability also has a considerable bearing on the
compulsory acquisition process since the proposed development must be perceived as being as
sustainable as possible within the constraints.

(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 potential of the site to
accommodate the proposed redevelopment for an existing use or development for an alternative land
use. Factors to consider include a detailed assessment of the site’s load-bearing capacity (i.e. the
provision of foundations for a potential multi-level building), access (i.e. ingress and egress both onto
and from the site for both construction and occupiers/tenants), natural drainage and proximity to
services (e.g. gas, electricity, water, sewerage) if these are not already in place. The existing services
(i.e. above-ground or below-ground electricity, water, gas, telephone, computer cabling) must be
examined to assess their capacity to meet the needs of the proposed development. If there is an
identified gap between (a) existing services and (b) the level of services required for the development,
the cost and relevant steps required to overcome this shortfall must be reliably estimated and then
factored into the development plan and financial calculations. Additional indirect costs, such as a
contribution to the local off-site headworks for the supply of water or sewerage for a major
development, cannot be ignored. For example the local government body may approve the
development, but conditional on a substantial financial contribution to the upgrade of the local water
supply pumping station. Alternatively there may be a condition requiring a financial contribution to
the government for a local park. The physical inspection should also look for other factors that may
affect the overall viability of the property development. This may include below-ground complications
such as an easement for a water main or an underground railway, or above-ground aspects such as the
height of the adjoining property and the interruption to views.
Other attributes of neighbouring properties should be noted if they have the potential to alter the
perception or desirability of the proposed development. An example would be if the proposed
development was a high-density residential development but the adjoining and use was as a major
railway station, adult detention centre or a 24-hour industrial factory. The characteristics of each
individual site will vary considerably but there should be an awareness of the potential presence of any
archaeological remains, contamination or associated stigma from a previous land use, e.g. due to the
removal of underground services and storage tanks from a gas station. A land identification survey by
a qualified land surveyor will normally be undertaken in this stage to confirm the exact dimensions
and configuration of the site. Factors such as archaeological remains or contamination can stall the
development process and/or require additional costs.

(c) Finance
Unless the developer is in the rare position of using their own cash/equity to fund 100% of the project
over the entire development period, there will usually be a requirement to borrow funds to finance a
portion of the costs associated with the development. From the outset it should be noted that the 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. This is often the largest cost in the development. 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. The level of interest rates will be based on the risk profile of the developer
and also the level of risk associated with the development. The subject of finance is discussed further
in Chapter 4.
Typically the types of finance required by the developer are either short-term or long-term finance.
Short-term finance is required to pay for costs expended both 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 in situations where, for example, the developer retains the property
for investment purposes. Alternatively the developer may seek a purchaser for the completed
development if the build is speculative. The availability and conditions attached to finance provided by
lenders can vary substantially. Part of the lender’s decision about whether to fund the proposal will be
based on other criteria including the viability and profit from the proposed property development that
will be closely scrutinised, as well as the track record and credit rating of the developer.

1.2.4 Design and costing

In the preliminary stages of the property development process it is normal to consider some basic
aspects of design and costing. This may be as simple as estimating the cost and feasibility of building
different types of structures on a particular site and varying adaptations. Most often there isn’t only
one option possible but rather various alternatives that are evaluated on a cost-benefit analysis.
The design and costing aspects are interlinked and often an iterative process is used until an
acceptable design is identified within budget constraints, as per the initial development brief. Clearly a
building with a complex design is usually associated with a higher cost and vice versa. The inclusion
of sustainable features often adds substantial additional costs and should hopefully be capitalised into
a commensurate higher rent or final sale price. Exceptions include if the final assessed value does not
fully incorporate the added value of incorporating sustainability attributes as much as anticipated, or
alternatively the sustainable features have been over-capitalised, e.g. more photo-voltaic solar cells
than the market deemed necessary. The overall design of each development is a balancing act between
competing interests. It is influenced by many factors including the client’s initial brief, public
perception and current architectural styles. At the same time the primary aim of the developer is
traditionally to maximise profit by maximising the development potential of the site. This is central to
the success of the development and its importance should not be underestimated, regardless of which
design and costing is considered to be optimal by different stakeholders.
Design is an almost continuous process undertaken throughout the property development and runs
parallel with other stages, becoming progressively more detailed as the development proposal
increases in certainty. Following on from the preliminary investigation into design options, the
developer may now have detailed knowledge of what design is required; this may be because the
likely tenant or purchaser has been identified and an agreement (in writing) has been reached. In the
case of a speculative property development proposal, it is commonplace for the developer to initially
consider a small number of conceptual proposals and to consult with real estate agents about potential
demand of each individual proposal, if completed. Investigating the design of other competing
developments is also important to ensure there is not over-supply and a competitive design aspect is
maintained. Therefore this process would lead to the professional team agreeing on a specific design
brief for the property development project. The importance of groundwork, at times, is underestimated
by inexperienced developers yet this groundwork undertaken for the brief will affect the ultimate final
outcome and also reduce uncertainty in the design phase. For extremely complex proposals it can save
substantial time, resources and substantially assist the architect to produce a design that meets the
needs of all stakeholders. It also should ensure market appeal for existing and future prospective
tenants.
 The preliminary design stages should be kept relatively brief in order to reduce costs before the
developer is fully committed to the scheme. Due to the unique nature of property it is not possible to
find two identical parcels of land, therefore the design itself only has relevance to that specific plot of
land and for that developer. This is an attractive facet of property development where a new approach
is required for each proposal, however it is accepted that many developers specialise in replicating a
particular type or style of property and building design. This approach can then be transferred between
each development based on adopting similar techniques in each stage from initial site identification,
design, construction and marketing.
It is essential for the preliminary designs to include sufficient detail to enable the quantity surveyor
to prepare an initial and reliable cost estimate, which in turn will allow the developer to prepare the
financial evaluation for different options. Although varying on a case-by-case basis, this initial brief
normally includes the following:

Architectural drawings with scaled floor plans showing location (or possible multiple locations)
of the proposed new building/s on the site, together with basic floor plans or sketches showing
the internal arrangement of each level in the building on individual levels.
Plans of the main elevations or a cross-section of the proposed building/s, together with an
outline specification of the required building materials and finishes, are often included at this
point in time. These plans together with the initial cost estimate should enable the developer to
prepare an initial evaluation of the development’s profit and risk level.

Following on, a decision may then be made to submit a detailed planning application for the proposed
scheme where there will be a requirement for the plans to be in substantially more detail. This will
require a full set of comprehensive plans showing the final layout, elevations, cross-section/s of the
building/s and detailed design specifications. Then the developer needs to increase their level of
confidence and certainty in relation to the costings in order to improve the accuracy of the financial
hypothetical development valuation and appraisal. Another objective here is to include minimal
assumptions. Based on this information the quantity surveyor needs to be able to produce a detailed
estimate of all building costs, which in turn will enable negotiations to commence with potential
building contractors either informally or via a formal process by inviting tenders. Additional care
during this phase will save time and expense at later stages of the development process, largely by
reducing the amount of uncertainty and therefore risk.
The design and costing stages typically involve input from all members of the professional team
with additional input from stakeholders such as the real estate agents and financiers. These
contributions continue throughout the entire construction phase of the property development. Most
importantly it is also the role of the developer to ensure there is fluent co-ordination between each
stage of the development when producing the design and costings. As the major shareholder, the
developer must ensure there are no delays to this process and project management software is
frequently used to chart each stage of the development process. In turn this enables corrective steps to
be taken to mitigate time delays and additional costs if there are unforeseen delays; for example a
delay in the planning approval by the relevant government body.
In most cases the final design will be very different to the initial design concept. This is due to the
input by stakeholders and therefore being through many design changes and alternations/modifications
before the final drawings are complete. It is important there is clear acknowledgement by all
stakeholders of a point in time when modifications can no longer be made. This is commonly referred
to as the ‘commitment’ phase where the time for significant and potentially costly design changes has
then passed. The only exception here is where there are unforeseen errors in the original design brief
or an external change, e.g. a recent change in planning legislation that must be addressed and
incorporated.
1.2.5 Consent and permission
It is common for a new development on a specific site to require a change of use from the previous
land use, such as an industrial site that is now to be developed as a medium-density housing
development. Since every proposed property development requires planning consent or permission
from the local planning authority then a change of use is dealt with at this stage prior to commencing
the property development. Further details relating to the planning process are discussed in Chapter 6.
There are many different variations as to what actually occurs next due to differences from an
international perspective. In many jurisdictions the developer may, where a building operation is
involved, apply for what is termed an outline (or ‘in principle’) application before full approval is
confirmed. In this context an outline planning consent establishes the approved use of the site and
states the permitted size or density of the proposed scheme. The developer only needs to provide
sufficient information to describe in limited detail the type, size and form of the scheme. Note that
outline planning consent, by itself in isolation, is most often not sufficient to permit the developer to
commence the actual development as a detailed planning consent is still required.
The detailed application that is usually submitted to the planning authority will explain all aspects
of the proposal with minimal assumptions, if any. The application will also include detailed drawings
and information about the location of the structural improvements on the land, access to and from the
site, design criteria, external appearance and landscaping. Where the development requires a change of
use, developers are usually required to submit the detailed application at the outset, effectively
bypassing the outline planning stage. In some instances there may be multiple outline applications
made if circumstances change before a developer purchases a particular site. If the design parameters
change after detailed consent has been obtained, then further approval is again required from the local
planning authority before proceeding further.
The developer will rely on their previous experience to make realistic initial estimates of the likely
timeframe and costs associated with obtaining the appropriate permission during the evaluation stage.
The task of seeking and being granted planning permission can become complex, requiring detailed
knowledge of the relevant legislation and policies as well as having essential local knowledge about
exactly how a particular planning authority operates. Enlisting the services of consultants to assist with
this process may be necessary and cost-effective when planning problems are envisaged or
encountered. If permission is refused by the local planning authority then the developer may be able to
lodge an appeal. The reasons for a refusal will vary between different regions and are often associated
with strategic agendas. For example an area may adopt a plan that limits the density of development
on the outskirts of a town or city, such as an ‘anti-sprawl’ policy (Klaus 2020).
The developer may be required to enter into a contract with the local planning authority where a
‘planning agreement’ is negotiated as part of a planning approval. In some countries (i.e. the UK)
these agreements used to be referred to as ‘planning gains’ and deal with matters that cannot be
covered as conditions to the planning approval. One example would be improvements to local
transport routes to improve local area access to and from the site when the development is finished.
Planning agreements must be signed before approval is granted and often impose additional
development costs (e.g. financial contribution to a park, provision of off-street car parking spaces)
therefore such agreements can directly affect the overall cost and viability of the scheme. It is not
uncommon for a property development to be stalled or stopped at this planning stage.
There are a variety of other legal consents that may be necessary before a development is allowed
to commence. These include gaining listed building consent (e.g. the right to alter or demolish a
‘protected’ or ‘heritage’ building); a diversion or closure of a right-of-way; removing or re-routing
existing infrastructure such as electricity lines; agreements to secure the provision of the necessary
services and infrastructure; and in all cases where building operations are involved, building
regulation approval. The prudent developer must clear all legal permission hurdles before commitment
to the development is possible.
1.2.6 Commitment
Prior to making a substantial commitment to the development each developer must be fully satisfied
that all the necessary preliminary investigations have been undertaken, which in turn will reduce
exposure to risk from unknown variables. Often this is referred to as undertaking ‘due diligence’
checks. The acquisition of statutory permissions must be satisfactorily negotiated before any
agreements are signed, since any additional time required to wait for these permissions would then
cause the developer to be liable for additional financial commitment and a further outlay of money.
After the work in the initial preliminary stage has been completed, the developer has a chance to
reconsider the proposal before fully committing to the development. This is the optimal time to
carefully review all factors that may affect the success of the development. For example, changes to
the economy may have affected underlying demand for the finished product. Another scenario could
be where land is subdivided for a residential development although between the planning application
stage and the completion of the first phase of the development some market preferences have changed
with regards to house size.
Even though the preliminary development phase was completed it is still possible for the developer
to make adjustments; for example to reconsider the optimal size of the subdivided vacant housing
allotments. This example highlights how critical it is for the developer to access detailed reliable
information and have adequate time to reflect on the status of the project throughout the entire
development process to ensure its viability.
The developer will endeavour to keep outlay or sunk costs to a minimum until all permissions are
granted and the actual title, either freehold or leasehold, has been transferred giving full access to the
site. Until this stage the expenditure will be primarily related to professional fees (e.g. planning
consultant, architect) and staffing costs for those who are co-ordinating the project. Certain factors
may affect initial costs, such as:

Professional teams working on a speculative basis in the hope of securing an appointment after
the scheme commences.
Developers acquiring land without planning permission (also referred to as ‘land banking’) with
a view to applying for planning permission at some future date. Development contracts entered
into are often referred to as Subject to Council Approval (STCA) and mean just that.

The next stage is for all parties to sign contracts for the property development. This includes the
contract to purchase or lease the land (e.g. 99-year ground lease), secure all of the finance required for
the project, engage the building contractor and also confirm the contracted professional team.
Contracts with all parties will usually be formed within a short space of time, ideally within a matter
of days, usually to avoid uncertainty and the risk of delays through prolonged negotiations.

1.2.7 Implementation
After a firm commitment has been made for a specific plot of land, the design and construction aspects
of any buildings on the site and the development costs will be spread out over the life of the project.
Once all the raw materials deemed essential to undertake the development process are in place then
the implementation stage can begin. Note the additional flexibility associated with design and
construction has been eliminated since the implementation phase has commenced. Whilst it is
important to maintain as much flexibility for as long as possible during the actual property
development stages, there is also a level of risk associated with being too flexible. For example the
inclusion of too much flexibility may lead investors to consider the future of the project uncertain.
The primary objective throughout the implementation stage is to ensure that the subsequent
completion of the development and the handover are both within (a) the allocated timeframe and (b)
the financial budget as contained in the proposal, although an allowance for contingency permits a
degree of flexibility for unknown variables, e.g. extreme weather conditions. There are no
compromises possible with regards to quality or taking ‘shortcuts’ to save time or money. Depending
on the experience of the developer and the complexity of the proposed development scheme, ensuring
the implementation runs smoothly is often achieved by employing a project manager to co-ordinate
the design and building processes. This is essential for large-scale developments. The project manager
and/or developer need to skilfully anticipate upcoming problems (if possible) and make prompt
informed decisions to minimise delays and extra costs. Note their qualifications, experience and tacit
knowledge come largely into play here.
It is common practice for the developer to take substantial interest in both the running of the project
and its overall promotion. The status of the property and the real estate market must constantly be
monitored in each property development stage to ensure the final product, when completed, will
remain close aligned to the market’s needs at that point in time. This objective might require slight
adjustments to the specifications to reflect market changes. Where the development is for a non-profit
organisation, the developer must aim to contain costs whilst at the same time maximising benefits to
the final occupier. The construction and project management stage of the development process is
further discussed in Chapter 6.

1.2.8 Leasing/managing/disposal
Although traditionally the final stage in the overall property development, it must be at the forefront of
the developer’s thoughts from the commencement of the scheme. This is because there could be an
adverse effect on the development’s value unless it is sold or leased at the estimated price or rental
value and also within the period originally forecast in the evaluation.
It is common for a tenant, either in the form of an owner-occupier or a lessee, to be confirmed
before the commencement of the property development or soon after the commencement of
construction. In turn this will reduce, or eliminate, the need for the developer to be involved in
marketing activity to secure a tenant. Also a tenant/lessor who is contractually committed to leasing
the completed development may want to have some input at the design and construction stages. This
will ensure a working environment that would best suit their staff.
Increasingly the need to secure a tenant for all or a substantial part of the development has been
influenced by financial institutions that provide the finance for a large proportion of the completed
development. It has become commonplace for the lenders to insist on set level of pre-commitment to
the total scheme (which can range from approximately 30% to 80% of the completed development
either sold or let by tenants) before the lender will commit to forwarding the finance. These
requirements vary depending on variables such as the risk profile of the developer and the level of
volatility in the property market. The final disposal of the completed property development may be in
the form of a lease (often long-term) or the transfer of the freehold interest to a third party. In the case
of a major retail development there are usually numerous individual small leases with single or
multiple anchor tenants in some centres. In direct contrast a small industrial development or office
building is often leased to only one or two tenants.
During the evaluation stage the letting and/or sales promotion strategy should be included in the
development planning as early as possible, then continually updated during each stage. A decision is
needed to determine the most appropriate time to sell or let the scheme. In some cases the
development may be completed or virtually completed prior to seeking an occupier although this
decision is often influenced by other stakeholders, especially the financiers or landowners if they have
remained partners in the project. If a suitable tenant has not been identified by the date of completion
or shortly thereafter, this will place the developer and stakeholders in a position where they are
exposed to additional risk, directly affecting financial risk due to ongoing holding costs with no
income stream. Reputations and goodwill may also be negatively affected.
At the commencement of the project the developer must decide what the final intention will be
regarding the tenure or ownership of the completed project. The decision may be to take on the role of
property investor and retain ownership of the completed development, or alternatively to sell and
realise a profit upon completion. However, this decision will depend largely on the motivation of the
developer, their experience and what they perceive their role is. This will also depend on other factors
such as the condition of the prevailing property investment market at the time, as well as the ability of
the developer to borrow funds over the long term in an investor role without adversely limiting their
borrowing power for future investments.
Every developer needs to be flexible to accommodate changes in the investment market prior to
completion of the scheme, especially when some larger developments can take many years between
the initial conception and completion. Careful thought must be given to the final anticipated
investment value at the initial evaluation and design stages, keeping in mind it is impossible to
accurately determine the value of any property in the uncertain ‘future’. If the decision is made to sell
the completed development to an investor, then the developer needs to fully research their
requirements. The location, design specification and financial strength of the tenant will be critical in
achieving the highest sale price for the investment.
To ensure the completion 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. They
will also ensure the property has maximum exposure in the marketplace to potential purchasers. The
real estate agent should be employed as early as possible to advise on the design specification of the
final product to ensure it meets the needs of the market.
The development process and the developer’s responsibility does not cease with the completion of
the construction process and final occupation. There remains an ongoing requirement for the developer
to maintain a relationship with the occupier, even though no direct landlord/tenant relationship may
actually exist. This enables the developer to keep up-to-date with occupiers’ requirements in general,
and in particular to understand the shortcomings (if any) of the completed building from a
management perspective. Management needs to be considered as part of the design process at an early
stage if (a) the final product is to benefit the occupier/s and (b) the developer maintains and enhances
their reputation. In reality the financial success of the development cannot be accurately assessed until
after the building is completed, let or sold. Often it may not be until the first rent review under the
terms of the letting agreement that the true picture becomes clear. The timing of the first review can
vary in different regions but is often three or five years after the commencement of the lease.

Discussion points
What is the sequential order of the stages in a property development?
To what extent can the order of these stages be changed?

1.3 Main stakeholders in the development process

The property development process has been divided into separate stages where in each stage there are
a variety of important stakeholders who each contributes to the outcome of the process. Some
stakeholders will be involved for a single stage, in more than one stage or may remain involved for the
entire development process. Each stakeholder will have their own perspectives and expectations
therefore an important role of the developer is to manage these diverse and often conflicting interests
to ensure the project runs smoothly and reaches a satisfactory conclusion. With so many diverse roles
the various stakeholders are discussed below in the approximate order they appear in the actual
development process. However, their importance can vary considerably between each project and not
all stakeholders will appear in every development scheme.

1.3.1 Landowners
The landowner plays an essential role in the first stage of the development process. For example they
may be engaged in initiating the actual development due to their desire to sell the land, or alternatively
they may seek to improve the value of their existing land by altering its current use. At times it will be
a hybrid combination of both of these drivers. On the other hand, a landowner may be unwilling to sell
their land and can become an obstacle to a proposed development. 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 available only to
the government. Often the landowner’s motivation will affect their decision to release land for
development and this is the same whether the landowner is an individual, corporation, public authority
or a not-for-profit organisation. Each organisation may even take on the role of the developer, either in
whole or in part. Land ownership can be broadly divided into three categories, namely (a) traditional,
(b) corporate or (c) financial as detailed further below.

a. Traditional landowners include the Crown Estate, the church, aristocracy, landed gentry and
occasionally the older universities – for example Oxford in the UK. They have a significant
interest in land both in terms of area and capital value. They are not completely motivated by the
economic return on investment (ROI) and their reason for land ownership is often linked to
social, political and ideological constraints rather than a return on capital.
b. Corporate landowners are related to the term ‘corporate real estate’ or CRE. This group own land
that is complementary to their main trading purpose or existence, being usually the provision of
some form of production or service. In this category there are a wide variety of landowners
including rural farmers, manufacturers, industrial companies, extractive industries, retailers and
service industries. This list can also include public authorities such as central, local and
nationalised industries that own land that is complementary to providing a particular service or
product. Understanding the motivation for land ownership within the group can be relatively
complex, since their attitude to land ownership is directly linked to the core reason for their
existence, namely their product. In addition they may be constrained by their legal status and
therefore will not always be seeking to maximise the return (ROI) on their land holding or real
estate since the property component is secondary to their core business function and there may
be little apparent economic advantages of releasing land for development. If an organisation in
this group is forced to sell their land due to a compulsory purchase or resumption scenario,
although they are compensated for expenses related to relocating and temporary disturbance that
affects the operation of their business activities, then limited financial allowance is made since
they are unwilling sellers. In addition there are often intangible losses to commercial businesses
although such losses are often difficult to identify and value. This scenario would be different if
the landowner/s were residential occupants.
c. Financial landowners view their land ownership simply as an investment holding and will treat
land in the same way as stocks and shares. Therefore this type of landowner/s is often more
willing to co-operate with the proposed development if the return on their land is financially
attractive and commensurate with their level of investment risk. The financial landowner will
have a clear motive for financial gain. They are likely to be the most informed type of owner
regarding financial variables such as land values and the level of profit/risk level in the
development process. Some of the major organisations in this category are financial institutions
 including pension/superannuation funds and insurance companies who have a substantial holding
of real estate when measured by capital value. Financial landowners may adopt the role of the
developer directly, or alternatively enter into a partnership arrangement with a developer. Major
property companies generally hold large property portfolios and carry out development and
therefore may assume the dual roles of both the landowner and the developer.

Historically many landowners have played an important role in shaping the way in which land has
been developed and when. They have influenced spatial layout, the type of buildings, infrastructure
and the design of the landscape. More recently the introduction of legislation and the planning system
has reduced the level of influence a landowner can have on the type of development itself, however
they can still influence the location and planning of the development.
An additional challenge for the development to overcome is when there are several landowners
involved in a single property development. In this scenario every landowner must agree to the
development proposal. However the greater the number of owners and the smaller their holdings, the
more difficult it is to assemble a site for development. In these situations it can take years for the
project to come to fruition and commence which requires substantial patience and foresight in the role
of the developer.

1.3.2 Developers
Private sector development companies come in a variety of forms and sizes ranging from single person
entities up to global multinationals. As with many privately owned organisations their primary aim is
to return a profit and therefore maximise the financial returns for their shareholders. This is the
standard objective for practically all private sector companies, regardless of the product or service they
offer.
Developers primarily operate as either traders or investors. Due to limited resources such as
financial equity and access to borrowed funds, many small development companies act as traders and
have to on-sell each project they complete. Relatively few developers have sufficient financial
resources to retain ownership of a finished development project and also continue with another new
development. The traditional pathway for a developer is to increase in overall size and also build up
their goodwill and perception in the marketplace. This process gives the smaller trader developers a
chance to evolve upwards into an investor-developer thus enabling them to retain profits for
investment purposes. In contrast, some of the larger property development organisations, as measured
by capital assets, hardly undertake any new development, preferring to specialise in managing their
property portfolio and primarily carrying out refurbishment and redevelopment work.
Most residential developers operate solely as traders, historically developing and selling on for
owner occupation or to private landlords. Many residential developers also become substantial
landowners after undertaking successful developments over time. The reasons behind this are largely
associated with the smaller exposure to risk with this type of development due to the wider cross-
section of possible purchasers when compared to retail or office developments, and the smaller
financial outlay required when undertaking residential developments. Also there is a higher level of
demand typically due to the need for residential accommodation in all towns and cities to some
degree.
As the type of developer can vary substantially, so can their preferred type of development. For
example some developers operate only in specific geographical regions but are flexible with the type
of development; however others specialise in developing offices or retail schemes but in different
geographical areas. Others prefer to spread their risk by producing different types of developments in
different locations and countries. Nevertheless property companies formulate their individual
development strategies and mission statements in accordance with the interests and expertise of their
directors, their perception of the prevailing and future market conditions as well as following the
strategic direction they desire their organisation to pursue when looking forward. Once again their risk
profile is a major consideration of their type of development. Operating outside one’s level of
expertise will increase exposure to risk and caution should be exercised here at all times.

1.3.3 Public sector and government agencies

Government organisations and the public sector are rarely directly involved as the main driver in the
development process. Usually government organisations are primarily concerned and involved with
developments for the sole purpose of their own occupation, community use and/or the provision of
infrastructure that directly benefits the public. Furthermore, governments are public entities so need to
balance competing resources with political influences and are typically constrained by their financial
resources and limited by their legal powers. Government bodies, in most developed countries, are
required to be transparent and are usually publicly accountable for their actions. Their core aim is to
meet the overall needs of the community they serve.
The degree and type of government participation and involvement in the development process will
depend largely on whether the government seeks to (a) encourage development or (b) control
development in order to maintain standards. Many government authorities undertake their own
broader or regional economic development activities designed to encourage and attract property
development and investment to regenerate their immediate area and support economic growth. Some
of the more proactive government bodies act as a catalyst to the development process by supplying
land, and in some instances also buildings and infrastructure, to increase economic development of
their area.
The broader acceptance of public-private partnerships (PPPs) was based on this approach being a
means of a government-related entity undertaking major property development without the financial
outlay previously required by governments. This has also been accompanied by relatively long
leaseholds issued to private organisations, such as a 99-year ground lease, ensuring the property
ownership remains with the government and is less contentious. Where a government authority has
retained freehold ownership of a development site but grants a long leasehold interest to the developer,
this is often accompanied with a share of rental growth through the payment of ground rent over the
period of the lease by the private investor to the government body.
Most government policies restrict public body intervention in the development process unless it can
be clearly demonstrated that private market forces have failed to deliver an adequate level of property
development proposals, particularly in locations already targeted for economic development. For
example a government may have an urban regeneration initiative administered through a dedicated
governmental department. The primary role of such a department is to facilitate development for the
benefit of society whilst also attracting investment in partnership with the private sector. At times a
government body will be able to assist developers with particular development roles including site
identification, site reclamation, provision of infrastructure and possibly financial grants if a
government’s needs are sufficiently large and the financial resources are available.

1.3.4 Planners
The underlying aim of most planning systems is to control the use of land in 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
politicians, usually on the advice of their professional employees, are responsible for approving the
development plans drawn up by professionals in accordance with the current legislation, policy and
influenced to a varying degree by factors such as the size of the development, the number of objectors
(if any) and the current status of the government. Usually at a more detailed level the planners are
responsible for determining which applications relating to permission for development proposals
should be either approved or refused. In addition the planners are responsible for advising the
politicians and administering the system and day-to-day operation.
The underlying basis for determining planning applications is laid down by statute legislation and
typically supported by guidance notes and publicly available local and regional plans, such as strategic
development plans. Individual planning applications are submitted and ultimately decisions are made
with full consideration given to the development plans, government policy and advice, as well as the
previous and the unique circumstances surrounding each individual application. However in reality
there are often differences and conflicts in the planning guidance leading to some uncertainty, which in
turn causes most developers to employ planning consultants to assist them in direct negotiations with
the planners. In turn, this saves time and therefore reduces overall exposure to risk and hopefully time
delays. Property developers need to know what type of land use is acceptable, what density of
development is permitted or possible, as well as which design standards must be met in order to obtain
planning permission. A successful development application is usually achieved by undertaking a
process of prior consultation and negotiation with the relevant government authorities before lodging
the planning application. In some instances this may involve agreement by the developer to provide
infrastructure or community facilities in the case of a large development, sometimes referred to as
‘planning gain’. Examples include the provision of off-street parking, recreational park facilities or
perhaps a financial contribution to town water or sewerage headworks. In times of tight public
spending a planning agreement can be seen as a useful means of securing benefits for the community
without making any financial outlay. However the issue of planning gain has been controversial and
there is a limit as to how much profit a developer can afford to forgo to acquire planning permission
but also still ensure the development is financially viable.
Planning authorities, both national and international, differ widely in their policies towards property
development. For example those planning authorities in locations with low economic activity may
seek to encourage development activity by placing only minimal restrictions on development
proposals, particularly when this will increase employment opportunities. In contrast the authorities
located in areas of high economic activity mainly see their role as imposing higher development
standards, ensuring sustainable development practices are adopted and even slowing down the pace of
development in order to achieve a better balance between different land uses and improve the design
of buildings. In some localities this results in an increased level of conflict between property
developers and government planners, leading to a higher use of the appeals system. In some instances
this conflict is caused by the politicians ignoring the advice of the professional planners, which may
also result in high-profile planning applications being the subject of media attention.

1.3.5 Financial institutions and lenders

It is unusual for a development to be entirely financed with a developer’s own capital. Other sources
of financial capital are needed and therefore financial institutions play a critical role in the
development process. The term ‘financial institution’ has been typically used to describe pension
funds, superannuation funds and insurance companies. Now 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. Financiers include banks and companies with the primary aim of lending money they have
received from depositors. Other financiers include pension funds, insurance companies, clearing
houses and building societies who can all provide finance for property development purposes. A range
of other hybrid financiers emerged in the twenty-first century and developed some innovative funding
vehicles. Another type of financier is an off-market private syndicate, usually comprising a small
number of individual investors who collectively provide funding for a development without the use of
an intermediary such as a bank.
 Generally there are two main types of money required to complete the development:

a. short-term finance or ‘development finance’ to cover the costs during the development and
construction process; and
b. long-term money or ‘funding’ to cover the cost of retaining ownership of the completed
development as an investment.

A developer may not always decide to retain ownership of a completed project and may seek to
dispose of the development in the long term. This approach will allow the repayment of the short-term
loan and hopefully realise a profit upon final sale. Due to the lead time required before commencing
each development a full-time professional developer will be focused on multiple developments at the
same time. For example as the current development is being constructed they will be also searching
for and securing a site for their next development. This process will require careful management of
cash-flow re: holding costs for a vacant parcel over an extended period of time, e.g. years. There is a
popular saying in property circles that ‘ants don’t pay rent’where a site needs to be improved before it
can provide a regular return. Therefore a property developer must have access to substantial financial
capital for holding costs associated with land banking and be able to meet loan repayments without
any additional income.
Financial institutions are generally motivated by financial gain as they have shareholders who have
invested in their organisation. Therefore most financiers need to achieve an acceptable capital growth
in order to meet their financial obligations to their shareholders. In contrast to many developers,
financiers usually take a long-term view and importantly they understand that investment in property
is a relatively long-term investment. This is in direct comparison to other investments such as the
stock market where trades can be made every day including the buying and selling of the same stock
or share.
Financiers seek to minimise risk and maximise future yields. The yield on any investment is the
annual income received from the asset expressed as a percentage of its total capital cost or value.
Property and real estate is only one of a number of investments that institutions invest in. In many
countries the total proportion of property value in the entire portfolio is low and may represent only 5–
15% of their entire portfolio of investments although this varies between regions and the status of the
economy. It is commonly accepted that in the case of property investment, the financier will receive a
lower initial income when compared to a fixed-interest investment, however this will be compensated
by the long-term growth.
A financier may provide both short-term and long-term finance to a developer by what is called
‘forward-funding’. In other words they agree to purchase the development on completion whilst
providing all the finance over the interim period. Almost all the risk passes to the developer who will,
in the majority of cases, provide a financial guarantee. Alternatively they may act as the developer
themselves to create an investment where all the risk is theirs but they do not have to provide a profit
to the developer. In reality only very few financiers would decide to purchase a completed and fully let
development since they perceive the risk exposure associated with carrying out the actual build phase
of a development as being too high. In order to be persuaded to take on the risks associated with
development, rather than purchasing a completed and let scheme, they need a higher return on
investment, often referred to as a ‘higher yield’.
Regardless of whether acting as a developer, financier or investor it is noted that each of these
stakeholders will adopt relatively conservative and risk-averse policies where possible, although each
stakeholder differs in their individual criteria and strategic directives. Nevertheless each is fully aware
of the benefits of diversification with regards to reducing exposure to risk and seeks to achieve a
balanced portfolio of property types rather than focusing on one individual land use or development
only. Furthermore most developers, financiers or investors also aim to spread their investments across
different geographical markets. They are looking for properties or developments that meet their
specific organisational criteria in terms of location, quality of building and tenant characteristics, i.e.
financial strength. Therefore it is essential for developers to initiate proposals to meet the strategic
objectives of the financiers rather than solely for the occupiers. Financial institutions also seek
developments that will have the widest possible level of demand. Often this policy ensures their
advisers will adopt a low-risk conservative view and recommend the highest specification for the
development project. However there is an added risk for this can lead to over-specification and less
sustainable buildings, therefore resulting in higher future obsolescence.
The availability of funding to the developer depends largely on the risk profile of the developer,
their accepted industry track record and the availability of funding in the marketplace at the time of the
development. For example if the proposed development is not considered to be ‘institutionally
acceptable’ or the developer is not prepared or unable to provide the necessary financial or personal
guarantees, it is possible for the developer to approach the banking sector for funding. On the other
hand if the property development is being undertaken in a current or forecast period of rising rents and
capital values the developer may prefer to use debt finance to maximise the potential profit on
completion.
In some countries the financial lending market has been deregulated and therefore the lending
market is somewhat competitive and able to provide a variety of lending products. This includes
providing finance for both short-term and medium-term loans. Actual lending rates will vary
depending on variables such as the availability of finance at the time of the development, the risk
profile of the developer and the base lending rate of the central lending bank, e.g. government bonds.
Banks need to protect their interest in each of their investments as they do not want to be exposed
to risk associated with all of a single developer’s projects. In order to reduce the exposure of their
shareholders to risk, the financiers will usually register their interest on the legal title where this is to
be removed prior to final sale of the development. Property is attractive as security since it is a large
identifiable asset, is immovable and also has a resale value. In addition most external parties would
conduct a title search confirming the existence of any outstanding loans or debts associated with the
property. As financiers have an interest in the successful completion of the development they will take
a close interest in the attributes of the property and seek to ensure that the property is well located, the
developer has the ability to complete the project and that the scheme is viable. With reference to
corporate lending, the financier is primarily concerned with the risk profile and strength of the
development company, its balance sheet, reputation, profitability and cash-flow characteristics. In
certain instances and depending on variables such as the size of the loan and the financier’s level of
exposure to risk, a financier may be in a position to take an equity stake in the property development
scheme.
Residential developers who focus on building owner-occupier homes usually only require short-
term development finance, typically over months rather than over many years. The amount of money
they need to borrow is comparatively small in contrast to commercial developments. Loans of this
nature are often provided by a bank where the process is relatively straightforward. As with all
developers, the ability to raise finance and gain loan approval is predominantly based on their ‘track
record’ (i.e. credit rating) and the level of risk exposure to the lender.
For public sector developments, similar sources of funding are much more difficult to obtain due to
a higher level of accountability and transparency by public bodies. Another option for local
government bodies is to apply for funding through broader grants, such as the development of a
historical building into a residential one which would otherwise be unviable due to the added cost and
higher risk. Another project would be an urban regeneration scheme in a disused area. This type of
funding is usually acquired via a competitive tender process; often the process is targeted at creating
PPPs with development undertaken in partnership with the private sector and the community. The use
of PPPs is popular with some governments because they can bypass some of the common problems
associated with obtaining finance, however still retaining ownership associated with the land and
continuing as major stakeholders in the development. The private party leasing the land from the
government is also a major stakeholder in the development but their motives are typically profit-
seeking, therefore they will be primarily interested in the profit and risk potential of the development.
If the arrangement is both planned and co-ordinated correctly then all stakeholders can benefit from
this arrangement.
At times developers may be able to access financial assistance from the various government
agencies in the form of grants and rental guarantees. In this scenario the developer has to prove that
the project would not go ahead without such assistance and that it will provide either new
infrastructure or create employment opportunities for the local population.

1.3.6 Building contractors

Building contractors are employed by developers to undertake the task of physically constructing the
development scheme and their prime objective is direct financial gain and profit from completing this
task. There are many different forms of building contractors and construction companies with each
having a particular focus on the type of construction and/or the geographical area in which they
operate. In addition there is a considerable variety of contractual systems in order for a building
contractor to ensure the timely completion of the new improvements and/or buildings.
Some development companies employ their own building contractors. For example certain
residential developers tend to employ all of the necessary expertise in-house, rather than tendering and
outsourcing to a third party contractor. Alternatively a development company may keep their
contracting division at ‘arm’s length’ as an entirely separate profit-making centre. More recently there
is a more general trend towards an integrated approach especially with regard to residential
developers.
A builder may also take on the role of developer, for example as a specialised house builder.
However they will then also be exposed to additional risk associated with the development process.
Where a builder is employed only as a third party contractor, the financial profit is related to the
building cost and length of contract. If the agreement is based on a design-and-build contract, then a
contractor will take on a design role involving a greater element of risk in relation to the responsibility
for cost increases. Larger contractors, including international organisations that possess the relevant
expertise, may take on the role of a management contractor and assume responsibility for managing all
of the various sub-contracts for the developer in return for a fee. In a scenario where the builder is also
the developer (i.e. ‘developer-builder’) then a larger return is required due to the risk involved.
However when combining the building and development profit, it is often acceptable for an overall
lower level of profit. For builders or construction companies who employ a relatively large labour
force, an additional objective may be to ensure continuing employment for the workforce. Sometimes
the only way to achieve this is by reducing tender prices and therefore reducing profit levels, however
this is only a short-term survival strategy and not a realistic long-term business practice.
Building contractors have a specialised role in the development process usually commencing at the
time of maximum commitment and risk for the developer. It is essential for a prudent developer to
ensure the capability and capacity of the contractor to undertake the proposed work, striking the
optimal balance between accepting the lowest tender and ensuring quality of performance. Clearly it is
not in the contractor’s or developer’s interest to have a situation where the contractor is unable to
make an acceptable profit from the scheme. Also it is not to the developer’s benefit for the contractor
to become bankrupt or to compromise anywhere on quality.

1.3.7 Real estate agents

There are many terms used to describe agents who sell real estate or real property and act as
intermediaries between buyers and sellers. The more common of these terms include ‘commercial
agents’, ‘estate agents’, ‘real estate agents’ or ‘realtors’ depending on the region and country of
operation. Quite often this agent can be instrumental in initiating the development process and/or
bringing together some of the main actors in the process. Typically agents are highly skilled at
networking and often rely heavily on technology to assist in this task. Agents are seen as the conduit
between supply and demand so they also 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.
Nevertheless an agent plays an important role in the development process and they are often
involved in every stage of the process from initial acquisition of the site through to the final sale of the
completed product. Agents are able to perform this role due to their detailed knowledge of both the
property market in terms of demand and current rents/prices and their ‘personal’ contacts with
developers, occupiers, financial institutions and landowners. It has been said that the property industry
is all about ‘people’ and a successful agent has excellent communication skills.
The agent’s motivation for providing a professional service is to make a financial profit from the
fees charged to their client, being a developer or an occupier or both. In the case of introducing one
party to another (e.g. a landlord to a tenant) they will receive a small fee but only if the transaction is
completed and this fee is usually based on a percentage of the value of the total transaction.
An agent may also be a catalyst for the initiation of the development process by either finding a
suitable site for a developer or advising a landowner to sell a particular site due to its development
potential. Unless an agent is retained by a developer to specifically identify a suitable site for a
particular land use, e.g. a specific location and land area/shape, then an agent will often take the
initiative by identifying suitable sites and presenting them to developers to consider. This process has
been assisted greatly by internet technology therefore enabling an agent to send email alerts to all
interested parties as soon as a property is placed on the market for sale, regardless of the global
location of the developer.
A successful agent will do their thorough homework and only introduce sites to those developers
who they consider have the appropriate expertise and resources to both acquire the site and complete
the development. In a competitive real estate environment an agent will not waste time with a
developer who does not have the potential to proceed. Quite often the agent will negotiate with the
landowner on the developer’s behalf and advise the developer on all matters relating to the evaluation
stage.
If the acquisition progresses then the agent may be paid a fee for introducing the site, which is
usually a percentage of the purchase price. The real estate agent may also secure appointment as
letting and/or funding agent for the development scheme. It is often a lengthy and time-consuming
process for the agent but the financial rewards for them can be high considering they have minimal
exposure to risk. If an agent acts for a landowner then they would advise on both the likely achievable
land value and the likely market for the site.
Agents may also be used by a developer to assist them in securing the necessary finance for a
development scheme due to their knowledge of the requirements of the financial institutions or banks.
Many financial institutions also retain an agent to advise them generally on their property investments
and development funding, and such agents may also specifically identify profitable development
opportunities for their client to fund. The institution’s agent will normally advise their client
throughout the development process and act as one of the letting agents with the scheme. Some of the
larger or more specialist firms of chartered surveyors or property/real estate consultants may undertake
a consultancy and act as financial intermediaries arranging funding packages with banks and other
institutions in return for a fee proportional to the size of the loan.
 Agents are widely employed by developers as letting or selling agents providing an essential link
between the developer and final occupier, either as the tenant or as a new owner. In performing this
role the agent needs to be involved from the start of the development to enable them to competently
advise the developer on the occupier’s viewpoint. Unless the agent’s organisation is sufficiently large
to have a specialist marketing department then it might not be possible to provide comprehensive
advice on the state of the market, both during the development and a forecast upon completion. A
developer will need to commission market research to obtain more detailed knowledge of a specific
market when undertaking a large development. Some developers may employ an in-house research
team although the advantage of an agent is knowledge of the market in general and their contacts with
potential occupiers or their agents.
Developers, landowners, occupiers, financiers and property investors may at some stage enlist the
services of a valuer, chartered surveyor or appraiser to assist their decision-making process. Chartered
surveyors, real estate valuers or appraisers are employed by many commercial and residential agents
to enable them to undertake professional work alongside their agency work. Developers will require
an independent assessment of the hypothetical future market value of the property in the post-
development phase to confirm their own opinion of value since they usually have limited knowledge
themselves. This type of assessment may also be required by a financier of the development who is
undertaking due diligence and is a condition of their loan approval. Independent and in-house valuers
or surveyors are also used by financial institutions and banks to evaluate proposed development
schemes for which they are considering making loans or granting mortgages, including the asset value
of any security being offered by the developer. Financiers will often employ building surveyors to
check on the construction phase of a development to ensure it is being built to the right specification,
as well as to certify drawdown of the development loan as the various stages are completed. In the
public sector the local authorities, central government and the inland revenue/taxation department, for
example, each employ valuers to advise and report on any development-related work.

1.3.8 Professional team

The development process is complex and most developers do not have the skills or expertise to carry
out a major development in isolation. The developer will seek to lower their exposure to unknown
factors and risk by employing a range of professionals to advise them at various stages in the
development process. Reference to the most important professionals is provided below.

(a) Planning consultants

Planning consultants are employed to negotiate with local planning authorities to obtain the most
valuable permission for a development, particularly when involving large or sensitive development
proposals. If a planning application is refused they may be employed to act as expert witnesses in
presenting the case on behalf of the developer. Planning consultants can also advise a landowner and
confirm the sites within their ownership are developed to their highest and best use in accordance with
the legal requirements of the planning scheme. At times this may involve negotiation with the local
planning authority at the planning preparation stage or subsequent representations at an enquiry into
the development plan. In performing this role, planning consultants can be important initiators of the
development process and greatly assist with the progress of the planning scheme.

(b) Market research analysts/economic consultants/valuation surveyors

Increasing emphasis continues to be placed on the role of market research analysts and their ability to
gather and analyse relevant data, designed to minimise exposure to risk during the development phase
and after completion. It is therefore essential they are employed at the evaluation stage to provide a
detailed market analysis in terms of the demand and supply levels of the type of development being
proposed. Many lenders insist on a comprehensive market analysis by a professional third party when
evaluating their lending risk for development finance. A lender or financier will often have their own
in-house researchers who constantly assess risk levels in alignment with their funding criteria and
lending policies and also in light of the changing economic environment.

(c) Architects
Architects and designers are employed by developers to design new buildings, the refurbishment of
existing buildings or new infrastructure. Their knowledge of design, building material and
construction methods also places them in a position to administer the building contract on behalf of
the developer if required and possibly to certify completion of the building work. In the case of
refurbishment work, building surveyors are often employed to survey the existing building and advise
on alterations and provide contract administration services.
Architects are normally responsible for obtaining planning permission if a planning consultant is
not employed. With a refurbishment, the building surveyor will usually perform this task. Architects
are paid a ‘fee’ usually linked to a proportion of the total building contract sum. It is important the
architect is engaged at the earliest possible stage in the development to ensure that all design work has
been approved and completed prior to the commencement of construction. It is also important to
employ architects with the appropriate experience, reputation, resources and track record in the
industry. Due diligence needs to be undertaken by the developer in this area as an architect can affect
the success or failure of a development.
A developer should ensure the architect has the right balance of skills to produce both (a) good
architecture and valued design and also (b) a cost-effective and workable design attractive to
occupiers. This balance is often hard to achieve and therefore it is important for the developer to
produce a clear architectural brief from the very beginning. Problems and complications start when
there is poor communication between the architect and the developer.
Larger architectural firms usually offer a comprehensive list of services including project
management, engineering, interior design work and landscape architecture. This may be an effective
‘one stop shop’ approach for some developers and also improve communication channels. However
most developers actually prefer to assemble their own professional teams to achieve the appropriate
balance of skills by bringing together the most effective and experienced team. Some larger
development companies will use their own in-house architects and design professionals with the added
benefit of existing communication links and familiarity with the developer’s needs and objectives.

(d) Quantity surveyors

Quantity surveyors (QS) are often viewed as ‘building accountants’ who advise the developer on the
likely costs of the total building contract and associated costs. They cost out the price of every single
item in the development. Their role can include this costing to the designs produced by the architect,
administering the building contract tender, advising on the most appropriate form of building contract
or procurement, monitoring the construction phase and approving stage payments to the contractor. A
quantity surveyor also needs to know the location of the proposed development since the cost of every
building material and labour differs between each location. In addition, the actual timing of the
purchase is critical since this will affect the cost of purchasing goods and services since prices
typically rise with time due to inflation and other factors.
More recently quantity surveyors have become increasingly more involved in the administration
and management of design and build contracts. Like architects, their fee is based on a percentage of
the final contract sum of the completed development. The choice of quantity surveyor should be based
on appropriate experience and reputation. Referring to their own experience and according to their due
diligence checks, the developer should be able to identify a quantity surveyor who works well in
partnership with architects and other members of the professional team to produce cost-effective
designs for the final development. Also a good quantity surveyor will be able to provide the developer
with cost-effective ideas as alternatives to those proposed by the architect.

(e) Engineers
Structural engineers are employed by the developer to work with the architect and quantity surveyor to
advise on the design of the structural elements of the building. They will also participate in the
supervision of the construction of the structure. Civil engineers will be employed where major
infrastructure works and/or groundwork is required for the development. On large and complex
schemes there is often a requirement for mechanical and electrical engineers to design all the services
within the building, whether new or refurbished. Engineers are usually paid a percentage fee based on
the total value of their proportion of the building contract.

(f) Project managers

Project managers are employed to manage both the professional team and the building contract on
behalf of the developer. Project managers are usually only employed on the larger and more
complicated schemes due to the size of the development and the associated economies of scale. They
are often drawn from other professions within the property industry such as architects, chartered
surveyors, quantity surveyors and civil engineers.
For many projects the actual developer will assume the role of the project manager and co-
ordinator or rely on in-house staff or another member of the professional team. Project managers
should be appointed before any of the other professional team or the contractor so that they are in a
position to advise the developer on the best professional team to be assembled for the development
project. Their fees can be either on an agreed salary or alternatively can be based on a percentage of
the total building contract sum. In addition there is often an added financial incentive for managing the
scheme within the agreed budget with delivery on time.
For ‘design and build’ schemes, developers often perform the role of project managers themselves
for occupiers who wish to employ the expertise of a developer in constructing their own premises.

(g) Solicitors
Solicitors are needed at various stages throughout the development process. This commences at the
time of the initial acquisition of the development site through to the completion of initial leases and
contract/s of sale to third parties when completed. Furthermore, solicitors are often involved with the
legal agreements covering the funding arrangements entered into by the developer. If the developer
has to appeal against a planning application via the court system, then both solicitors and barristers
may be involved in presenting the developer’s case at an inquiry. With some schemes there are
guarantees or collateral warrantees required by purchasers and a solicitor will be involved in this
process. Collateral warrantees are defined as supporting documents to a primary contract where an
agreement is needed with a third party outside the main contract. This could be the architect, a
contractor or sub-contractor who will need to provide a guarantee to a funder, tenant or a purchaser
that it has fulfilled its duties under a building contract and accepts liability for their performance.

(h) Accountants
Specialist accountants may be employed to advise on the complexity of taxation-related issues that can
have a major cost impact on a development and the level of profit/risk. A knowledgeable accountant
will often lessen the added taxation expense and can identify the best financial structure and holding
vehicle to benefit the developer.
This list of the various professionals and specialists employed during the development process is
not meant to be finite, however such professionals normally form an integral part of a successful
development team. There are a considerable variety of other specialists who may be necessary
depending on the characteristics of the proposed development, including its size and complexity. Other
professionals may include environmental experts, road/highway engineers, land surveyors, soil
specialists, archaeologists, public relations consultants and marketing consultants. The above highlight
the cross-section of skills that are required within the development process and are unique, just as
much as each development is unique.

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; it is important for the developer to be aware of the role of
objections to the development process and the relevant transparency. There are two categories of
objectors who can potentially cause delay and possible abandonment of development projects. The
first group of objectors may be purely ‘amateurs’ and self-interested neighbours of the proposed
development who usually live nearby to the proposed development. They are often referred to as
NIMBYs (‘not in my back yard’) and, when well organised, can achieve considerable obstruction to
the successful progress of a development. The rise of social media has greatly enhanced their ability to
raise the profile of the proposed development to a broader audience, frequently through the use of
social media.
The second category is the well-organised professional permanent bodies at either/or the local,
regional or national levels. At a local level they may be referred to as ‘amenity’ societies who take an
interest in every proposal affecting their local environment and heritage. This may also occur at the
regional or national levels and the degree of involvement depends on the size of the project. Often
these bodies have considerable influence with the local planning authorities and tend to be always
consulted on major development applications. These organisations are usually well-informed and have
a thorough knowledge of planning and development processes.
The developer must be aware of the interest or potential interest of these objectors. Accordingly the
developer must be prepared to either accommodate their objections where this may result in some
level of compromise on the development scheme or alternatively to refute their opposition. Ideally any
negotiations resulting from objections to the proposal should be undertaken before a planning
application is submitted in order to avoid complications and lengthy delays.
Opposition to a proposed development can be costly to a developer, either by imposing higher
standards and costly alterations or causing lengthy delays resulting in additional holding costs. In a
worst-case scenario this opposition can lead to the complete abandonment of a development proposal
that otherwise may have been sound. Sometimes a large-scale or sensitive development may become
part of a political discussion and receive substantial media attention, often resulting in intervention at
the government level in the development proposal. Where possible, a prudent developer needs to
anticipate objectors when evaluating the likelihood of their development proposal receiving planning
permission.

1.3.10 Occupiers
Unless the final occupier of a building is the actual developer or alternatively the final occupier is
known early in the development process, this is an unknown variable in the overall process.
Furthermore the final occupier is not considered to be a major stakeholder in the development process
because they are often unknown until the development is completed and let/sold. The demand for
accommodation triggers the development process and influences both land prices and rents, to which
developers then respond by producing more supply. The future requirements of a potential occupier
should be carefully researched at the beginning of the process. In the past some developers have
tended to produce buildings in accordance with the requirements of the financial institutions, where
the needs of the occupier have been largely overlooked or are a secondary consideration. It is
important to ensure that property development is viable and meets the needs of the future potential
occupants, which in turn will lessen the exposure of the lender and developer to risk.
When the final occupant of the property development is confirmed early on in the development
process, then the occupier becomes a major stakeholder in the overall development. The building will
be constructed in accordance with the occupier’s future needs and requirements, which at times can be
unique to a specific occupier. This is particularly applicable to the occupants of industrial property
developments. In some instances the developer may need to persuade the occupier to compromise on
their requirements in order to provide a more standard and flexible type of building. In turn this will
broaden the future appeal of the building in the wider market if it has to be offered for sale or lease at a
later time. In addition the developer will also be concerned about maintaining the financial value of the
building as security for loan purposes.
An occupier, either in the role as a tenant or owner, may regard the buildings they occupy as an
overhead incidental to their core activities as providers of a service or product. Although some
organisations do employ an in-house property team, including a facilities manager, many occupiers
tend to fail to adequately plan for their future property requirements to meet their changing needs.
They simply react to changes in their business as they happen and act accordingly. The property
requirements of occupiers are influenced by both the short-term business cycle and long-term
structural changes underlying the general economy, including events such as the global financial crisis.
Such factors can influence occupiers at a specific level or across the business sector in which they
operate. The level of demand for accommodation in the real estate market is also influenced by
advances in technology where changes affect both operational working practices and their physical
property requirements. A relevant example is the increase in online shopping and less demand for
major retailers in some regions. The increased importance of social distancing due to the COVID-19
pandemic has also altered how real estate space is used by occupiers.
In specific instances some occupiers have been acknowledged by agents and developers for not
quite knowing exactly what accommodation specifications they are after. However many organisations
have now become far more knowledgeable about the role of property within their business and
frequently employ their own facilities manager to advise on their accommodation requirements and
building specifications. Different occupiers have different real estate requirements and priorities,
particularly in the case of office space requirements, making the developer’s task very challenging
when aiming to produce a building suitable for as many tenants as possible. The response from the
financial institutions is to seek the highest quality specification with a layout to suit the widest possible
range of tenants. As a consequence an occupier may be forced to occupy a building compromising
their requirements in terms of location or specification.
Developers and the financiers are taking more account of the needs of the final occupants. For
example many tenants seek a degree of flexibility in their leasing agreement terms, especially in
uncertain economic times. The occupants prefer to have the option to extend the lease at their
discretion, which is opposed to the preference of the developer and lender who often prefer a longer
lease incorporating rent reviews and no options to end the lease. A balance must be struck here and
this is often driven by conformity in the wider real estate market.
 Occupiers have been increasingly seeking ‘sustainable buildings’ in the twenty-first century, which
follows the initial trend for ‘green buildings’ in response to the increasingly higher profile of climate
change. Developers need to be aware of this trend by ensuring their buildings are future-proofed and
have incorporated sustainability aspects into the property’s design and marketing. Occupiers are
seeking sustainable buildings for a variety of reasons including corporate social responsibility (CSR)
which appeals to the customers, a better workplace for staff and potentially lower operating costs, e.g.
natural ventilation instead of air-conditioning.

Discussion points
State the main stakeholders in the property development process.
List the level of importance of each stakeholder from high to low.

1.4 Economic context

Property development does not occur in isolation or in a vacuum. Every property development is
located within different markets based on geographical location and also economic considerations in
the local, regional, national and global market. Property development stakeholders have no control
over the external market as shown quite dramatically by the global financial crisis which highlighted
the ability of one region to directly affect volatility levels in global markets. The demand by occupiers,
either tenants or freehold ownership, is a factor of supply and demand interaction in the broader
market as consistently proven by conventional economic theory.
The level of occupier demand is a reflection of short- and long-term changes in the economy where
the availability and cost of development finance is also linked to conditions in the wider economy. The
economic climate is important to developers as the local economy helps to determine the market
demand for an individual scheme and the wider economy affects general property market conditions
including the confidence of occupiers, investors and developers about the future. Of course, the longer
a development takes until completion then the more complex is the task of trying to forecast future
demand and investment returns.

1.4.1 The local economy

It is accepted that most demand for an individual office or industrial development is drawn from a
relatively small geographical area in the locality of the scheme. The ability of a retail scheme to attract
national retailers depends largely on the spending capacity of the local population. Workers will live in
residential accommodation located in relatively close proximity to their place of employment so as to
reduce commute time. Since local economic conditions will help determine how much development,
and of what type, is appropriate in a particular location, it is in the interest of any developer to look
beyond the individual scheme to the wider economy. The local economy can be a useful indicator of
the likely viability of any development project and can be used alongside the development appraisal.
However it must be remembered that the focus is on the completion of the project in the future, so a
downturn in the market today may result in a market upturn close to the completion of the project.

1.4.2 The national economy

At any given time the state of the national economy has a direct effect on the real estate market from
both supply and demand perspectives. The developer must be aware of the implications from changes
in the national economy and also must factor in any changes as much as possible that potentially affect
their business plan. The strategic approach for a diligent developer is to anticipate these changes as
much as possible and adjust their plan accordingly. Fortunately there are many organisations analysing
data and forecasting changes in the marketplace and much of this information is now either free or
available to purchase by developers.

(a) Supply considerations

Competing developers will enter the marketplace when there is the potential for a positive return on
their investment. One way in which the state of the national economy affects the viability of a property
development is the effect it has on the cost of borrowing. For example base interest rates for
borrowing are traditionally set by the national government and the interest rate applicable to loans to
finance a development can be the largest individual cost, especially when the project has a lengthy
construction phase. Meeting the costs associated with high interest rates can make or break a
development. Alternatively a government may restrict the level of investment from overseas investors
for a particular development or place limits on the proportion of ownership if resident in a foreign
country. This can result in lack of equity for a proposed development, which in turn may not meet the
lending requirements of the financier regarding the loan-to-value ratio (LVR).

(b) Demand considerations

The national economy can directly affect confidence in the broader market and the need for property
accommodation. For example if national unemployment levels are high then there will be reduced
interest in homeownership with households unable to borrow funds due to a lack of stable long-term
employment. At the same time this will then transfer to increased demand in the rental market. High
unemployment also reduces the level of disposable income so retail spending may be lower.
Government measures such as reducing taxation rates or the introduction of a stimulus package can
help mitigate the impact on the property market (Gemeda et al. 2020). At the national level such
factors are largely outside the control of the developer but a skilled developer can interpret changes in
the national economy and produce a development that will be of substantial value in the future upon
completion.

1.4.3 The global market

The increased use of technology and the instant availability of information changed the nature of the
property market and it is now interlinked on a global basis. The global financial crisis in the early
twenty-first century and the later COVID-19 pandemic confirmed that global financial markets are
now very closely related so uncertainty in one market can adversely affect other markets. A developer
must now consider broader changes in the marketplace, regardless of the size of their development.
Some organisations are moving part of their business offshore (e.g. to India) to reduce operating costs
and reduce risk. In turn this can have a direct effect on employment levels and demand for a certain
real estate product. Property developers could be considerably affected by changes in the global
economy and need to be aware of prevailing trends and forecasting changes.

Discussion point
Why is it important for property developers to be adaptive to change?
1.5 Reflective summary

This chapter outlined the strategic framework for property development and introduced the
stakeholders, each of which has different objectives required to achieve a successful outcome.
Collectively they operate within the overall context of the local market, the national and global
economies. Development is affected by the status of property cycles at any given time that can
adversely affect the viability of a new development. The development process may be initiated by
any of the main stakeholders identified, but it can only take place with the consent of the
landowner. An exception is when compulsory purchase powers are used.
The lender/financier is a critical stakeholder in the development and assumes a large
proportion of risk, therefore practically becomes a partner in the development. As a development
proceeds through the various stages then the developer and the lender become increasingly
committed and therefore flexibility is reduced, exposing both parties to greater risk prior to
completion. Before a developer makes a commitment to both acquiring land and signing a
building contract they need to undertake a due diligence process. This includes obtaining all of
the necessary consents, carrying out the necessary investigations and securing the finance at an
acceptable lending rate. In addition, a thorough financial and market evaluation should be carried
out with the best information possible to establish the project’s viability in light of the status of
the occupier market for either renters or owners. The ultimate success of the completed
development will depend on many factors including the skill and experience of the developer,
state of the local, national and global markets, as well as a myriad of other variables being often
outside the control of the developer. The key to a successful development is closely linked to the
ability of the developer to be a ‘visionary’. This includes knowing when to proceed with a
development, or most importantly, when not to proceed.

References and useful websites

Alonso, W. (1964) Location and Land Use: Toward a General Theory of Land Use,Harvard University Press.
Appraisal Institute, www.appraisalinstitute.org.
Gemeda, B.S., Abebe, B.G. and Cirella, G.T. (2020) ‘Urban land speculation: model development’, Property
Management,13 July.
Graaskamp, J.A. (1981) Fundamentals of Real Estate Development, Urban Land Institute.
Kauko, T. (2019) ‘Innovation in urban real estate: the role of sustainability’, Property Management,37:2, pp.
197–214.
Klaus, J. (2020) ‘Sharing property value losses: the spatial concentration of development rights as a way to limit
urban sprawl’, Land Use Policy,94, https://doi.org/10.1016/j.landusepol.2020.104540.
Lausberg, C. and Viruly, F. (2019) ‘Gut feeling or reason: how do property developers decide? An international
research project on rational and intuitive behaviour in the field of property development’, in Proceedings of the
26th Annual Conference of the European Real Estate Society, 3–6/07/2019, Paris.
NAIOP Commercial Real Estate Development Association, https://naiop.org.
Property Council of Australia (PCA), www.propertycouncil.com.au.
Property Institute of New Zealand (PINZ), https://propertyinstitute.nz.
Reed, R.G. (2015) ‘Real estate development in the fastest growing free market democracy’, in International
Approaches to Real Estate Development, edited by G. Squires and E. Heurkens, Taylor & Francis, pp. 150–66.
Reed, R.G. and Pettit, C.J. (2018) Real Estate and GIS: The Application of Mapping Technologies, Taylor and
Francis.
Royal Institution of Chartered Surveyors (RICS), www.rics.org.
Scottish Enterprise, www.scottish-enterprise.com/sedotcom_home/about_se.htm.
Squires, G. and Heurkens, E. (2015) ‘Introducing international approaches to real estate development’, in
International Approaches to Real Estate Development, edited by G. Squires and E. Heurkens, pp. 1–22.
Urban Development Institute of Australia (UDIA), www.udia.com.au.
Urban Land Institute Americas (ULI Americas), www.uli.org.
Urban Land Institute UK (ULI UK), www.uk.uli.org.
Von Thunen, J.H. (1826) The Isolated State, Perthes.
Chapter 2

Land for development

2.1 Introduction

The essential element in every property development is the unique geographical location of the
land as surveyed and its legal reference. This site may be identified and recorded as being at
ground level or alternatively either above or below the earth’s surface. The initial acquisition of
land or space above land surface in the case of a strata title development is usually the
developer’s first major decision when seeking to undertake a property development. The land
may be previously undeveloped or may currently include a building/s or other structures attached
to the land. The current use of the land may not currently equate to its highest and best use, being
further evidence that the current timing of the development process may be ideal. When
undertaking a property development, the purchase of the land should not take place until after a
full analysis and evaluation of the proposed development project has been undertaken. This is
further discussed in Chapter 3. This chapter discusses the initiation and purchase acquisition
stages of the land or strata required in order to commence the property development process.
The selection of a development site fundamentally affects the nature and success of each
development. This decision is irreversible and due to one of the inherent characteristics of land
being immovable. Poor site selection cannot be rectified after the decision has been made and no
amount of careful design or promotion can totally overcome the disadvantage created by a poor
location or a lack of demand for accommodation at that location. This statement holds even when
the ‘for sale’ value is pitched at below market price for the final product. Land is unique and
every site has its own individual characteristics. Site identification and acquisition can be a very
long, frustrating and unpredictable process as there are many factors involved, some outside the
developer’s control, which affect the successful acquisition of a viable site. The increasing need
to undertake sustainable development is another critical factor to address since sustainability
affects many aspects of the process from initial site selection, proximity to public transport and
also the construction phase (Perera and Mensah 2019).
The objective of this chapter is to identify approaches and strategies to be used by a developer
to identify and acquire a site deemed suitable for development. There is also a discussion about
the role of landowners and other stakeholders in the process. As much as each site is unique,
often a specialised tailor-made approach must be undertaken when searching for an appropriate
site. Whilst technology and online search engines have greatly enhanced the availability of
information instantaneously accessible to a developer, industry networking and an understanding
of the basic skills related to site identification are still closely linked to every successful
development. If a site has been vacant for an extended period of time with little change of other
variables in the marketplace, extreme caution should exercised as other developers have decided
 any proposal includes excessive exposure to risk. In most marketplaces there are usually a
number of vacant or near vacant sites that will eventually be developed when the analysis returns
a positive outcome following an upswing in the market.

2.2 Identification of development site

The first initial step prior to identifying a development site is to confirm the developer’s search
parameters by defining the aims, nature and relevant geographical area of the search. The overall
strategy and objectives of the development company will form the basis for the identification of sites
and potential development opportunities in line with their risk profile (Yang and Wu 2019). For
example some developers restrict themselves to a specific type of development in a particular location.
In this type of scenario the obvious advantage is they can benefit from previous knowledge about
certain types of successful developments they have undertaken in the same general locality. The
availability of resources will also be a major consideration, such as the amount of finance they can
obtain, skilled workforce or materials, as will market information they have already gathered about the
level of demand and the type of product sought.
Within this overarching strategy a developer needs to accurately define the optimal search criteria
to identify their preferred geographical areas and associated real estate parameters. This criterion
relates to the size/area, shape, topography, access and location of sites. In addition the geographical
area of search for sites depends on other variables such as:

risk profile of the developer;

developer’s knowledge about a particular location;
forecast status of the market when completed, both now and in the future;
potential to diversify risk across different locations in a portfolio;
availability of development finance for a specific location; and
results from detailed market research into supply and demand considerations.

The location of the development company’s offices will also be a consideration because the further the
development site is located away from the office the higher the possibility for management of the
project to be less effective. On the other hand the availability of technology will practically negate this
concern. Another partial solution would be to establish a temporary office in close proximity if the size
of the development is sufficiently large. If the developer is operating within their own local precinct
then the developer will usually have already established many good contacts with real estate agents,
occupiers and the local planning authorities and will be able to consult with them about the proposed
development.
In a scenario where a development site is located a considerable distance from the developer’s
office and also in a different region, a good working relationship will need to be established with local
agents. In this example it may be prudent to undertake the development with a local development
partner since there is no substitute for local tacit knowledge to lower the exposure to a lack of local
knowledge risk. Larger national and international development companies benefit from economies of
scale and often are able to spread their exposure to risk by spreading their development activities over
different locations. Therefore if an over-supply of accommodation occurs in one particular location
then the problem will be restricted to only some projects and does not affect the entire development
portfolio.
The process undertaken by a developer in the identification of a suitable site at times is largely
influenced by the manner in which a developer sources finance for the development project. For
example if a developer intends to seek finance from a particular lender or financier, then the developer
needs to be aware of their preferred locations when lending for property investment. An analogy can
be drawn here with the cost of car insurance and the location where the car is parked every night.
Many insurers will require a higher insurance premium being commensurate with the perceived higher
exposure to risk in certain locations. This approach is also used by many property development
lenders who perceive certain locations as always being in high demand; at the same time they view
other locations as being in less demand, therefore associated with higher risk.
In previous development booms the location of a speculative development site was generally less
important when seeking finance, mainly due to the widespread availability of funding for loans.
However following market downturns in the property cycle practically all lenders have tightened their
lending criteria and therefore placed increased importance on the attributes of the property developer
and the proposed completed development. In other words it is commonly accepted that obtaining
funding is more likely to be successful on well located sites; such sites will have the widest appeal to
potential occupiers with associated reduced risk. Much focus is continuing to be placed on reducing
the exposure to risk, especially for commercial real estate developments which have a substantial
initial outlay and a limited pool of occupiers/tenants (Thilini and Wickramaarachchi 2019).
Regardless of the state of the real estate market at any given time, a prudent developer should
always seek the best location appropriate to the proposed highest and best use. Settling for a second
choice location could affect the long-term success of the project and the developer should consider this
additional risk carefully in the evaluation stage.
When identifying the optimal location for the geographical search a developer should focus on the
project’s completion. Therefore the developer’s perception of occupier demand, supported by reliable
market research, is a critical factor. In this role the developer’s skill, knowledge and experience are
important in identifying areas of potential growth where market forces will provide increased demand
for accommodation and providing there is no unexpected downturn, demand should exceed supply
when a development project is completed.
Proactive and forward-thinking developers may commission research at a strategic level to identify
trends in the market and areas of potential opportunity. This decision also aligns with the proven
concept of a successful developer being a ‘visionary’. Market research should seek to identify current
and projected levels of supply and demand of various types of accommodation in a particular area in
addition to short-term and long-term trends in rent and capital values. From a valuation perspective,
direct access to services and transport are usually highly sought-after by residential and commercial
occupiers. Accordingly good access to road networks and public transport schemes are some of the
more obvious factors influencing levels of demand for accommodation in a particular location.
Developers will seek to purchase a site in a location likely to be affected by future population growth
and an expansion of urban areas so associated infrastructure will also need to be examined.
The developer should identify and examine factors influencing occupiers in their choice of location
as part of market research. Different factors affecting decisions about the choice of location for each
type of land use are explained further below.

(a) Residential development

All humans have a basic primal need for shelter to provide protection against the external environment
and also as a safe place to sleep. The actual form of shelter varies substantially between different
locations and regions depending on climate type, weather, crime, government policy as well as the
availability of land and construction material. Most importantly, all real estate including residential
real estate have property rights that provides options to the owner/s to use. Over time the traditional
family home, in addition to providing essential shelter from the environment, is widely acknowledged
as having the additional benefit of being a wealth asset or an investment in a family’s asset portfolio.
Wider acceptance of homeownership also provides many direct and indirect benefits for individual
households and broader society including lower crime rates, a sense of ‘place’ for family as well as
improving social cohesion and sustainability (Hu and Wang 2019).
The procedure to achieve homeownership status in western civilisations for a large proportion of
the population is to purchase their home with the assistance of a loan or mortgage from a financier,
e.g. bank, credit society. In order to meet loan repayment obligations it is usually an essential
requirement of the lender that the borrower/s is in ongoing employment. Following on, in order to
reduce transit time between home and work it is accepted that the optimal location for most residential
property, especially in urban cities, is in relative proximity to the homeowner’s place of employment.
This scenario commonly requires prospective homeowners to search for residential real estate with
nearby transport links and, with increasing global commitments to sustainability coupled with road
traffic congestion, there is a need to locate close to reliable public transport networks.
From a planning perspective there have been increasing debates about options for urban cities to
expand ‘up’, e.g. high rise condominiums, or ‘out’, e.g. urban sprawl into rural areas on the edge of
outlying suburbs. Nevertheless most residential densities continue to increase due to an expanding
global population base; in many regions this has resulted in smaller living spaces, such as high rise
accommodation in Hong Kong or New York. However this type of residential accommodation is not
ideal for all urban cities and occupants, accordingly careful market research needs to be conducted to
assess the demand for different types of dwelling from a forward-looking perspective. Consideration
must always be given to the lifecycle of a residential property and ensuring today’s property
development concepts will not quickly become obsolete due to rapidly changing demand in a
particular location. The in-use life of residential accommodation should realistically cover many
decades.

(b) Office development

Due to the evolution of many cities from initially being only a marketplace then expanding to a town
followed by a large city, the centre of these urban areas has usually remained the most sought-after
location since there is limited land supply in the middle aligned with the highest level of demand.
Accordingly the traditional location for office space has been in the centre of the cities where transport
hubs are easily accessible to and from residential areas located on all sides of the city. Note that some
cities have become so congested that there has been a trend to develop office ‘hubs’ located on the city
fringes in close proximity to workers, and that these are often on cheaper land. At the same time
planning approval and examining the risks associated with a location some distance away from the
core office precinct (i.e. city centre, central business district or downtown) requires careful assessment
(Anacker et al. 2019).
The proximity of reliable roads, rail and air are all vital in the identification of potential locations
for office development. The choice of location for an office occupier is determined by a range of
diverse factors including traditional locations, proximity to other related professionals (e.g. other
financiers, lawyers), transport links, staff availability, quality of accommodation, availability of
parking and individual preferences of decision-makers.
With the advent of internet technology, including smart phones and tablets with associated high-
speed connectivity, many companies have partly reduced their requirements for office accommodation
in contrast to previous needs. Many organisations encourage staff to work from home or in transit out
on the road, therefore each office worker does not necessarily require a dedicated individual office
desk which is vacant most of the time. The uptake of working from home during the COVID-19
pandemic has also increased the acceptance of working from home for extended periods. The concept
of ‘hot-desking’ where multiple employees share a desk or workstation is often designed into office
accommodation and this is particularly common with active and mobile staff spending most of their
time out of the office. There continues to be much debate about how such changes in working patterns
and advance in information technology will affect the location of offices in the future. Earlier concerns
in the late twentieth century that telecommuting would severely reduce demand for office space have
been dispelled although office buildings must be agile to sufficiently adapt to the changing future
needs of occupiers due to the extended life of a high-rise office building in comparison to other land
uses.

(c) Retail
Retail is acknowledged as an integral and essential component of twenty-first century society and
development takes place within a hierarchy of shopping locations and a diverse range of retail
accommodation types. This hierarchy of shopping locations consists of regional centres, district
centres, local centres and superstores/retail warehouses. A particular shopping area will be classified
within the hierarchy by reference to its general demographic characteristics and the size of its
catchment population. The catchment population is typically calculated by reference to the size of the
population living in close proximity to a specific location for a proposed shopping centre.
Prior to making a decision to develop a site the retail developer will carefully analyse the catchment
area surrounding the proposed scheme and undertake scenario modelling. In relation to regional and
district retail centres the catchment will be modelled in terms of (a) travel time to/from the retail centre
and (b) the potential target population and its characteristics in terms of demographic characteristics,
e.g. age, household income, disposable income, spending patterns. An analysis will also be made of
competing shopping centres, both existing and planned, to evaluate the impact of a proposed scheme
on the existing retail centres and vice versa. In carrying out this analysis the developer assesses the
trading potential of the proposed scheme within the broader retail market with the emphasis placed on
the return on investment (ROI). The analysis is conducted from the point of view of both the
individual retailers and the individual shopper since the overall viability of the scheme will depend on
the decisions of these stakeholders.
An example of an evolved retail category is retail warehousing, at times referred to as ‘big box’,
‘out-of-town’ retailing or ‘large format retail’. A developer of this type of land use has a detailed
knowledge of the locational requirements of each retailer via their working relationship with them and
associated in-depth research into the industry. Many of the national and global retailers who operate in
out-of-town stores undertake their own property developments. With this approach the development
division of a retail organisation will identify potential sites and then the retail division will project
their potential trading position and forecast turnovers.
A critical factor in identifying the optimal location of any proposed town centre retail scheme,
whether it is a single shop unit or a major shopping centre, is pedestrian flow characteristics. Studies
can be constructed to model the pedestrian flows heavily influenced by car parks, bus and railway
stations, pedestrian crossings and the location of major stores commonly referred to as ‘anchor’
tenants or stores. It is this precise geographical location of a shop or store that is directly linked to the
level of rental value, therefore it is crucial the developer makes the correct and optimal decision at this
stage.
Retail shops and shopping centres are compared in the market on a ranking system being somewhat
broadly similar to the ranking system adopted for office buildings albeit with different criteria and
scales. For example different retail locations are classified using terms such as ‘prime’ and ‘secondary’
with reference to characteristics including pedestrian flow and proximity to competing retail stores.

(d) Industrial
Industrial development is closely aligned to real estate zoning restrictions designed to separate non-
compatible uses from other uses; for example industrial and residential developments are rarely
planned together in the same location, however retail and residential uses are encouraged due to their
synergy. Therefore industrial development occurs in designated and separated locations due to the side
effects of transport noise, potential pollution (e.g. noise, air) and the large parcels of real estate
typically required. There are various types of industrial property, each with unique locational
characteristics. Industrial property can be categorised into many different industrial land use categories
including general industrial, light industrial, service industry and warehousing/distribution.
Usually the zoning of ‘general industrial’ refers to larger land parcels with good ingress/egress for
large trucks/semi-trailers as well as dedicated parking on hardstand for trucks, often equating to up to
50% of the total area of the parcel. The improvements in this type of zoning are often larger industrial
buildings with a relatively small office component. The underlying emphasis is placed on the ability to
provide accommodation for a wide range of industrial activities (e.g. heavy industry) where each
industrial land use is too narrow to have individual industrial categories.
The category of light industrial typically refers to real estate used for processes involving the
manufacture of goods although with minimal or no environmental impact. There are various types of
occupiers who require light industrial property. At one end of the scale there is the traditional long-
standing manufacturer in contrast to companies in ‘high technology’ industries who require office and
research and development facilities alongside production facilities. Often this type of development is
located in a dedicated area (e.g. Silicon Valley in California) as opposed to a dedicated Business Park
that specialises in administrative processes or in a dedicated Industrial Park focusing on
manufacturing. Light industrial buildings are developed to a particular specification and also situated
in a location identified as in demand by potential occupiers.
Industrial warehouses are large industrial units occupied by retailers, manufacturers and
distribution companies. Each occupier’s needs have increasingly become more diverse over recent
times and often highly specialised due to technological advances and the urgency factor in today’s
economy. A large proportion of the warehouse development is carried out on a ‘design and build’ basis
rather than on a speculative basis to suit each potential new tenant. Sites suitable for a warehouse or
distribution centre must be in a location with good access to major transport infrastructure. This
scenario also suits ‘just in time’ (JIT) approaches adopted by many organisations where stock is not
stored for extended time periods but moved quickly in and out of the warehouse. In many regions the
service industry accommodation is also perceived as semi-retail and provides direct services and sales
to the community.
There are specific variables influencing the location of industrial premises. Industrial occupiers
need to locate in areas close to their markets and also to supplies of raw materials, as well as with
good access to major transport routes including road, rail and sea. Companies employing a high
proportion of office plus research and development staff will often have similar locational
requirements to occupants of office property; for example attractive landscaped built environment and
the availability of quality housing in the nearby proximity.
Once a developer has established the parameters of the locational search, a strategy and brief for
the site identification process can be produced based on certain parameters. It is important to define the
size of target sites by calculating the total land area of the potential development scheme and the
preferred land-to-building ratio. The next stage is then to identify preferred locations in a town, city or
region.

2.3 Brownfield and greenfield sites

In order to increase the efficient use of land in urban cities there has been an increasing emphasis
placed on urban regeneration and the development of existing vacant sites. At the same time such
urban areas are typically experiencing higher levels of peak traffic congestion where commuters are
transiting past, often in slow-moving traffic snarls, vacant and unused sites in order to reach their
outlying homes. The inefficiencies here are obvious. The need for increased urban regeneration is
accepted by most stakeholders where this is also often associated with an increased plot ratio density
in future developments and encouraging the uptake of public transport use by residents. Note the
catalyst for urban regeneration is often supported by major changes in government policy to promote
the re-use of existing land, at times with a different prior land use, being commonly referred to as
‘brownfield’ land.
The development of this brownfield land is actively promoted while the development of greenfield
land (i.e. previously undeveloped land) is encouraged if ‘land banking’ or storage is occurring. Urban
regeneration, or alternatively ‘urban renaissance’ as it is sometimes referred to, is increasingly
undertaken in all developed countries. Brownfield land located in, or close to, the city often appeals to
property developers as it is considered to be in a good location on the urban fringe. These sites may
have become available due to a decline in manufacturing, however attention must be placed on
associated challenges such as contamination from the previous land use. An example of the conversion
of brownfield sites that often occurs when a major redevelopment is undertaken would be the
regeneration of an area by converting a disused industrial estate into a medium to high density
residential area (Choi 2019).
Brownfield land redevelopment can be very complex at times and involve substantial risks. Most of
the best brownfield sites may have already been identified by other developers and redeveloped.
Therefore the remaining brownfield sites are often poorly located and/or the costs of cleaning up the
contamination are prohibitively high; for example converting a previously used industrial site to a new
residential site. In many global cities it is now probable that there are locations where there is an
insufficient supply of brownfield land for residential and commercial property development, thus
leading to increased densities and pressure to rezone outlying rural land for development. There has
been a broad trend to apply the same principles of increasing densities to new greenfield developments
although applying densities not as high as the inner-city development densities. This in turn will
reduce the amount of land required to accommodate a development.

2.4 Initiation
After undertaking research and defining a strategy for site acquisition, the next step for a developer is
to actively seek and identify potential development sites. This can be achieved in a number of ways,
however theory and practice often differ here in their exact approach. A developer may have in mind a
well thought out and thoroughly researched land acquisition strategy but actually achieving that
strategy will depend on numerous factors, many being beyond the control of the developer. This is
where the property development process for each scenario is unique and much depends on the
opportunities available.
Above all, a developer’s ability to acquire land and possibly existing buildings forming part of the
land is dependent on the availability of land at any particular time. But the availability of land is
dependent on many factors including the state of the real estate market at that time, planning policies
and physical factors including the shape of the land including access to and from the lot. Furthermore,
every proposed property development will also be reliant on the motives of the existing landowner and
their willingness to sell their property. In this scenario the developer, landowner, real estate agent and
government bodies sector are the main stakeholders involved in the development initiation process.
For some development projects a landowner could take either an active or passive role in the process.
A successful developer needs to comprehensively understand all of the dynamics at play in the real
estate market. For example, in accordance with standard economic theory, there is likely to be more
land supply available during a time when land values are rising rapidly (Payne et al. 2019). The
availability of new land will be influenced by the allocation of land within a local planning authority’s
‘development plan’ and the perceived chances of obtaining planning permission in respect of
unallocated areas of land or land allocated for other uses. Although land may be available on the
market and is allocated within the development plan for the proposed use, it still may be unsuitable for
a development due to certain physical factors, e.g. potential to flood which is becoming a more
frequent occurrence in some countries as attributed to climate change (Christensen and Gabe 2018).
The lack of necessary infrastructure, such as road access and services, can also make a
development scheme unviable. On the other hand the state of the physical ground may be
contaminated or unstable, therefore ensuring it is cost prohibitive when seeking to undertake a
profitable development. Contaminated land is practically unavoidable for many previous uses and
undertaking rectification (i.e. decontamination) must be evaluated in the original assessment, not once
the site has been acquired and works have commenced. In some instances the contamination has only
been identified once the buildings have been completed, therefore necessitating the demolition of the
new buildings in order to undertake decontamination. In all instances it is essential for all stakeholders
to closely examine all of the various ways of initiating the site acquisition process.

2.4.1 Initiation by the developer

In most instances a development will be initiated by a developer identifying a potential development
opportunity, then making an initial approach to purchase. The search for land will often be undertaken
via a search of real estate internet websites, being on a subscriber list for new ‘for sale’ properties or in
regular email contact with a real estate agent/s. At times a potential seller may enlist the services of an
agent or property consultant (e.g. vendor’s advocate) to directly approach prospective large site
developers. For a small developer there can be no substitute for approaching a potential seller with the
opportunity to explain the intention in purpose. In contrast a larger developer may employ an in-house
team, an agent or a planning consultant to actively identify a development site/s based on the criteria
set out in the site acquisition strategy.

In-house land buyers

Many developers, particularly those who specialise in a certain type of development (e.g. enclosed
retail shopping centres) and land development companies employ their own staff who specialise in
buying land direct from sellers. Their primary task is to identify and acquire sites in accordance with
the development company’s strategy. Most importantly they will require a good knowledge of the
target geographical area and relevant planning policies. At times these searches will be made in the
field in person, by car or on foot to identify potential sites. Reliance on internet search engines and
mapping applications only is convenient for the user, however this data will not be updated daily, as
opposed to a vendor posting a ‘for sale’ property on their boundary the next day and seeking a quick
sale.
If an identified site is not currently on the market and for sale then the next step is to source details
about existing ownership of the land. There are a number of ways to achieve this including an
approach to local agents or physically knocking on the door of the owner. In some countries there has
been privacy legislation introduced to restrict the release of personal information by government
bodies to third parties. Another option is to investigate if a planning registry is in use, or alternatively
a body recording historical planning applications and approvals.

Employing a planning consultant

A developer may employ a planning consultant to conduct a strategic study of a particular
geographical area to identify suitable land within the planning context. A strategic study of an area
will involve examining planning documents, i.e. development or strategic plans and local plans if they
exist covering that area, as well as discussions with local authority planning officers. The study will
usually highlight sites identified and allocated in the strategic development plan but not yet developed.
Commentary will be provided on their suitability and availability for the proposed use. A report will
be made on each site describing its characteristics, planning history and details of the landowner if
known.
The study will also identify sites that have not been allocated but where there is a high probability
of obtaining planning consent for a property development by negotiation or in an appeal process.
Often the optimal time to conduct this study is when the development plan is in its draft or review
stage since at this time it may be possible to influence the allocation of land by presenting evidence at
the public inquiry. Accordingly, it is of vital importance that developers are aware of the timing of
every review so they can access draft publication of the development plans relevant to their search
area. The study should advise the developer about the actual sites to be pursued due to their potential
future viability.

Employing a real estate agent or realtor

A different approach is possible when a developer enlists the services of a real estate agent or
approaches a number of real estate agents to identify prospective sites in a particular location. The
developer will need to brief the agent/s as to their requirements in terms of the nature and area of
potential sites. An effective agent will have an in-depth knowledge of the local area and its relevant
planning policies; therefore on this basis a local agent/s is usually employed or approached. A
developer is usually in direct contact with a number of agents as it is important to develop good
relationships to build trust and ensure each agent/s remains fully committed.
If the real estate agent is directly retained by the developer then a fee will be payable if the latter is
successful in acquiring a suitable development site identified by the agent. For example this may
equate to 1% of the land price, however this fee will be a result of direct negotiation and depends also
on the amount of the real estate agent’s involvement in the latter stages of development, letting and
funding of the scheme. Another advantage of using a real estate agent is they become the developer’s
eyes and ears within the marketplace. Referring to their in-depth knowledge of the area they know
who owns a particular site and its history. Over time an agent develops an intricate knowledge of
properties, owners and buyers in the marketplace and can often anticipate whether a particular site
may be coming onto the market. At times they may have previously sold the site to the current owner.
With occupied buildings they may know when leases will expire and therefore when potential
redevelopment opportunities may arise.
It is advantageous if sites can be identified as early as possible since it gives a developer the chance
to negotiate directly with the landowner and secure a site before release onto the open market to wider
competition. A developer’s ability to acquire a development site ‘off market’ will depend on the
developer’s negotiating abilities and the current state of the market, as well as the seller’s level of
urgency. When the market is booming and land values are rising rapidly, the landowner will be
strongly advised by their agents to put the site on the open market. Note a negotiated deal may not be
possible if the landowner is a government authority since they are publicly accountable and need to
demonstrate the highest price in the market has been sought and achieved. Often they use an auction
or tender process to fulfil this requirement.
Developers may also identify sites in some less obvious ways. For example a developer may
acquire an entire organisation as part of their acquisition strategy therefore securing a site or an entire
portfolio of properties. Alternatively a development company may purchase a particular retail chain as
a means of securing ‘prime’ sites in a built up area. The developer may retain ownership of the
property assets and either (a) on-sell the operating part of the business to a third party, (b) move the
business to other leased premises or (c) cease operating the business. Developers also may acquire
individual properties or entire portfolios through direct approaches to other developers or property
investment companies regarding their corporate real estate assets. These types of transactions are
considered to be ‘off market’ and not common knowledge until after the transfer has been completed.

2.4.2 Approach via real estate agent or realtor

Although real estate agents or realtors (note: simply referred to from this point forward as ‘agents’)
may be retained exclusively by a developer to identify potentially suitable sites, they will often take
the initiative and introduce opportunities to developers first. The use of an email list is a common tool
here. Such an opportunity may be a site already listed for sale on the market or a site likely to come on
to the market very soon. If the introduction to the developer ends in a successful acquisition of the site,
then the agent will expect a fee from the developer unless they are retained and instructed by the
landowner. The fee is typically around 1% of the land price but may be negotiated. It will also depend
on to what extent the agent continues to be involved with the scheme in the future through the
marketing, letting and/or funding phases.
An agent will seek to introduce the site to only those developers most likely to be successful in
acquiring that particular site then undertaking the development. Some agents remain loyal to a certain
developer because that particular developer is an established client and they have established a good
working relationship over time. The agent will examine the experience of development companies,
their track record and also their financial status when making their decision about who to introduce a
particular site to. The most likely candidates are successful developers active in the particular market
at the time and have the underlying fundamentals in place to remain successful over the long term.
A development company, depending on its size and financial status, may receive introductions
about prospective development sites on a daily basis when market conditions are favourable. It is
particularly important to set up a register of sites already introduced to the development company
because it is highly possible that different agents will introduce the same scheme to different people in
the same organisation. It is important to avoid duplication of agents, otherwise two acquisition fees
might be payable for the same property. Unless an agent is advised in the first instance that the
developer was already aware of the site, due to this misunderstanding the same agent may effectively
‘black list’ the developer from future opportunities.
When introducing a site to a developer the agent should provide sufficient detail to enable an initial
decision to be made by the developer as to whether or not to pursue a potential development
opportunity. Ideally this information should include a site plan, location plan, planning details and
details of the asking price and terms. It is the introducing agent’s responsibility to assist the developer
throughout the acquisition process and therefore earn their commission. Furthermore this agent should
be able to provide detailed advice on the local property market, rental values and information on
existing and proposed schemes of a similar nature to assist the developer in the evaluation process.
The agent is also frequently relied on to negotiate the land price on behalf of the developer.
The approach to identifying a site is a two-way process between the developer and the agent. At all
times the developer must establish and maintain a good relationship and regular contact with local,
regional and national agents. It is important to provide those agents with details of site requirements to
avoid a situation where site opportunities are continually rejected, then causing the agent to give up
and work with a rival developer. At the same time the agents should provide a good service to their
developer clients to ensure the business relationship continues and increase their chances of receiving
letting and funding instructions associated with the property development. Other property
professionals such as solicitors, planning consultants, valuers, architects and quantity surveyors may
also introduce opportunities to developers. In-person networking and effective communication are key
skills a successful developer must possess, rather than relying solely on impersonal email and
keyboard communication. In many respects property development is more about who you know than
what you know and the skill of networking cannot be understated. Professional networking websites,
such as LinkedIn (www.linkedin.com), greatly assist with maintaining networks and developing
additional links with other professionals.

2.4.3 Landowner initiatives

A landowner may take an active role in initiating the development process via their decision to sell
their land or alternatively to enter into partnership with a developer. This may be because the
landowner is ‘asset rich-cash poor’ and lacks access to finance, as well as lacking the expert skills and
knowledge to develop their own land or property to its highest and best use. Understanding the drivers
behind the landowner’s decision to sell can substantially assist to complete the negotiation process and
speed up the sale process. Empathy and communication are essential traits of a successful developer
and likely reasons why other purchasers were unable to secure the same property.
An obvious source for identifying development sites for sale is ‘for sale’ advertisements, whether
on a site board, via direct mail, in the media or in property publications such as Estates Gazette in the
UK, Real Estate Times in Asia, or Realtor in the United States. The starting place is when an agent
lists available property as ‘for sale’ on their own website. These sites are designed to be very easy for
prospective purchasers to navigate with most including a search engine with filters allowing the user to
define the characteristics of a sought-after property and reduce search times. In addition it is often
possible to subscribe to a particular agent’s website as they will forward notification of new property
‘for sale’ based on the stated parameters. The benefits of using this method to search for land include
(a) where potential purchasers are instantly advised about a property just placed on the open market
and (b) it reduces the need to constantly revisit real estate internet websites in case they have been
updated since the last search.
Other advertising mediums where ‘for sale’ property can be found include local and regional
newspapers, both of which usually have real estate sections. The reliance on newspaper advertising
has substantially decreased with the exception of more expensive sites being advertised in financial
newspapers as an investment asset. In addition a developer may also receive particulars of a ‘for sale’
site directly from a landowner or their agent if they have been identified as a potential purchaser due to
their past activities in the market.
Potential development sites advertised on the open market will automatically involve the developer
competing in the open market to purchase the site. However the level of competition from other
developers will depend largely on how the site is offered to the market and the associated conditions
of sale. There are various methods available to bid for the land including informal tender, formal
tender, a competition process, auctions and open ‘for sale’ listings. The method of disposal is at the
discretion of the landowner after considering advice from the agent where this decision will depend on
market conditions and the motives of the landowner. The developer may be in competition with any
number of other potential purchasers or there may be a selective list of bidders. The different
approaches to sale are discussed further.

(a) Informal tenders and invitations to offer

An informal tender or an invitation to offer involves inviting interested parties to submit their highest
and best possible bid within a certain timeframe. This usually involves all parties who have expressed
an interest in the site and forwarding an invitation to bid. In certain circumstances it may include an
indication of the minimum price acceptable. For example it might state that offers to purchase over a
certain dollar amount are invited. In addition it will state any conditions attached to the bid; for
example where planning permission for a change of use has been approved.
 An important point from the developer’s perspective is when the bid is made but subject to any
necessary conditions. After a bid is informally accepted by the landowner then the developer has the
ability to renegotiate the price if there is some justification to do so before the contract is agreed by
both parties in writing. There is always a risk the landowner may not accept a revised price and may
offer the lot to one of the other prospective purchasers who also made a bid. Generally speaking,
developers prefer ‘informal’ to ‘formal’ tenders as they allow bids to be made on the developer’s own
terms. However the more conditions a developer attaches to a bid then the less likely the bid will be
acceptable even if it is the highest bid received. Most often the landowner will accept the highest bid
unless the conditions attached to it are unacceptable or the developer’s financial standing is
questionable and perceived as high risk. After receiving the bids, the landowner may negotiate with
several prospective purchasers before making a decision as an attempt to vary conditions or the level
of the bids.

(b) Formal tender

A formal tender effectively binds both parties to the terms and conditions set out in the tender
documentation being subject only to contract. It involves an invitation to interested purchasers or the
entire market to submit their highest and best bids prior to a stated time on a specific date. The
invitation will set out the conditions applicable. Note the document will usually state that the
landowner is not bound to accept the highest bid.
In many instances a developer does not favour involvement in formal tenders since it reduces their
flexibility and therefore increases their risk. The exception to this would be a situation where all the
possible unknowns had been eliminated; for example where a detailed acceptable planning consent
was in place, a full ground and site survey had taken place and the site was being sold with full vacant
possession. Sale of property by governments is normally undertaken by tender to ensure competitive
transparency and an arm’s-length transaction.

(c) Open ‘for sale’ listing

A landowner may decide to list their property for sale on the open market at a certain price. The listing
may be assigned to only one particular real estate agent, although multiple agents are often used to
broaden the amount of exposure in the marketplace. Selling on the open market is also used to dispose
of property that did not sell previously, such as via the auction process or via the tender process. An
obvious advantage to the landowner is there are usually no substantial upfront out-of-pocket expenses
for marketing the property in contrast to the costs involved in a tender or auction process. The
downside is that achieving a sale can take many months or even years. It should be noted that open
‘for sale’ listings are often priced above the market’s true value in anticipation of the asking price
being driven down during the negotiation process. Also an open listing could be unrealistically priced
substantially higher than the actual market value as the seller has no costs until the final sale is
completed. Therefore simply because a property is listed for sale this price has limited relevance to its
true market value being the agreed price between purchaser and seller in accordance with the
definition of market value.

(d) A competition process

A competitive process may be adopted by the selling landowner when financial considerations are not
the only criteria for site disposal. Therefore competitions are an approach mainly used by local
authorities and other public bodies seeking to identify the optimal developer to implement a major
scheme. They are also used in a more informal way by other landowners seeking development
partners. For example a landowner may want to obtain planning permission before disposing of the
land, therefore a developer may be selected on the basis of planning expertise. On the other hand a
government entity may not wish to dispose of the land and will seek a property developer to project
manage the scheme in return for a profit share. This has become increasingly common and is
commonly referred to as a private-public partnership (PPP).
As the majority of competitions involve government bodies and other public bodies, the emphasis
is placed on these public authority competitions. Government authorities and other public bodies will
invite competitive bids on a tender basis, whether formal or informal, and the bids will normally be
evaluated on a financial and/or a design basis.
As an initial step the authority will usually advertise their intention to set up a competition and
invite expressions of interest. Alternatively the government authority may choose a selection of
developers to enter the competition. If the first method is adopted then developers are usually invited
initially to express their interest in becoming involved in the process. Each developer will usually be
asked to provide details about their relevant experience and track record, financial status (e.g. usually a
copy of their company report and accounts), the professional team if appointed and any other
information considered relevant. As an example a developer may own land directly adjoining the
competition site or may have been involved with the subject site for a considerable time.
In the next step the government authority will assess all expressions of interest and compile a
shortlist of suitable developers to enter the competition. This may or may not be the final selection
process and additional bids may be invited from those shortlisted in order to assemble a final shortlist.
The number of selection processes will depend largely on the total number of interested parties and
complexity of the competition. If the authority requires each interested property developer to submit
both financial information and design bids for a relatively detailed design, then the number of
developers shortlisted for the final process is normally a maximum of about three developers. Many
competitions involve property developers spending large sums of money to submit bids; therefore in
such circumstances extended shortlists are not favoured.
It is important that a development brief is prepared to provide guidelines for the competitive
process. The development brief should state the basis of the competition and the criteria adopted for
choosing the final developer. The development brief will set out the statutory requirements of the
government authority with regard to such matters as total floor space, pedestrian and vehicular access,
car parking provision, landscaping and any facilities the authority considers desirable in planning
terms. The authority may also include a sketch layout or outline sketch drawings illustrating the
development required, but in the majority of cases it is the developer’s responsibility to suggest design
solutions.
The brief should state how flexible the authority is when evaluating if each bid meets its
requirements. From a developer’s perspective it is very important for a developer to find out if they
will be penalised for not strictly adhering to the brief and how much flexibility within their bid is
possible. As a general rule the developers who follow the guidelines set out in the brief will be looked
upon favourably; this is unless a developer proposes an alternative solution to the brief. For example
there may be a scenario where through their ability and expertise a developer may be able to produce a
higher financial bid by proposing an additional area to lease than originally envisaged in the brief
whilst still producing a viable and sensitive design. Every competition is unique and it will pay for the
developer to study the development brief in depth and identify all possible angles potentially available
for their competitive advantage. For example a single aspect, such as a short period until settlement or
naming the development after the seller, may be the ultimate difference in securing the property or not.
Most developers generally find a competitive process to be the least attractive method of acquiring
development sites, mainly due to the lack of control by the developer (e.g. negotiating skill becomes
irrelevant) as well as the resources and financial outlay needed. Competitive bids involving designs
require an input of substantial time and expense linked to the preparation of drawings and financial
bids. In addition this information will be irrelevant for any other future site bids if the developer does
not win approval for that particular site.

(e) Auctions
In some regions and countries the preferred method of sale is via the auction process. Some
development sites are also sold at auction in this manner. In direct contrast other regions use auctions
as a sale method of last resort and then often for unusual sites that have remained unsold. For example
a government authority may use an auction process to dispose of disused railway embankments or
alternatively land with no or limited access.
The underlying benefit of the auction process, where the buyers and seller come together at one
point is time, is based on the belief the market actually determines the final sale price. Other uses of
the auction process are varied since it can be an effective approach if used and marketed correctly. An
auction may be used to sell real estate investment opportunities where leases are due to expire in the
next five years and there is obvious redevelopment potential. Therefore a developer conducting a
search for potential development site/s should regularly examine auction advertisements and subscribe
to email lists related to development opportunities.
As a result of a successful auction process the highest bid secures the site, providing the reserve
price has been met and/or exceeded. With this type of sale the control rests with the landowner who
dictates the conditions of sale, however there are often no accompanying conditions and the property
is sold on a cash settlement basis. Prior to the auction the landowner will instruct the auctioneer about
the reserve price being effectively the lowest price acceptable. If the reserve price is not reached, and
the landowner will not reduce the reserve further downwards, then that particular lot is withdrawn and
often placed back on the open market for sale from that time onwards.
The auction will set out both the standard and special conditions of sale relating to each particular
lot. Once a final auction bid has been accepted, the successful bidder exchanges contracts at that point
by handing over the deposit, together with details of their solicitor or conveyancer (where applicable).
Therefore if a developer plans to acquire a site at auction they must ensure a thorough evaluation has
previously been conducted and all other preparatory work has been finalised prior to the
commencement of bidding. Occasionally a lot may be acquired prior to auction by direct negotiation
with the landowner being ‘sold before auction’.
While there are many different approaches to selling a site, either sale via tender or auction is a
common method of disposal preferred by landowners when market conditions are good. In contrast a
developer will generally prefer to obtain a site off market, therefore avoiding direct competition with
other purchasers and reducing their likelihood of success. For example if a developer enters a number
of competitions and tender situations they could all be unsuccessful or alternatively all or some could
be successful; all of these decisions are out of the control of the developer. In this scenario there is no
certainty and the developer may become very frustrated with an unfavourable outcome, wasting a lot
of time and money in the process.
Securing the appropriate site for an acceptable price is based on the developer’s ability to
successfully evaluate the best opportunities to pursue and also identify the lowest level at which to
submit a winning financial bid. However in many instances it may be simply a case of luck or being in
the right place at the right time. The site acquisition process can be very competitive, especially since
a developer is naturally looking for sites in areas where there is demand for new development and this
can be observed in the market. It must be appreciated that even the best thought-out acquisition
strategy may not be achieved in the manner or in the timescale first envisaged or sought-after by the
developer.
 Discussion point
Examine the positive and negative aspects of developing a brownfield site versus a greenfield
site.

2.4.4 Local authority initiatives

In many regions the public sector is now less directly involved in the development process due to
variations in government policy. Often the emphasis of government policy is to enable development
and facilitate private sector involvement in development although with minimum interference from
government bodies. Nevertheless the government authorities still have an important role to play in
initiating the development process, commencing with the responsibilities of the planner via the
planning system. They may also facilitate development by directly promoting or participating in
development opportunities themselves.
Local governments are restricted by the scope of their legal powers, the availability of finance and
the need for public accountability and transparency. Some government authorities are more active than
others; this depends on the priorities of the political party in overall control of the authority and if they
wish to actively encourage development within their area. It is important to examine the various
methods adopted by local authorities to influence the availability of land for development and their
recent track record.

(a) Planning allocation

The allocation of land within a government planning authority’s development plan establishes the
framework for the permitted use of land and therefore directly establishes its potential value for the
purpose of development. In formulating planning policies in the development plan a local authority
has to balance the demands of developers against the wider long-term interest of the local community.
After all, the community can vote a government authority either in or out based on the government’s
track record. A developer will examine the development plan relevant to the areas identified in their
search for sites. At the same time the local government entity, in their role as the planning decision-
maker, can influence the availability of a particular site by allocating a specific use to it in the
development plan.
It must be stressed that allocation of a site in a development plan does not automatically make this
site available for development. The developer and landowner must be able to agree upon terms and
also the site must be suitable in physical terms for the proposed use. Even if a site is available it may
not be developed because the location of the allocated land does not meet the requirements of
occupiers in the market. If the developer and/or landowner disagree with a particular allocation in a
development plan that appears to be in preference to their own site, often they can discuss their
specific case with a planning inspector at the public enquiry into the development plan. Alternatively
they could make a separate appointment at a convenient time to both parties. Hence to some degree
there is flexibility in the planning process designed to balance the needs of all stakeholders over the
long term.

(b) Land assembly and economic development

Local authorities may make land available for development by assembling development sites for
disposal. At times this process may involve using their statutory compulsory purchase powers to
acquire land from existing landowners without their agreement although this approach can be
controversial. Their ability to assume this enabling role clearly depends on the amount of land under
their control and their attitude towards encouraging development. In regions where there is economic
decline and high unemployment some government authorities are very active and encourage direct
private sector investment. For example their planning department may work with developers to bring
forward certain sites for development using their land acquisition and development powers in order to
deal with physical constraints on development. In economically prosperous authorities an activity may
be restricted to involvement in prestigious sites such as enclosed retail centre shopping schemes.
However this scenario of positive participation by local authorities in making land available is not just
limited to land assembly, whether by agreement or compulsion, but may include site reclamation; the
provision of buildings; the provision of infrastructure/services; the relocation of tenants; and general
promotion of their area as a business location. Any or all of these activities tend to be described by the
general term of ‘economic development’.
The need for a local government authority to become involved in ‘economic development’ depends
on the initiatives taken by the private sector and whether market forces in isolation meet the
expectations of the local authority for the development of their area via the creation of employment
opportunities. Another consideration is the extent to which local government authorities can undertake
‘economic development’ as the statutory body must work within the parameters of government policy.
A viable scenario for a local government authority is to use a proportion of their capital receipts (i.e.
proceeds from the sale of land or buildings) for new capital investment. The remaining balance of
funds is used to redeem debts or as a substitute for future borrowing or set aside to meet future capital
commitments. A local authority’s ability to raise money through capital receipts is important when the
government sets their credit approval limit; for example the extent to which they can borrow money.
The reference to capital receipts usually extends to the receipt of rent (e.g. occupational rents and
ground rents) and the receipt of reduced rent in lieu of some benefit where this must be fully valued in
current monetary terms. In addition any temporary financing by local government authorities, such as
the acquisition of land pending disposal to a developer, will count against their credit approval limit if
the period between acquisition and disposal exceeds one year. This extended timeframe is not
uncommon within the property development process.
Some local government authorities, particularly those located in inner-city locations or in areas of
high unemployment, may receive additional funding from the current government. It is accepted that
access to government assistance has become increasingly competitive and local authorities are being
forced to increasingly identify innovative ways to achieve economic development aims. Joint
initiatives undertaken between the government and the private sector are commonly viewed as a viable
option.
When a local authority does become directly involved in land assembly it can also benefit a private
sector developer, but often will extend the timeframe of the whole development process. When a
particular site identified by a developer is owned by different landowners then a developer may require
the co-ordination of the local government authority to acquire the site. For example this scenario is
quite common in medium or high density urban and town centre locations. The local government
authority may allocate the site for comprehensive redevelopment in the relevant development plan and
therefore is willing to work with the developer to achieve the government’s planning aims. In this type
of scenario the developer may experience difficulties in negotiating reasonable land values with the
various landowners; in other words the landowners may effectively hold the developer ‘to ransom’ by
demanding unrealistically high prices since a specific landholding is vital to the proposed development
due to the ‘special value’ with adjoining lots.
The landowner may be unwilling to sell their site since the primary motivation for their current
occupation of the land is the long-standing operation of their business. In contrast a particular
development site might be land-locked with access under the control of a landowner seeking a price
well above the market value because of their advantageous position. A government authority assisting
with navigating the land assembly process may assist to reach a compromise agreement via
negotiation. If this step is unsuccessful, then a government authority may have the option of making a
compulsory acquisition or purchase order, subject to prevailing legislation. Note that there are strict
rules and regulations surrounding compulsory acquisition and compensation, as well as the obvious
implications and generally negative perception from a political perspective for elected government
officials.
The entire process of compulsory purchase is often a very lengthy and drawn-out process. This
involves the relevant government authority agreeing to compensation values with all of the individual
interests directly affected by the compulsory acquisition. The number of interests affected may equate
to hundreds of landowners in the case of an inner-city redevelopment, or potentially even thousands of
landowners in the case of a major new road within an urban area. In this scenario the correct notice
must be served on all interests involved and details of the scheme publicised.
In most cases the monetary compensation payable by the acquiring authority is the actual value
realised if the property was hypothetically sold on the open market at its highest and best use for full
market value. In addition there may be other heads of claim sought by the affected party including
disturbance, relocation and removal expenses, cost of adapting new premises and loss of profit. In
many cases the compensation amount for disturbance may exceed the value of the land. In the event of
disagreement between the parties then the matter is referred to the court system for independent
adjudication with the assistance of expert witnesses.
In return for assisting a developer with site assembly it has become commonplace for the local
government authority to require the provision of social facilities, a financial contribution towards other
government assets (e.g. water main contribution) or even participate in the financial rewards of the
eventual development scheme. In the past some local government authorities in their role as planners
have used the threat of their compulsory purchase powers in a negative manner to achieve some
material benefit in the form of ‘planning gain’ or amendments to planning applications.
When a local government authority disposes of land to a developer they usually produce a
development brief outlining their strategic plan of how they would like to see the site developed. It is
important that the brief is flexible and not overly detailed in order to allow the developer some
freedom to react to prevailing market conditions. Where compulsory purchase powers are used then
the land assembly process may take several years; over this extended period the market conditions
could have completely changed. It is important from a developer’s point of view that sites are sold as
clean as possible with minimal additional work needed to be suitable for development. In other words
any current encumbrances, problems or constraints existing with regards to the legal title, services,
planning and access should be addressed in the initial commencement.

(c) Infrastructure
The provision of supporting infrastructure is critical to the site acquisition process where local
authorities play an important role in ensuring its provision. The reference to ‘infrastructure’ is used to
describe all the services deemed necessary to support a new development. For example this includes
good vehicle ingress and egress to/from the site and the general locality, water and sewerage
provision, open space and parkland, schools and retail shops.

2.4.5 Site access and additional infrastructure

Access to a site via existing or the proposed provision of roads is important when identifying viable
locations for property development. While proposals for a new road will generate pressure for new
development along its route, a new development will also create additional traffic pressure on the
existing road network. As the existence of infrastructure is absolutely critical to the viability of a
particular development scheme, it is accepted that there are direct influences on land values and also
on the highest and best use of the site. If the necessary infrastructure does not currently exist to
support a development then a developer will take account of the cost of its provision in the evaluation
of the land value.
Local government authorities are largely responsible for deciding the level of infrastructure
required in the locality and securing its provision. In performing this role they must determine who is
ultimately responsible for the cost of its provision. Due to government control on spending, local
government authorities often negotiate agreements with developers to secure the provision of new
infrastructure if it is required to support the development. For example this may refer to the provision
of a roundabout to link the development scheme with the existing road network or the provision of
additional public open space and parks for the public to access.
The assessment of future infrastructure requirements at a strategic level is the responsibility of
different government departments or associated bodies. Their assessment of future requirements will
vary depending on the infrastructure they are responsible for; examples include the road network
(either/or local and major roads), electricity, sewerage, water supply, parkland or waterways. Special
consideration will be given to development with different aspects. For example a new high-rise
development in the city would normally cause higher demand for on-street parking if the development
incorporated insufficient parking, so therefore each development should not place unacceptable
additional pressure on the existing infrastructure and current residents living nearby.
Many government authorities adopt a proactive approach to the provision of infrastructure because
they recognise that new roads assist the opening up of additional land for development. Land is often
assembled at the same time as the construction of a new road so the government authority can benefit
from enhanced land values by packaging sites for disposal to the private sector. There is often a debate
about the pressure for development caused by new roads, particularly in prosperous or
environmentally sensitive locations. Once again this highlights the need for a developer to employ
sustainable development practices.
In some cases the developer may be required to make a financial contribution to pay for
improvements to existing roads in order to accommodate additional traffic caused by a new
development. This potential increase in road traffic also presents an opportunity for government to
reduce the need to travel by car by influencing the location of development schemes relative to public
transport networks or existing roads. From a sustainable perspective they may encourage development
viewed as easily accessible via low carbon (CO2) forms of transport including car sharing, cycling,
walking and public transport.
Many local government authorities actively promote the uptake of public transport as a viable
solution to traffic congestion and a shortage of car parking spaces. This usually includes a standard bus
service however in some locations this has been expanded to include a light railway or tram/light rail
system to ease traffic congestion. In order to secure the necessary public funding for such
transportation systems, government regulations usually stipulate that private sector contributions have
to be secured in advance. Often developers and landowners with sites that will directly benefit from a
new nearby proposed transport system will be approached to contribute to a proportion of the required
financial capital. Note that there is a realistic limit to how much developers can contribute as any
additional financial payments will be automatically deducted from funds the developer had allocated
to purchase the property. This same scenario is applicable to financial contributions made by
developers for road and other infrastructure improvements.

2.4.6 Public-private partnerships (PPPs) with developers

One strategy often adopted by government authorities is to retain a legal interest in the development
scheme by granting a long leasehold interest to the developer (e.g. 99 years) instead of selling the
freehold of the site. In return the government retains ownership and receives regular payments for a
ground rent at a percentage rate usually linked to the long-term success of the scheme. At the
expiration of the lease then the land and any structures or improvements revert back to the authority’s
control. This very low level of rent is often called a ‘peppercorn rent’. Alternatively this type of
arrangement may be referred to as a public-private partnership (PPP) and overcomes the problem of
the government making a large initial financial outlay to develop the site.
At times a government may only retain an interest in the property until the development has been
completed where a building licence is granted for a nominal premium to a developer to enter onto the
land and complete the development. Under this arrangement the government authority sells the
freehold interest to the developer on final completion and therefore receives a financial benefit from
any increase in property value. The main consideration in these scenarios is to identify which
stakeholders are exposed to the most risk. Although such arrangements are presented to the public as a
partnership arrangement, note that this is not a true partnership as the private sector bears the majority
of the risk whilst sharing in only some of the rewards.
Property developments involving a local government authority can often result in a lengthy and
costly competitive process to select a development partner. The size of such schemes involve a
substantial risk for the private sector with substantial sums of money being expended before funding
for the development is secured. The legal agreement between the government authority and a
developer often takes a long time to negotiate and is usually subject to the developer securing finance.
At times some developers are forced to withdraw from such schemes due to lack of funding or because
the initial evaluation of the scheme has changed significantly due to the amount of lapsed time. A
further complication can arise since there are often conflicting interests between a local government
authority’s social objective and a private developer’s profit objective. It must be acknowledged that the
local authority has multiple overlapping roles in the development process directly conflicting with
each other, such as being both the planner and landowner at the same time.
A local government authority is based on democratic and transparent processes that are often
lengthy and inflexible compared with the relatively quick decision-making approach of the private
sector. Sometimes it may take an extended period for a property developer to gain confidence amongst
the elected members of the local authority, only for changes to occur in the authority’s personnel and
also the elected political party in overall control following regular government elections.
Some government authorities, as an alternative to the above arrangements, have entered into joint
ventures with developers via companies limited by shares or guarantees. Another viable scenario is
where some governments have formed wholly owned subsidiaries; for example the use of enterprise
boards to carry out economic development initiatives. This can also apply to those companies being
essentially extensions of a government authority. As a general rule the government wants to ensure
that local government authorities remain accountable to the public and will have policy or legislation
restricting the use of joint companies as a means of avoiding capital expenditure restrictions. Many
developers prefer joint venture arrangements as they are familiar with this arrangement and it also
facilitates a quicker decision-making process. In addition it allows more flexibility in securing funding
for the scheme as the property developer passes some of the risk to the local authority, which then
shares in any decrease in the value of the completed scheme.

Discussion point
What is the role of government authorities in the property development process?
2.5 Site investigation
Prior to site acquisition there are a number of very important investigations the developer must
undertake. These investigations will influence the terms of the contract to acquire the site and the price
the developer is willing to pay for the site. Although landowners, particularly local government
authorities, will provide as much information as possible it is up to a property developer to satisfy
themselves that there will be no unexpected surprises once legally binding contracts for the acquisition
of the site have been drawn up and exchanged. The investigations listed below are of critical
importance when a developer is acquiring a particular site. For example, after closer examination the
investigations may reveal that the proposed scheme is no longer viable due to the physical state of the
ground and the cost of remedying such problems.

2.5.1 Site survey

A site survey needs to be undertaken by qualified land surveyors to establish and/or confirm the extent
of the site and whether the boundaries agree with those identified in the legal title deed. The location
of structural improvements, fencing and even a boundary wall on a site does not necessarily confirm
the location of the actual site boundary as stated in a legal title deed. For example there is not always
an obvious boundary when the site adjoins community or state owned parkland. To avoid future
disputes over ownership, physical inspection of the site and comparison with the legal title deed is
essential.
The need for a site survey is of vital importance where a development site is being assembled by
bringing together various parcels of land in different ownerships. In this scenario the survey needs to
confirm all the boundaries of the various parcels are correct in both length and alignment and that the
entire aggregate site consisting of multiple individual properties is actually being acquired. There
would be acute development barriers if the developer discovered after commencing the property
development that a small but vital part of the site had not been acquired. In this type of scenario the
developer would then have to negotiate from a very weak position with that particular landowner,
being effectively held to ransom with little bargaining power. The site survey also establishes the
contours and levels of the site. If any existing buildings on the site are to be retained, a structural
survey will need to be conducted.
A legal search of the title deed/s will confirm the responsibility for the maintenance of the
boundaries. It will also identify any encumbrances on the site, such as a sewerage or electricity
easement under the ground possibly limiting the construction of any improvements on the land above
these utilities. For example there may be a high voltage overhead power line (HVOTL) in existence
therefore restrictions are placed on the land underneath, such as not being legally permissible to be
improved with a structure (Wadley et al. 2019). Another example would occur when there is an access
or ‘right of way’ easement over the site to an adjoining lot; in addition the access arrangements to this
site need to be confirmed to ensure the site boundary abuts the road and gives direct uninterrupted
access. If a public highway exists then a solicitor needs to check whether it has been adopted by the
local authority and is maintained at their expense. If access to the site is via a private road then the
ownership and rights over that road need to be established.

2.5.2 Ground investigation

Unless reliable information already is available as to the state of the property below the surface then a
ground investigation needs to be carried out by appropriate specialists. The purpose of the ground
investigation is to assess the suitability of the land to support the building structure. Ground
investigations can vary both in cost and extent depending on the size of the proposed scheme and the
information already known. A comprehensive investigation will normally include a series of boreholes
taken at strategic locations on the site. Then such samples taken from the boreholes need to be
analysed in a laboratory to establish the nature of the soil, substrata and water table, together with the
possible existence of any contamination.
The results of the investigation will be given to the structural engineer, architect and quantity
surveyor. They will need to analyse the results to establish whether any remedial work is necessary to
improve the ground conditions or whether any pile foundations are required. An example would be the
addition onto the site of external soil as fill material and then compacted. Both circumstances will have
an impact on the cost of the development scheme, which in turn will affect the overall viability of the
development.

2.5.3 Contamination
The existence of any contamination on a site has become an issue that developers are legally unable to
ignore. Unless the parcel of land has never had a previous use and has always been in its natural
undeveloped state since the beginning of time, there will arguably always be some level of
contamination left behind. The process of property development commonly requires a change of land
use; for example from a previous industrial use to a residential use. Industrial processes typically
cause land contamination from the chemicals and products used in the manufacturing process
including cleaning products, oil and acids. It has been well documented that long-term exposure to
these contaminants can be harmful to humans and therefore contamination must be completely
eliminated prior to development. Another example is the identification of asbestos on a site with a
previous use.
Contaminated land is generally referred to as land that represents a natural or potential hazard to
health or to the environment as a result of current or previous uses.
There are varying definitions of contaminated land depending on the jurisdiction. A reliable
definition of contaminated land produced by the UK government is ‘where substances are causing or
could cause: (a) significant harm to people, property or protected species; (b) significant pollution of
surface waters (for example lakes and rivers) or groundwater; or (c) harm to people as a result of
radioactivity’(UK Government 2020).
In the United States the definition is based on a category system that refers to the level and type of
contamination, as well as the regulations under which they are monitored and remediated (USEPA
2020). These categories produced by the United States Environment Protection Agency (USEPA) are
listed below.

Superfund National Priorities List sites. These sites are seriously contaminated and include
industrial facilities, waste management sites, mining and sediment sites, and federal facilities
such as abandoned mines; nuclear, biological, chemical, and traditional weapons production
plants; and military base industrial sites (e.g., those used for aircraft and naval ship maintenance).
Resource Conservation and Recovery Act (RCRA) cleanup facilities. These facilities are
subject to cleanup under RCRA due to past or current treatment, storage, or disposal of hazardous
wastes and have historical releases of contamination.
Underground storage tanks/leaking underground storage tanks. Businesses, industrial
operations, gas stations, and various institutions store petroleum and hazardous substances in
large underground storage tanks that may fail due to faulty materials, installation, operating
procedures, or maintenance systems, causing contamination of soil and ground water.
Accidental spill sites. Each year, thousands of oil, gas, and chemical spills occur on land and in
water from a variety of types of incidents, including transportation (e.g., rail, barges, tankers,
pipelines) and facility releases.
 Sites contaminated by natural disasters or terrorist activities. Disasters of any sort, naturally
occurring or caused by humans, have the potential to contaminate lands and cause problems at
already-contaminated sites.
Land contaminated with radioactive and other hazardous materials. Many sites spanning a
large area of land in the United States are contaminated with radioactive and other hazardous
materials as a result of activities associated with nuclear weapons production, testing, and
research.
Brownfields. Brownfields are real property where expansion, redevelopment, or re-use may be
complicated by the presence or potential presence of a hazardous substance, pollutant, or
contaminant. Cleaning up and reinvesting in these properties protects the environment, reduces
blight, and takes development pressures off green spaces and working lands.
Military bases and defense sites. Some of the millions of acres of land used by the Department
of Defense are contaminated from releases of hazardous substances and pollutants; discarded
munitions, munitions constituents, and unexploded ordnance; and building demolition debris.
Similarly, as part of its defence mission, the Department of Energy owns numerous facilities that
have been contaminated from releases of hazardous chemical and/or radioactive substances.
PCB-contaminated sites. Prior to the Toxic Substances Control Act, polychlorinated biphenyls
(PCBs) were widely used across many commercial industries, and significant PCB contamination
resulted from spills and releases, and from the use and disposal of products containing PCBs.
Abandoned and inactive mine lands. Abandoned and inactive mines may not have been
properly cleaned up, and may have features ranging from exploration holes to full-blown, large-
scale mine openings, pits, waste dumps, and processing facilities (USEPA 2020).

When highly contaminated land is initially suspected it is important to employ the services of
professionals and assess the cost, if any, and the associated timescale for remedial action. It has
become commonplace for the financiers and end-use purchasers of development schemes to demand
evidence from developers that sites are no longer contaminated after completion. In instances where
they were, the stakeholders need to be convinced that satisfactory remedial action has been taken. It is
accepted a developer will not obtain finance for a scheme if there is the slightest risk of contamination
and associated high risk.
Contamination is typically caused by a previous occupier/s use of the land. Unfortunately for many
sites the use of contaminants is unrecorded which makes it incumbent on the developer to undertake a
thorough investigation, especially of brownfield sites. Occasionally contaminants will migrate onto
land from other adjoining sites and pollute the land, although such an occurrence can cause very
complex issues to arise in terms of enforcing the polluter to pay costs of remediation.
Different land types that are most often contaminated (and examples of relevant contaminants) for
different land types are listed below (API 2020).

1. Abattoirs and animal processing works. 1b. Arsenic

2. Acid/alkali plant and formulation.
3. Agricultural activities (vineyards, tobacco, sheep dips, market gardens). Heavy metals.
4. Airports. Trichloroethylene from solvent cleaning operations.
5. Alumina refinery residue disposal areas. Fluoride (atmospheric emissions).
6. Asbestos/asbestos production.
7. By-product animal rendering. Pesticides.
8. Bottling works.
9. Breweries. Pesticides, oils and greases, underground storage tanks.
10. Brickworks.
11. Car wreckers. Oils and greases, TPH and BTEX compounds, TCE (solvent cleaning).
12. Cement works.
13. Cemeteries.
14. Ceramic works. Heavy metals.
15. Chemical manufacture and formulation.
16. Coal mines and preparation plants. Organic compounds – surfactants.
17. Defence works
18. Docks. Oils and greases, TPH and BTEX compounds, TCE (solvent cleaning), pesticides, heavy
metals.
19. Drum reconditioning works
20. Dry cleaning establishments. Organic compounds.
21. Electricity distribution. PCB compounds.
22. Electroplating and heat treatment premises. Chrome, heavy metals.
23. Ethanol production plants.
24. Engine works. TPH, BTEX compounds, organic compounds (associated with solvents).
25. Explosives industries.
26. Fertiliser manufacturing plants.
27. Gasworks.
28. Glass manufacturing works.
29. Horticulture/orchards. OCP and OPP pesticides.
30. Industrial tailings ponds. Heavy metals, organic compounds, TPH, BTEX.
31. Iron and steel works.
32. Landfill sites. Variety of possible contaminants.
33. Limeworks.
34. Marinas and associated boat yards. Heavy metals particularly Tributyl tin.
35. Metal treatment. Heavy metals.
36. Mineral sand dumps.
37. Mining and extractive industries.
38. Munitions testing and production sites.
39. Oil production, treatment and storage.
40. Paint formulation and manufacture.
41. Pesticide manufacture and formulation.
42. Pharmaceutical manufacture and formulation.
43. Photographic developers. Heavy metals – Ag Cl used as part of process.
44. Piggeries. Pesticides and heavy metals.
45. Plant nurseries.
46. Plant or fibreglass.
47. Power stations.
48. Prescribed waste treatment and storage facilities.
49. Printed circuit board manufacturers. Solvents and glues – volatile organic compounds.
50. Properties containing underground storage tanks. TPH, BTEX, PAH, solvents.
51. Radioactive materials, use or disposal.
52. Railway yards.
53. Research laboratories. Metal, organic compounds, radioactive elements.
54. Sawmills and joinery works. Copper, chrome, arsenic.
55. Scrapyards. TPH, BTEX.
 56. Service stations.
57. Sewerage works.
58. Smelting and refining.
59. Sugarmill or refinery.
60. Tanning and associated trades (e.g. fellmongery).
61. Timber treatment works. Formaldehyde, copper, chrome, arsenic.
62. Transport/storage depots.
63. Tyre manufacturing and retreading works. Glues – volatile organic constituents.
64. Waste treatment plants in which solid, liquid chemical, oil, petroleum or hospital wastes are
incinerated, crushed, stored, processed, recovered or disposed of.
65. Wood storage treatment. Formaldehyde, copper, chrome, arsenic.
66. Wood treatment facility. Formaldehyde, copper, chrome, arsenic.
67. Wood preservation. Formaldehyde, copper, chrome, arsenic.

The cost of ground investigation is usually substantially higher than normal when any level of
contamination is identified, therefore representing a potentially substantial upfront cost for the
developer. As much information should be obtained on the site’s history of previous land uses before
any ground investigation is started. This is achieved by examining ordnance survey maps, local
authority records, title deeds and any other likely historical source of information. In regions where
contamination is widespread then the local government authority may have already compiled records
of contaminated land. However the information obtained from records may be limited and will always
need to be thoroughly checked as the major risk rests with the developer.
The ground investigation will usually involve taking soil samples down to the water table level.
This may be accompanied by extensive surveys of all underground and surrounding surface water due
to the risk of contaminants seeping into water below the surface (for example see the UK legal case
Cambridge Water v. Eastern Counties Leather plc [1994] 1 All ER 53 involving the contamination of
the local water supply from the operation of a tannery). The results of the ground investigation will
enable an assessment to be made of the extent and cost associated with undertaking remedial
measures.
There are many different approaches to treat and remedy contamination. The main options
available are (a) remove the contaminated soil and replace it, (b) treat the on-site contaminated soil in-
situ, or (c) contain the contamination under a blanket of clean earth where this is often referred to as
‘capping’. Ongoing measures may be required once the development is complete such as venting
methane gases to the surface, especially in the case of previous landfill sites. If contamination is
limited to one area of the site it may be possible to design the development around the problem; for
example by locating a car park in the proximity. If ground has to be decontaminated by using imported
material as fill as part of the process then deep piled foundations may be required.
Sometimes when a developer is faced with a contaminated site then the remedial measures are
often very expensive, which in turn eliminates practically all alternative land uses except higher value
uses such as commercial office or retail warehousing. In view of the increasing concern about
contaminated land and the debate about identifying the stakeholder to be financially responsible, the
developer should undertake a thorough due diligence and spend time in the preliminary investigations
to thoroughly investigate its possible existence. The appropriate professionals should undertake a full
environmental audit so this can then be presented to all stakeholders including potential purchasers,
financiers and final owners.

2.5.4 Services
The site survey should establish the existence of services currently available to the site including the
provision of water, gas, electricity and drainage. All of the utility companies should be contacted to
confirm the services identified in the survey actually correspond with those listed on official records.
In addition, the capacity and capability of the existing services to be able to meet the needs of the
proposed development should be accurately evaluated. If the existing services are considered as
inadequate the developer will need to then negotiate with the company concerned to establish the cost
of upgrading or providing new services. A relevant example would be making a financial contribution
to a new electricity substation to provide the additional electricity needed for the development scheme.
When tasks need to be carried out by either an electricity or gas company the developer will often
be charged the full cost of these additional service requirements. At times a partial rebate may be
available once the development is occupied and the company is receiving a minimum level of income.
The physical route of a particular service may need to be diverted to allow the proposed development
to take place, such as where one lane on a road or a complete road may be closed to give the builder
more access to the site. The cost of this diversion and the time period required to complete should be
established at the earliest possible stage.
A legal search of the title deeds will reveal if any adjoining neighbours or occupiers have rights to
connect to or enjoy services crossing the development site. The developer may need to renegotiate the
benefits of these rights if they affect the development scheme. It is accepted that access to services are
essential to any new development and the developer must be 100% certain the site will have full
access to those services required by the occupier prior to proceeding further.

2.5.5 Legal title

In most cases a solicitor or legal expert will be engaged by the developer to identify the correct legal
title to be acquired and also conduct all of the necessary enquiries and searches before contracts are
entered into with the landowner. The developer’s solicitor will apply to the body governing, or in
control of, land registration to examine the official register of the title. If the land to be acquired is
leasehold then it is essential to closely examine brief particulars of the lease and record the date it was
entered into. The developer will need to establish the length of the lease, examine the pattern of rent
reviews and the main provisions of the lease. Such provisions need to be checked to ensure the terms
are acceptable to the provider of development finance.
The solicitor needs to confirm the land will be acquired with vacant possession and also that there
are no unknown tenancies, licences or unauthorised occupants. The fact that a site or building is
currently vacant or unoccupied does not necessarily mean that no legal rights of occupancy exist and
belong to an absent third party. The search of the lease and title deeds will also reveal the existence of
any conditions or restrictions affecting the rights of the landowner to sell the land. In addition, all
rights and interests adversely affecting the title will be identified such as restrictive covenants,
easements, mortgages and registered leases.
The existence of an easement could fundamentally affect a development scheme. An easement may
either (a) positively affect the land, e.g. a public or private right-of-way to an adjoining property or (b)
negatively affect the land, e.g. a right of light access or views for the benefit of an adjoining property.
If the easement exists to the detriment of the proposed scheme then the developer may be able to
negotiate its partial or full removal or some type of modification to allow the scheme to proceed.
Rights relating to the availability of natural light might affect the proposed position of the scheme
and ultimately affect the amount of floor space available in the property development. If a party or
inter-tenancy wall exists then it will be necessary to agree a schedule of condition with the adjoining
property or make a payment of compensation. A property professional with specialist knowledge on
party wall matters may need to be appointed by the developer to correctly evaluate this aspect.
 The existence of restrictive covenants may adversely affect the development scheme; for example a
covenant restricting or prohibiting a particular use of a site. However it is sometimes difficult to
identify individual landowners who benefit from a covenant since the covenant may have been entered
into some considerable time ago. If the beneficiary can be found then the developer may be able to
negotiate the removal of the restriction. If not identified, then another option is for the developer to
potentially apply to the relevant government authority for its discharge although typically this is a
lengthy process. Another alternative is for the developer to take out an insurance policy to protect
against the beneficiary enforcing it. The insurance cover may be able to compensate against the loss in
value caused by any successful enforcement action.
A solicitor will also conduct or request a search of local government authority records. This process
has varying names depending on the regions, such as being referred to as the ‘Local Land Charges
register’ in the UK. This will reveal the existence of any planning permissions or whether any building
and/or site is listed as a building of special architectural or historic interest or there are any other
charges on the property or land being sold. Enquiries should also be made of the local government
authority to confirm whether the road/s providing access to the site are adopted and maintained at
public expense. The existence of any proposed road improvement schemes might affect the site. A
relevant example is where a strip of land may be protected at the front alignment of a site for future
road widening purposes.
Direct enquiries should be made of the existing site landowner in their role as the seller/vendor and
include standard questions on matters such as boundaries and services. Enquiries will also reveal the
existence of any overriding interests (e.g. rights and interests to other parties which do not appear on
the register of the title) or adverse rights (e.g. rights of the current occupiers of the land). Solicitors
may also make additional enquiries of the vendor considered directly relevant to the land being
acquired.
The developer should aim to acquire the freehold or leasehold title of the development site without
as many encumbrances as possible by renegotiating or removing these restrictions and easements.
However this not always possible and the developer may need to make some compromises, especially
with reference to the retention of heritage buildings and facades already existing on the site. Lenders,
particularly financial institutions, usually prefer to acquire their legal interest with a minimum of
restrictions that potentially can affect the value of their investment in the future. In other words, the
market would rather have fewer restrictions than more restrictions due to the perceived higher risk.
The developer has to be able to sell the title to the final occupants, being either purchasers or tenants,
as quickly as possible without any added complications, e.g. complex encumbrances

2.5.6 Finance
The provision of finance is fundamental to the success of the development. No prudent developer,
unless there are sufficient internal cash resources and equity, would consider entering into a
commitment to acquire a site without having first secured the necessary finance or development
partner to cover at least the cost of acquisition, including interest on the acquisition cost, while the site
is held pending development. The developer should aim to ensure that the financial arrangements are
confirmed to coincide with the acquisition of the site. If no financial arrangements are in place then the
developer must be 100% certain either the finance will be secured or that the site can be sold on the
open market if no funding is forthcoming.
The developer must ensure all investigations have been carried out thoroughly so a financier or
partner has a full and complete picture of the site. Every area of doubt must be removed if at all
possible. Market downturns create a situation where lenders are more risk-averse and typically tighten
their lending criteria to reduce their exposure to risk. Often this means they will require a commitment
to pre-letting to an existing tenant for all or a substantial proportion of the proposed scheme before
they are prepared to finance the venture. The developer needs to fully understand what a lender is
looking for regarding lending criteria and then organise their application accordingly.

Discussion points
When evaluating a particular site which are the most important considerations for a property
developer to consider?
How does each consideration affect the viability of a development?

2.6 Site acquisition

The findings from all of the investigations undertaken, as discussed above, need to be fully reflected in
the site acquisition arrangements. The degree to which developers reduce the risk inherent in the
property development process depends to some extent on the type of transaction and associated
conditions that all parties agree to during the site acquisition stage. The prudent developer will always
endeavour to reduce the element of risk to a minimum and the site acquisition arrangements are
important in this respect. Ideally no acquisition will be made until all the relevant detailed information
has been obtained and all problems resolved. A comprehensive due diligence must be completed.
However, in practice, it is practically impossible to remove every single aspect of uncertainty due to
the inherent characteristics of the real estate market. The degree to which a developer can reduce risk
to the site acquisition stage is largely dependent on the landowner’s method of disposal, the amount of
competition and the form of tenure. At times it is possible to pass some of the risk to the landowner
however this will largely depend on the developer’s negotiating abilities.
The majority of site acquisitions are undertaken on a straightforward freehold basis where the
developer will own the site outright. The freehold title transfers from the vendor/landowner to the
developer after contracts have been completed; from that point the property developer is responsible
for all of the risk associated with the land. The developer can reduce much of the risk inherent in the
transaction through careful negotiation of the various contract terms. The contract is usually always
conditional to some extent and payments can be paid in stages or delayed. For example the property
development may be based on obtaining permission for a change of land use and therefore the
developer should negotiate that the contract is subject to a ‘satisfactory planning consent’ being
obtained. The vendor, if such a condition is acceptable, will try to ensure the term ‘satisfactory
planning consent’ is clearly defined.
The developer may obtain a planning consent that does not reflect the highest value of the site but
satisfies the condition in the contract. However at a later stage the developer can possibly obtain a
better planning consent. It is not uncommon for ‘top-up’ arrangements to be made whereby the vendor
benefits from any improvement created by planning consents obtained by the developer. Developers
will carefully identify and evaluate the degree of uncertainty in relation to planning and it will be a
matter of judgement as to whether the additional exposure risk or uncertainty is acceptable. If the
vendor is undertaking to sell the site with vacant possession then the contract should be conditional
upon this tenure since there could be a time delay for the occupants to actually leave the building in a
vacant state.
Whilst the normal period between signing a contract to purchase a site and then access can be
relatively short (e.g. 28 days or less), the developer may negotiate an extended time delay for the
completion, e.g. 12 months. Any delay in the development process will incur an added expense
therefore the developer should ensure that any potential problems identified in the investigations are
dealt with prior to completion of the contracts. Alternatively it should be ensured that the amount of
time needed to resolve them is reflected in the evaluation and therefore also incorporated in the price
paid for the land.
If the planning process is perceived to be very long and difficult, the developer will often consider
it will be advantageous to pay for an option to reserve the land for future purchase. This type of option
involves the developer paying a nominal sum to secure the right to purchase the freehold rights to the
property. There is usually an agreed date, also referred to as a ‘long stop’ date, after which the vendor
is free to sell the land to another purchaser if the developer has not taken up the option by the
expiration. The option agreement might specify that certain conditions need to have been complied
with by the developer before they are permitted to purchase the land. If the developer fails to complete
the purchase by the ‘long stop’ date then the vendor is free to market the site to other purchasers for
sale. Alternatively, the agreement may allow the developer to call upon the vendor at any time to sell
the site after sufficient notice. The developer will aim to nominate the specific value of the site at the
time the option agreement is entered into, but in reality this is often difficult to actually achieve. At
least in a rising market where values are increasing the vendor/landowner will usually try to ensure
that the open market value is fixed at the same time the developer actually purchases the land.
The developer may only be able to acquire a long leasehold interest in the land at a premium with a
nominal ground rent, sometimes referred to as a ‘peppercorn rent’. This occurs when the landowner is
(a) only able to dispose of a leasehold interest or (b) wishes to retain some control over the
development, e.g. the landowner is a local government authority. The developer may be able to take
out a lease on a building in the first instance, therefore immediately forming a legal estate although
probably subject to covenants relating to the satisfactory completion of the property development.
Alternatively the transaction might be arranged on the basis of a building agreement and lease. This
only gives the developer a licence to enter onto the site and construct the building however it includes
a commitment by the landowner to grant a lease when the building has been satisfactorily completed.
A similar arrangement is sometimes made by local government authorities in relation to freehold
transactions. For example where the developer is able to carry out the development under a building
agreement and the freehold is then transferred on the satisfactory completion of the property
development. Under this type of transaction the local government authority may become an equity
partner in the scheme. The value of the scheme is assessed on completion and therefore the authority
can share in any growth. The developer can use this type of transaction to reduce their exposure risk at
the outset. The property developer may only be required to pay a nominal premium to enter into a
building agreement and the consideration owed to the local government authority may be only payable
if a profit is made on completion. The consideration paid to the local government authority may be in
the form of a profit share or it could be the land value on completion. This method of acquisition is
advantageous to the property developer where the development scheme is large and likely to take a
number of years to complete. The risk to the property developer can be substantial; nevertheless a
government authority may be willing to be flexible due to their interest in the implementation of the
scheme. A prudent developer would not enter such a building agreement on a large property
development scheme without making this agreement conditional upon funding approval.
It is important that the building agreement is carefully negotiated as otherwise long drawn out
arguments can take place after final completion in relation to the calculation of profit. Larger property
development schemes will take many years to complete and as a result it is possible the political party
and related personnel in overall control at the local government authority will have changed when the
project is finally completed. In turn this may lead to disputes over matters such as the precise
definition of development costs that adversely affect the authority’s profit share. An alternative
approach to undertaking lengthy negotiations about how to calculate the profit is to form a joint
company with the authority. With a joint company the profit is clearly listed in the audited accounts of
the company so there is no dispute as to the level of acceptable development costs.
 For some developments the site will be acquired on the basis of a long leasehold interest with an
open market ground rent payable, instead of a premium being payable with a nominal ground rent.
Some leasehold agreements can be for an extremely long timeframe such as 99 or 125 years. The
actual level of ground rent payable can be reviewed in various different ways and might be geared to
(a) a proportion of the current market rent of the property, (b) a proportion of the rents received less
outgoings or (c) the level of rents receivable.
Each developer should have high regard to the preferences of financial institutions and lenders in
the local region in which they operate. Most financial institutions prefer freehold arrangements to long
leaseholds and this will be reflected in the yield at which the institution values the completed
investment. The reviews might be to a vacant site value with planning permission and based on the
assumption that a similar term of lease will be granted at the time of review. Some financial
institutions prefer the revised rent of the building to be fixed when the ground lease is granted. This
means the ground rent might cease to rise or may even fall towards the end of the term. Ground leases
may have a user covenant to limit the use of the site to a particular planning use class.

2.7 Government assistance

There can be barriers to development when (a) the land is not made available for sale or (b) a
development is not initiated by private market forces since the development process is not viable.
Development is often not viable due to low market rents and lack of occupier demand in a particular
area and/or prohibitively high development costs as a result of the physical condition of a particular
site. Typically many of these areas are located within the city centre or regions in economic decline
and associated with high unemployment. Often the infrastructure in such areas is extremely congested
or non-existent and there may also be widespread contamination from previous uses of the land
parcels by heavy industries. An added challenge with urban regeneration of an older area is the
requirement by the local authority to preserve the historical significance of the original property e.g.
retaining the facade at the street alignment (Lai and Lorne 2019).
To tackle this problem many innovative forms of funding urban regeneration have been
encouraged, typically involving additional risk sharing by the public sector rather than simply
distributing financial grants to developers. This approach is especially applicable to areas in a rundown
or disused state for an extended period and have minimal appeal to developers due to the higher
inherent risk.

2.7.1 Government agencies

Various government agencies exist to implement and administer urban regeneration policies on behalf
of the government. However these agencies may exist at the locality level, the regional level or the
country level. For example in the UK there are different agencies operating within England, Scotland,
Wales and Northern Ireland. Their roles differ but they all take an active, initiating role in the
development process by making land available for development and providing financial assistance; at
times they may even participate directly in development. A prudent developer should be aware of the
existence of these agencies, their remit and how to provide a development solution being profitable for
the developer and also meet the objectives of the agency. For the developer this can reduce the level of
risk as their development partner is of higher quality than a normal market participant.

2.7.2 Funding and grants

Direct government financial assistance via funding or grants is usually available to local authorities
and/or developers proposing important urban regeneration schemes in specific areas of their region or
country. For example financial grants are often available to developers and the public sector to develop
rundown inner-city sites and buildings. At times this will include historic or heritage sites where the
developer must work with and retain parts of the existing buildings and infrastructure.

Discussion point
How do governments provide assistance to the development process?

2.8 Reflective summary

This chapter has discussed the framework surrounding the selection of land for development.
Even if the developer has undertaken a substantial amount of research prior to implementing a
land acquisition strategy then successfully achieving this objective within the stated timeframe
and within budget is often beyond the control of the developer. The following preconditions need
to be in place for the development process to be initiated through land acquisition:

1. The landowner’s willingness to sell the land at a price with associated conditions to enable a
viable profitable development to proceed.
2. Planning permission granted for the proposed development or allocation of the proposed
use within the relevant development plan and zoning constraints.
3. The existence of adequate infrastructure and services to support the proposed development.
4. If necessary, after appropriate decontamination at a reasonable cost, the existence of suitable
ground conditions to support the development.
5. The necessary development finance at an acceptable cost.
6. An identified end-user or confirmed hypothetical occupier demand for the proposed
development.

If one or more of the above conditions cannot be confirmed then the development should not
proceed since it will usually represent a considerable risk to the developer. Local authority
involvement and government assistance may be available in relation to compulsory acquisition,
provision of infrastructure, site reclamation, finance or occupier/investor incentives depending on
the nature of the proposed development and its location. Most importantly the requirements of
occupiers are always the central component of a successful developer’s land acquisition strategy
to reduce exposure to risk.

2.9 Case study: large-scale residential development – Armstrong Creek

This case study examines the planning process undertaken by Jinding Developments (Jinding), being
part of the Jinding Australia Group, to improve the value of a large-scale development to both the
Project Partners and future residents. This process was led by Jinding in partnership with Yolk
Properties and the landowner, the Harkness Family (i.e. jointly together as Project Partners), who have
used the property for farming and held ownership since 1995. The subject of this case study is the
development of a masterplan for this land between 2018 and 2020 to form the future Harriott
residential community, https://harriottarmstrongcreek.com.au/ (the Project). The Project is located
within the Armstrong Creek growth area forming part of the Armstrong Creek East Precinct Structure
Plan (PSP). This case study focuses on the skill and determination of the developer to overcome major
challenges associated with the Project whilst also maximising the highest and best use of the site.
Rather than accept an average outcome for the Project, which would have satisfied all approval and
commercial requirements of the Project Partners, the final outcome was superior in many respects.
Armstrong Creek is a regional location on the outskirts of Geelong, Australia. The aggregate
Armstrong Creek growth area is an extremely large contiguous area consisting of more than 2,500
hectares (6,175 acres) of land suitable for development. Eventually the region will provide housing for
between 55,000 and 65,000 residents in 22,000 residential homes. The emphasis has been placed on
being a sustainable community with a focus on walkability, public transport provision and sustainable
water use (Geelong Council 2020).
The PSP sets the planning framework for the Project and nominated ‘residential use’ for this
location and site. This includes a mixture of standard residential and medium density allotments closer
to the planned Neighborhood Activity Centre (NAC). The PSP also accounted for an existing
easement containing the High Voltage Overhead Transmission Line (HVOTL) in favour of Alcoa
Corporation. This easement traverses the entire site from the south-west to the north-east corners
(Figure 2.1) where it extends across the Armstrong Creek growth area from Geelong City to the now
redundant power plant. The PSP considers this HVOTL as encumbered land and nominated it as
‘Public Open Space Easement’.
Figure 2.1 Part of the Armstrong Creek East Precinct Structure Plan highlighting the project (Source:
Jinding 2020)

To develop a site subject to a PSP overlay each developer must obtain Planning Permit approval
that complies with the PSP. The Planning Permit must detail the road grid, open space distribution and
lot density to conform to the PSP planning framework. Initial plans for the Project incorporated the
HVOTL easement per the requirement of PSP. However the HVOTL and its alignment compromised
the master plan in the following ways:

The HVOTL did not align square to the property boundary, thus required additional roads and a
higher development cost.
Increased intersection and corners in roads also reduced vehicle and pedestrian permeability as
well as increasing walking and drive time.
The HVOTL alignment created odd shaped lots and resulted in less efficient use of land, in turn
resulting in a lower average value per square metre of developed land.
The HVOTL contained unsightly infrastructure that would substantially reduce the market value
of homes abutting it and also those located nearby.
Overall decrease in perceived quality of the project would be due to widespread negative
perceptions about electro-magnetic fields (EMFs) relating to HVOTLs (see Wadley et al. 2019).

The original plan (Figure 2.2) was still viable for the Project Partners and would have been approved
in usual timeframes since it complied with the PSP. However the developer adopted an alternative
approach since they were aware there were plans from Alcoa to decommission and remove the
obsolete HVOTL. The developer recommended a proposal to achieve the intent of the PSP on the
basis that the HVOTL was removed. This approach included an inherent risk since there was a
possibility that the HVOTL may not be removed in the near future, where the local government
needed to agree to an alternative plan that varied from the PSP. Nevertheless the developer considered
that the potential urban design and livability benefits were substantial if achieved, therefore they
proposed the project should proceed down this path.
Figure 2.2 Initial masterplan including HVOTL and easement (Source: Jinding Australia 2020)

After confirming the imminent plans for removal of the HVOTL, the developer was able to
proactively progress removal of the easement. This was a complicated process since the easement was
in favour of the Crown and therefore the Queen’s representative needed to give approval for the
removal of the easement. An exhaustive legal process led by Jinding confirmed the Crown no longer
had an interest in the easement therefore it could be removed if ministerial approval was granted. As
the revised plan was contingent on the easement being removed, the local government delayed
Planning Permit approval until this was achieved. An early engagement with local government about
an alternate plan was imperative to gain in principle support for the process and then ensure the
Council’s planning objectives were met with the alternative plan. This dialogue continued throughout
the evolution of the plan. The final approved plan is shown in Figure 2.3. Some key elements that
Council sought to maintain in the alternative masterplan included:
Figure 2.3 Updated masterplan without the HVOTL easement (Source: Jinding Australia 2020)

walking and cycling paths providing a direct connection between the NAC and the Sparrovale
Wetlands;
a linear green corridor with an active open space at the top of the hill (northern end) to provide
an amenity to all residents; and
 increased housing density close to the NAC and amenity.

In addition to meeting the local government’s objectives, the following improvements were achieved
in the final masterplan (Figure 2.3):

removal of the HVOTL allowed for a structure layout therefore creating an efficient and
permeable plan;
fewer roads but more legible north-south and east-west connections;
increased net developable area due to less roads and regular shaped lots and parks;
a new boulevard connector road providing direct access from the NAC and Regional Active
Open Space to the east;
lots that are regular shaped and with added variety; and
additional useable and greater accessible open space.

This case study highlighted the developer’s ability to maximise their returns with an additional 100
lots, as well as producing more appealing lots and also an improved livable master plan. Arguably a
different developer, if faced with the same scenario and the associated pressure to complete a
successful development, would have proceeded with the initially approved development plan
including the HVOTLs and associated easement as the original scenario was still viable and also had
less approval risk.
There are many direct and indirect benefits related to this developer’s approach and regard for
careful master planning that provided examples of value for the Project Partners and the future
residents:

a more desirable masterplan that increased the value of the Project and ensured enhanced
livability for end users;
additional regular lots that are easier to sell and also are better suited for dwelling construction;
improved marketability of the overall development without the stigma from the previously
existing HVOTL;
superior connectivity and visibility (i.e. without the existing HVOTL and associated towers) for
all residents in the development, not only on the date of sale but also well into the future.

This case study highlighted differences between a mediocre development and a high-quality
development based on the foresight of the developer. Rigour and commitment to good design, even
when there is potentially an easier path, will pay long-term dividends for all stakeholders including the
developers, local council and many generations of residents. Property development has an extremely
long-term residual effect on the environment and the decisions made today will have an extremely
long-term effect for many decades, potentially centuries.
Jinding Australia, www.jindingau.com/, is an integrated property services company with five
business divisions: Jinding Developments, Jinding Real Estate, Jinding Investments, Jinding Funds
Management and Jinding Services. In just over three years Jinding Developments has established a
development pipeline for over 4,000 homes including medium density, apartments and mixed use
sites. The organisation’s philosophy states that in the Chinese language, ‘Jinding’ translates to ‘a
lifetime of commitment’ (Jinding Australia 2020). They apply this philosophy to both their
stakeholder relationship and to their service and product lines, understanding that a good customer
experience will lead to ongoing business and shared success.

References and useful websites

Anacker, K.B., Nguyen, M.T. and Varady, D.P. (2019) The Routledge Handbook of Housing Policy and Planning,
Routledge.
API (2020) ARPGN 1 Land Contamination Issues, http://anzvps.api.org.au/12-1-arpgn.php (last accessed 28 June
2020).
Choi, K. (2019) ‘A case study on urban regeneration projects for declined industrial districts in downtown area’,
Journal of the Korea Convergence Society, 10:10, pp. 129–42, https://doi.org/10.15207/JKCS.209.10.10.129.
Christensen, P. and Gabe, J. (2018) ‘Public regulatory trends in sustainable real estate’, in Sustainable Real
Estate, Springer, pp. 35–76.
Communities and Local Government, www.communities.gov.uk.
Department for Transport, www.dft.gov.uk.
Geelong Council (2020) www.geelongaustralia.com.au/armstrongcreek (last accessed 29 May 2020).
Hu, M. and Wang, X. (2019) ‘Homeownership and household formation: no homeownership, no marriage?’,
Journal of Housing and Built Environment, https://doi/10.1007/s10901-019-09724-5.
Jinding Australia (2020) www.jindingau.com (last accessed 2 June 2020).
Lai, L.W.C. and Lorne, F.T. (2019) ‘Sustainable urban renewal and built heritage conservation in a global real
estate revolution’, Sustainability, 11:3, p. 850, https://doi.org/10.3390/su11030850.
LinkedIn, www.linkedin.com
Payne, S., Serin, B., James, G. and Adams, D. (2019) How Does the Land Supply System Affect the Business of
UK Speculative Housebuilding? UK Collaborative Centre for Housing Evidence.
Perera, U. and Mensah, C.A. (2019) ‘Conceptualizing sustainability in the real estate development process’,
Journal of Environment and Sustainability, 3:1, pp. 1–66.
Thilini, M. and Wickramaarachchi, N. (2019) ‘Risk assessment in commercial real estate development: an
application of the analytic network process’, Journal of Property Investment & Finance,37:5, pp. 427–44.
UK Government (2020) Contaminated Land, www.gov.uk/contaminated-land (last accessed 28 April 2020).
United States Environment Protection Agency (USEPA) (2020) Contaminated Land, www.epa.gov/report-
environment/contaminated-land (last accessed 28 April 2020).
Wadley, D., Han, J.H. and Elliott, P. (2019) ‘Regarding high voltage transmission lines (HVOTLs): perceptual
differences among homeowners, valuers and real estate agents in Australia’, Property Management, 37:2, pp.
178–96.
Yang, Z. and Wu, S. (2019) ‘Land acquisition outcome, developer risk attitude and land development timing’,
The Journal of Real Estate Finance and Economics,59, pp. 233–71.
Chapter 3

Development appraisal and risk

3.1 Introduction

This chapter examines how property development projects are evaluated from a financial profit
and risk perspective so therefore it focuses on the process of development appraisal and
valuation. Assessing and evaluating the financial viability of a development constantly occurs
throughout all stages of the development process, however the exact type of analysis varies
depending on the specific land use (Popovic et al. 2019). A developer should not stop after
conducting an appraisal/valuation prior to the acquisition of a development site, but rather
constantly re-evaluate and re-appraise the profitability of the scheme throughout the entire
development process due to the effect of all influencing factors that are subject to constant
change. Many dynamic factors influence the development so their status must be updated and re-
evaluated in light of the overall risk attached to the development. At this point the importance of
value management in the property development process is critical (Sari and Prayogi 2019).
Furthermore each region is associated with unique influencing factors and drivers so special
attention is therefore required to identify the local characteristics (Lakshmanan and Button 2019).
Risk is an inherent component of the property development process (Puschel and Strobel
2019). Whilst there are many identified and known risks, other risks are emerging and need to be
identified as soon as possible; for example the existence of flooding risk (Hudson 2020) is
accepted in many locations although a higher focus on rising sea levels has increased the
perception of this risk due to the climate change debate. Even though a totally risk-free
investment would produce a profit to a developer or investor, in reality this scenario does not
exist according to standard economic theory (Yoe 2019). Therefore risk is unavoidable and we
shall consider how this is assessed as part of the overall evaluation process. Another important
concept underpinning appraisal is the definition of market value as defined by the International
Valuation Standards Committee where: ‘Market Value is the estimated amount for which an asset
or liability should exchange on the valuation date between a willing buyer and a willing seller in
an arm’s length transaction, after proper marketing and where the parties had each acted
knowledgeably, prudently and without compulsion’(International Valuation Standards Committee
2019).
This chapter commences with a discussion of the conventional approach to development
appraisal before introducing the different cash-flow concepts including the discounted cash-flow
(DCF) approach. We shall also consider the importance of market research (see Chapter 8 for
further detail) in the assessment or appraisal of profit and risk. Finally we shall examine the
influence of uncertainty and how this can be contained in order to reduce the effect on risk.
3.2 Financial evaluation

3.2.1 Conventional technique

The financial maths and models for undertaking a property development are not difficult or complex to
understand if broken down and examined separately. The best approach is to commence with a basic
‘no frills’ short-term development and then increase the skill level up to complex long-term
developments. The conventional techniques of identifying the various components of value in a
proposed development are relatively straightforward and founded on using a form of ‘residual’
valuation. This type of model is designed to isolate an individual component of a development, such
as the level of risk/return or the land value, then to assess their individual ‘unknown’ value when
information about all of the other variables are known. In other words it starts with the ‘known’ or
certain variables and then moves to evaluating the ‘unknown’ variables to complete the analysis. It
commences with the total value of the completed project and then gradually deducts selected
components to finally arrive at the remaining or ‘residual’ component. The main variables in this type
of model are:

initial land purchase price;

building construction cost;
current level of market rents and sale prices;
interest rate level;
investment yields or return on investment (ROI); and
time period on a per month basis.

There are two primary models used in undertaking residual valuation and each differs depending on
the final outcome sought. The first approach focuses on calculating the investment risk/return with the
second approach based on calculating the remaining (i.e. residual) cash available to purchase the land
after all other development costs, including the developer’s profit, have been paid.

1 Investment risk/return
This model commences with (a) the final estimated value of the completed property development
based on estimated final market prices. Then (b) the total development costs (e.g. land, construction
cost) are deducted from (a) to establish whether the project produces (c) an adequate rate of return for
the developer or financier, either in terms of a trading profit, an investment yield or return on capital.
In this model the financial amounts in both (a) and (b) are generally determined/fixed by the market
and outside the control of the developer. Therefore the result for (c) may be too low at present to
undertake the property development, possibly because (a) is too low (e.g. low predicted demand) or
(b) is too high (e.g. high current borrowing costs and interest rates).

2 Affordable land purchase price

An alternative approach for using a residual valuation is to assess (a) the likely costs of producing a
development scheme and by deducting these costs from (b) an estimate of the value of the completed
development scheme to arrive at (c) a land purchase price. The developer will include an allowance
for the required return in assessing the total development costs. Once again, the financial amounts for
both (a) and (b) are generally determined/fixed by the market and outside the control of the developer.
Therefore the current ‘for sale’ price of the land (c) may be too high to make the development
‘affordable’ at present. For example there may be an added risk associated with the cost of remediation
due to the effect of land contamination (I-Chun et al. 2019).
The manner in which the above-mentioned variables are brought together in a development
appraisal can be shown best via a working example as follows. Let us assume a 0.8 ha site (2 acre) is
on the market and the vendors are seeking a price of £$4,200,000. The site is in a good location in a
town with adequate transport access and the vendor has obtained planning consent for 4,299 m2
(46,274 ft2) of offices. Through market research, a developer has established that rents are currently £
$355.21 per m2 (£$33 per ft2) for comparable office space. A bank has agreed to provide short-term
finance for the scheme at an interest rate of 2% above the bank’s base rate of 6.25% to be compounded
quarterly, i.e. effective annual rate of 8.47%. The developer’s quantity surveyor has advised him that
building costs are currently £$1,561 per m2 (£$145 per ft2). The agents have advised the developer
that the completed scheme should achieve a yield of 8.0% when sold to an investor. The developer
will carry out the following typical conventional evaluation as shown in Example 3.1. A model
showing the formulas is shown in Example 3.2. Note that there may be rounding undertaken in some
of the calculations when totalled in order to simplify the analysis.

Example 3.1 Residual valuation

Evaluation of profit (risk/return) £$ £$

(a) Net Development Value
(i) Estimated Rental Value (ERV)
Net lettable area 4,299 m2 (46,274 ft2) @ £$355.21 per m2 (£$33 per ft2) 1,527,048
(ii) Capitalised @ 8.0% YP in perpetuity 12.50
19,088,097
(iii) less purchaser’s costs @ 2.75% 524,923
Net Development Value (NDV) 18,563,175
(b) Development costs
(c) Land costs
Land price 4,200,000
Stamp duty @ 1% 42,000
Agent’s acquisition fees @ 1% 42,000
Legal fees on acquisition @ 0.5% 21,000
4,305,000
(d) Building costs
Estimated building cost
Gross area 4,599 m2 (49,500 ft2) @ £$1,561 m2 (£$145 ft2) 7,179,039 7,179,039
(e) Professional fees
Architect @ 5% 358,952
Structural engineer @ 2% 143,581
Quantity surveyor @ 2% 143,581
M & E engineer @ 1.5% 107,686
Project manager @ 2% 143,581
897,380
(f) Other costs
Site investigations – say 21,175
Planning fees – say 7,260
Building regulations 36,300
64,735
(g) Funding fees
Bank’s legal/professional fees – say 72,600
Bank’s arrangement fee 108,900
Developer’s legal fees – say 60,500
242,000
(h) Finance costs
(i) Interest on land costs (£$4,305,000) over the development period and void 975,015
of 30 months @ 8.25% compounded quarterly = (1.0206)10
(ii) Interest on (d) building costs, (e) professional fees, (f) other costs and (g) 356,651
funding fees divided by a half (£$8.38m/2) over building period of 12
months @ 8.25% compounded quarterly = (1.0206)4
(iii) Interest on building costs, professional fees, other costs and funding fees (£ 713,303
$8.38m) over void period of 12 months @ 8.25% compounded quarterly =
(1.0206)4
2,044,969
(i) Letting and sale costs
Letting agents @ 15% ERV 229,057
Promotion 135,000
Developer’s sale fees @ 1.5% NDV 278,448
Other costs (see text)
642,505
(j) Total Development Costs (TDC) 15,375,628
(k) Developer’s profit
Net Development Value 18,563,175
Less total development costs 15,375,628
Developer’s profit 3,187,547
Developer’s profit as % of total development costs 20.73%
Yield on development cost 9.93%

Example 3.2 Formulas for residual valuation

A B C
1 Evaluation of profit (risk/return) £$ £$
2 (a) Net Development Value
3 (i) Estimated Rental Value (ERV)
4 Net lettable area 4,299 m2 (46,274 ft2) @ £$355.21 per m2 (£ =4299*355.21
$33 per ft2)
5 (ii) Capitalised @ 8.0% YP in perpetuity =100/0.08/100
6 =B4*B5
7 (iii) less purchaser’s costs @ 2.75% =B6*0.0275
8 Net Development Value (NDV) =B6-B7
9
10 (b) Development costs
11 (c) Land costs
12 Land price =4200000
13 Stamp duty @ 1% =B12*0.01
14 Agent’s acquisition fees @ 1% =B12*0.01
15 Legal fees on acquisition @ 0.5% =B12*0.005
16 =SUM(B12:B15)
17 (d) Building costs
18 Estimated building cost
19 Gross area 4,599 m2 (49,500 ft2) @ £$1,561 m2 (£$145 ft2) =1561*4599 =B19
20
21 (e) Professional fees
22 Architect @ 5% =B$19*0.05
23 Structural engineer @ 2% =B$19*0.02
24 Quantity surveyor @ 2% =B$19*0.02
25 M & E engineer @ 1.5% =B$19*0.015
26 Project manager @ 2% =B$19*0.02
27 =SUM(B22:B26)
28 (f) Other costs
29 Site investigations – say 21175
30 Planning fees - say 7260
31 Building regulations 36300
32 =SUM(B29:B31)
33 (g) Funding fees
34 Bank’s legal/professional fees - say 72600
35 Bank’s arrangement fee 108900
36 Developer’s legal fees - say 60500
37 =SUM(B34:B36)
38 (h) Finance costs
39 (i) Interest on land costs (£$4,305,000) over the =(C16*((1+0.020625)^10))-
C16
40 development period and void of 30 months @ 8.25%
compounded quarterly = (1.0206)10
41
42 (ii) Interest on (d) building costs, (e) professional fees, (f) other =(((C19+C27+C32+C37)/2)*
costs and (g) funding fees divided by a half (£$8.38m/2) ((1+0.020625)^4))-
over building period of 12 months @ 8.25% compounded ((C19+C27+C32+C37)/2)
quarterly = (1.0206)4
43
44 (iii) Interest on building costs, professional fees, other costs =((C19+C27+C32+C37)*
and funding fees (£$8.38m) over void period of 12 months ((1+0.020625)^4))-
@ 8.25% compounded quarterly = (1.0206)4 (C19+C27+C32+C37)
45 =SUM(B39:B44)
46 (i) Letting and sale costs
47 Letting agents @ 15% ERV =B4*0.15
48 Promotion =135000
49 Developer’s sale fees @ 1.5% NDV =C8*0.015
50 Other costs (see text)
51 =SUM(B47:B50)
52
53 (j) Total Development Costs (TDC) =SUM(C16:C51)
54
55 (k) Developer’s profit
56 Net Development Value =C8
57 Less total development costs =C53
58 Developer’s profit =B56-B57
59
60 Developer’s profit as % of total development costs =C58/C53
61 Yield on development cost =B4/C53

We shall now examine each of the elements of the appraisal in further detail.

3 Net development value

There are two important variables in establishing a development scheme’s value, namely ‘rent’ and
‘investment yield’. These terms vary between each region and country, however in this context the
term ‘rent’ refers to the annual financial amount a tenant pays for occupying the final developed
product. The term ‘investment yield’ refers to the income return on an investment being usually
expressed as an annual percentage based on the cost of the investment. Both variables can have an
adverse effect on the appraisal model so it is critical that careful attention is paid to accurately defining
each variable to ensure both are accurate.

(A) RENT
The forecast level of rent that a tenant is likely to pay to occupy part of, or all the completed property
scheme on completion is usually established in consultation with a real estate agent or a valuer. This
amount should reflect the interaction between supply and demand factors in the property market at a
certain point in time and is usually based on a forecast of the property market when the development
will be finally completed. An estimate of the future rent must be considered reliable and based on as
few assumptions as possible. The estimate will be based on a thorough analysis of the present and
future market trends and is often referred to as ‘fair market rent’. According to the International
Standards Valuation Committee (2019) market rent is defined as ‘the estimated amount for which an
interest in real property should be leased on the valuation between a willing lessor and a willing lessee
on appropriate lease terms in an arm’s-length transaction, after proper marketing and where the parties
had each acted knowledgeably, prudently and without compulsion’.
The best source of information about the current market levels of rent is to refer to comparable
market evidence based on recent lettings of similar schemes in close vicinity of the property, in the
local region or in the surrounding area in accordance with the definition of fair market rent as stated
above. It is important for every lease to comply with each section of the definition and in all respects is
representative of a normal rental agreement. In other words the tenant involved in the comparable
lease must have been fully conversant and aware of the market and hypothetically may have even
leased the proposed development if it was completed.
As no two properties are exactly identical then it is important that the level of rent for every
property involved in each rental lease is adjusted to reflect differences in its attributes including age,
quality and specification. For example where there are relatively few or no recent comparative leases,
a thorough market research exercise needs to be undertaken (see Chapter 8 for further details). It is
essential that this estimate is based on the developer’s estimate and firm reliable evidence with careful
analysis to establish today’s rent level, i.e. at the date of the appraisal. Note that the importance of
ensuring this rental estimate cannot be over-emphasised since an overly optimistic estimation in rental
levels can adversely result in an incorrect presentation of potential risk and return upon the completion
of the development.
It is not recommended for a developer to heavily rely on a forecast (i.e. based on assumptions) or
inflated rent in this type of appraisal model. When there is reliance on a forecast rent this should be
explicitly stated in a valuation model, being either a discounted cash-flow or capitalisation of income
approach, rather than bound up and hidden within the discount rate or an ‘all risk’ yield. The property
market is a complex interaction of variables so it is extremely difficult, if not impossible, to forecast
future rent levels with a relatively high degree of accuracy. The foundation for this modelling should
place the emphasis on known variables such as the existing market status and the current level of
agreed rents.
Rents are usually analysed by reference to a rate per square foot or rate per square metre based on
the annual cost per year. In the case of an office building, the net area of the building (i.e. generally the
internal usable space) needs to be established and is commonly known as the net lettable area (NLA).
The tenant is most interested in the NLA available (as opposed to the aggregate building area being the
gross lettable area or GLA) and tenants who seek a larger area to lease will often be rewarded with a
smaller rate per square metre (m2). Larger rental areas are usually less expensive (on a ‘per unit of
area’ basis) than smaller rental areas due to bulk discount and economies of scale theory, even though
other influencing factors (e.g. use, building, floor level) remain fixed. In addition any discounts applied
to the rate will take account of areas with less demand, such as basements (i.e. due to no or restricted
natural light) and floors with restricted or lower headroom. At times it can be difficult to ascertain the
components on a floor to be included in NLA and what is excluded since this can have an adverse
effect on the amount of NLA, especially in a multi-level office or retail building.
It is essential for all measurements to be undertaken in strict accordance with the relevant guidance
notes as accepted by lessees and lessors in the local property market; these guidance notes clearly set
out the various definitions of area measurement for different types of property. Often these guidance
notes are produced by the nationwide industry body and are updated on a regular basis, therefore
providing relevance for that particular location and market. For example in the UK the industry
standard is produced by the Royal Institution of Chartered Surveyors (RICS) where definitions and
guidance for measuring is set out in the RICS Property Measurement published by RICS (2020). In the
United States the relevant standard is the “BOMA Floor Measurement Standards” published by the
Building Owners and Managers Association International (BOMA 2020). Many countries have a
unique approach to measuring lettable areas and these industry standards are accepted by local
surveyors, property owners and tenants. Therefore if operating in a country or region outside of the
normal region then it is essential to refer to the local industry body for confirmation. In 2013 a new
global body was formed with the aim of standardising global measurement standards. The body,
referred to as International Property Measurements Standards Coalition (IPMSC), produced the first
international guidance notes in 2014 titled International Property Measurement Standard (IPMS)
(IPMSC 2020).
With an industrial scheme it is commonplace for the ‘gross internal area’ to be measured and this
includes all internal space within the external walls. In contrast the approach to measuring retail
property and other types of land use varies. For example in some regions the rent for the retail units
may be analysed in sections or zones measured from the front boundary of the shop (e.g. zone widths
are usually a depth of 20 feet or 6.1 metres in the UK, London has variable widths, some parts of
Ireland have zones of 15ft or 4.5 metres). The first zone at the front of the retail space is usually
referred to as Zone A, the second Zone B and the remainder Zone C. Retail units are valued in relation
to the Zone A rent which is the rate applied per square metre (or per square foot) to the area of Zone
A. Then half the Zone A rate is applied to the area of Zone B and a quarter of the Zone A rate is
applied to the area of Zone C. This zoning is to reflect the fact that the most valuable space is at the
front of the shop in Zone A. As most shops do not conform to a standard size and shape, adjustments
will be made to the above described analysis to reflect the varying levels of demand for different
frontages and unusual shapes, which largely will be based on the experience of the property
professional (e.g. valuer) and their knowledge of the current market conditions. Large retail units such
as department stores and variety stores, together with smaller shops in lower profile locations, are
usually analysed on an overall rate rather than based on a Zone A rate.

(B) INVESTMENT YIELD

The return on the total financial capital used to purchase a real estate investment is usually referred to
as the ‘investment yield’. Applied in the process of assessing the overall development value the
investment yield is used to discount the future rental income stream needed to calculate the capital
value of the development scheme in today’s money. Derived from the investment is a multiplier that
can be applied to the future income stream and is referred to as the ‘Year’s Purchase’ (YP) in
perpetuity. The YP is the reciprocal of the investment yield.
This modelling approach is based on taking a snapshot of the current rental income and, where this
represents current market value, assumes it will remain at its present level in perpetuity. The growth in
the rental income and the risks associated with it are then reflected in the multiplier used. For example
if the future income from the completed property scheme is estimated to be $500,000 per annum and
the investment yield is 5% then 5 is divided into 100 to calculate the YP of 20, which is then
multiplied by the rental income to produce the final capital value of the completed development. In
this example it is $10,000,000. Therefore the investment yield (5%) is derived by dividing the rental
income into the capital value (0.05) and then multiplying by 100 to express it as a percentage. Table
3.1 lists a range of investment yields and their respective YP.

Table 3.1 Investment yields and respective year’s purchase (YP)

Investment Return (%) Years Purchase (YP)
30 3.3
27.5 3.6
25 4.0
22.5 4.4
20 5.0
17.5 5.7
15 6.7
14 7.1
13 7.7
12 8.3
11 9.1
10 10.0
9 11.1
8 12.5
7 14.3
6 16.7
5 20.0
4 25.0
3 33.3
2 50
1 100

The actual investment yield for a particular property can be obtained by comparing ‘like with like’
in the property market, then making allowances for differences between the properties. This is a
common valuation technique and also the simplest. The approach is by way of comparison, based on
an analysis of recent sales of properties considered similar to the property development scheme being
proposed. When undertaking the comparison approach then consideration should be given to a large
number of variables, as well as each variable’s varying level of contribution to value, which will affect
the value of each property.
A starting point for undertaking this comparison is to consider the two main variables in the
property development, namely (a) the land component and (b) the building component. The
investment yield is viewed as a measure of risk and return and will reflect the property investor’s
perception of (a) the future rental growth against (b) the risk of future uncertainty. In general terms the
higher the level of rent growth expected in the future then the lower the yield an investor is prepared to
pay at the outset. However the level of perceived risk in an investment can have an adverse effect on
the property itself and therefore risk factors also need to be identified and then factored into the model.
The level of yields tends to change with variations in the patterns of rental growth or investor demand.
Generally retail developments tend to attract the lowest yields while industrial developments often
attract higher yields as based on their previous history of rental growth.

4 Purchaser’s costs
Regardless of whether the developer intends to retain the completed property development as an
investment or sell the property upon completion, the final completed development value needs to be
expressed as a net development value to allow for purchaser’s costs including stamp duty, agent’s fees
and legal fees.

5 Development costs

(A) LAND COSTS

The land cost includes the land purchase or acquisition price being either the price already negotiated
with the landowner or, as in this example, the price being sought by the landowner. All costs and
expenses associated with acquiring the site must be included. Accordingly the acquisition costs and
fees will include stamp duty or tax as a percentage of the land purchase price, legal fees associated
with acquiring the site and the real estate agent’s introduction fee if applicable. In many regions the
applicable stamp duty (tax) is not a flat rate irrespective of value but rather can be separated into
graduated bands based on the land price. Fortunately many government authorities have online tax
conversion tools freely available on their website. Note for the purposes of this simplified example in
Example 3.1 the stamp duty rate is assumed to be a flat 1%. Legal fees are often between 0.25 and
0.5% of the land price, depending on the complexity of the deal. Often the real estate agent’s fees are
between 1% and 2% of the land price and depend on whether the agent is to be retained as the letting
and/or funding agent.
Other considerations will affect the modelling process for each unique property development where
complications may arise in certain jurisdictions with regards to stamp duty, property tax and
land/investment tax if applicable. For example if the project is being forward-funded by a financial
institution then the developer may have to allow for payment of double stamp duty on the land cost if
the developer purchases the site prior to completing funding arrangements with the financial
institution. This is because stamp duty will be incurred on the initial purchase of the land by the
developer and also on the subsequent transfer to the financial institution.

(B) BUILDING COSTS

Building costs are estimated by the developer’s quantity surveyor and are usually expressed as a ‘per
unit’ cost, such as the overall rate per square metre (or square foot). Then this ‘per unit’ cost is
multiplied by the gross area of the proposed building. The building costs are estimated at the time of
the proposed implementation of the development project. In many cases no allowance is made for cost
increases (e.g. due to higher inflation) during the building contract period, although some developers
may inflate building costs in their appraisals based on informed assumptions and forecasts by third
parties. This will be particularly relevant in periods of rapidly rising building costs or if the
construction period covers an extended period of time and there is a level of uncertainty about future
building costs.

(C) PROFESSIONAL FEES

These fees are normally calculated as a percentage of the total building costs and include fees for all
professional services employed in the completion of the development. Often this includes the
architect, quantity surveyor, structural engineer, mechanical engineer, electrical engineer and the
project manager. The actual rates per professional can vary considerably in accordance with factors
such as the size of the project, the capital outlay and complexity of the task. When the total costs of
professional fees are not standardised they are often in excess of 10% of the total building costs, say
about 12–13%. These professional fees are either calculated on a ‘flat fee’ basis or based on (a) the
‘scale of fees’ or charges for each profession, (b) a negotiated percentage or (c) a fixed fee.
The percentage agreed with each member of the professional team depends on factors such as the
nature and scale of the property development, as well as the relationship/goodwill between the
developer and each professional to some extent. Small refurbishment schemes normally attract higher
percentages than larger, complex development projects due to the economies of scale. Perceived high-
profile or ‘blue ribbon’ developments may cause competition between industry professionals who are
more than willing to be a part of an important project to raise their professional profile, which in turn
may equate to a lower rate. If a developer is to appoint other professionals, such as a traffic engineer, a
landscape architect or a party wall surveyor, then these additional costs must be included in the final
evaluation of the project.

(D) SITE INVESTIGATION FEES

These fees include costs allocated for ground investigation and land surveys. Especially with reference
to residential developments, all potential land contamination must be identified and rectified. There are
many examples of a building/s being constructed on contaminated land (i.e. with the contamination
not originally identified in the initial site survey) although this error of judgement later necessitated the
new building/s to be demolished prior to the site being decontaminated. Other more knowledgeable
developers were possibly aware of this added risk and bypassed the particular development land for
this reason. The importance of a thorough site investigation to reduce exposure to risk of the unknown
cannot be over-emphasised.

6 Planning fees
These costs relate to the government fees required to make a planning application and secure consent
for the property development project. Many developments necessitate a change in the use of the
property from a previous land use, such as from previous industrial to future residential land use,
where the highest and best use of the land and surrounding properties has changed over an extended
time period. For example this may be due to a lower demand by light industry and higher demand by
newly settled residents. This cost normally only includes the fees paid to the relevant government
planning authority with the total cost based on the scale and nature of the scheme. A list of the relevant
fees and charges can normally be obtained from the government planning authority and usually varies
depending on the size of the development.
In the above example the planning consent has already been obtained. However in a situation when
obtaining planning permission may prove difficult and especially where there is a substantial change
in use, a developer has to allow for planning consultant fees. In the event of an appeal there will be
additional costs such as fees for solicitors, counsel and expert witnesses. The allocation of additional
time will need to be reflected in the interest costs associated with the extended holding period for
which the developer is directly accountable.

7 Building regulation fees

Usually these costs are calculated using a sliding scale and based on the final total building cost.
Details of such fees are available from the building control department of the relevant government
authority.

8 Funding fees
Most financial institutions and lenders charge various fees when arranging development finance. These
fees are related to the costs associated with arranging development finance and will vary on the
method of finance. To illustrate this point, Example 3.1 is bank financed so the developer will need to
pay the bank’s arrangement fees, solicitor’s fee and surveyor’s fee. These fees are a matter of
negotiation but usually reflect the size of the required loan and may equate to between 3 and 10% of
the value of the loan (note: see Chapter 4 for further details).
If the property development is to be ‘forward-funded’ by a lender or financial institution then the
developer will pay the fund’s agent (if appointed) and associated solicitor’s fees, as well as their own
agent (if appointed) and their own solicitor’s fees. The developer may also have to pay the fund’s
building surveyor’s fees to monitor the construction of the building on behalf of their client.

9 Finance costs/interest
Interest costs for borrowed funds are a critical element of the appraisal and often have an adverse
effect on the overall viability of a development proposal. These costs reflect either (a) the actual cost
to the developer of borrowing money over time or (b) the implied or notional opportunity cost
reflecting an alternative investment opportunity forgone; in other words according to the concept of
opportunity cost the capital could be earning money elsewhere at a comparatively higher return but not
necessarily with an added level of risk.
The actual cost of the finance/interest is affected by many factors including the loan-to-value ratio
(LVR), the risk in the specific land use sector and the location (e.g. a new retail development located
in a different area), the established relationship between the borrower and the financier/lender, as well
as the borrower’s estimated risk that the borrowed funds will be completely repaid in full by the due
date. With reference to the calculations in Example 3.1 the development company will borrow money
from the bank and, as a condition of the loan, will provide some financial capital from its own
resources. It is assumed here the level of interest rate charged by the bank and the opportunity cost of
the developer’s own money are both identical.
In order to calculate the interest costs the developer must estimate the total length of the
development. Normally the cash inflow will commence either (a) when the completed property
development is let to a tenant/s and therefore becomes income-producing or (b) is sold as is usually
the case in residential schemes, where property is often sold before the development is completed.
This enables the developer to use this income to fund the balance of the scheme and reduce the cost of
borrowing finance to build the scheme. This decision depends on whether the developer seeks to or is
financially able to retain the scheme following completion or not. In addition the developer must allow
adequate time for all the preparation work required after the site has been acquired but prior to the
commencement of the building contract. Furthermore there must be a careful estimation of the time
period required to either let or sell including a vacancy/void period; this is based on a prediction of
prevailing market conditions at a future point in time.
In Example 3.1 the development timetable is assumed as shown in Table 3.2 and Figure 3.1.

Table 3.2 Development timeline

Site acquisition, preparation and pre-contract 6 months

Building contract 12 months
Letting period 6 months from completion
Investment sale period 6 months from letting
Total development period 30 months

Figure 3.1 Development timeline

 The site acquisition is the first commitment and requires a major capital financial outlay. As this
payment is at the very beginning of the development, interest is calculated on all site acquisition costs
over the entire development period. This is the longest time span within the development period and is
incorporated from the date of acquisition to the final letting/sale of the building. The total timeframe of
the development in Example 3.1 is 30 months. In some circumstances there may be additional
expenses incurred prior to the site acquisition; an example is the costs associated with searching for
potential sites. However these costs are usually not considered to be substantial capital outlays that
attract a high interest cost. Once the building contract is signed off then most other costs will be
incurred at various different times over the building contract period, where in Example 3.1 this period
is 12 months. Note that the actual timing of the individual cash-flows does vary and are often difficult
to accurately quantify. Accordingly, a ‘rule of thumb’ simplistic method of calculating the interest is
adopted for a straightforward short-term development based on an assumption the costs are incurred
evenly over the entire contract period. Therefore all costs, with the exception of promotion and letting
costs, are divided in half and then the interest is calculated on that sum over the whole period. In
Example 3.1 this time period equates to 12 months.
After the building contract has completed then the interest costs payable will continue to accrue on
all the building and other costs spent (with the exception of some of the promotion costs and
letting/sale fees) until the date when it is assumed the building will be eventually sold or let. In
Example 3.1 it is assumed the building is leased within six months of final completion and then on-
sold to a third party investor within 12 months of completion. It is further assumed a rent-free period
of six months is granted to the tenant. If it were to be assumed some rental income was received prior
to the sale of the investment then this income would be included in the appraisal and also offset
against the interest calculation. In Example 3.1 the interest is calculated by using the Amount of ($)
(£)1 formula for compound interest since it is commonly accepted in the real estate analysis discipline.
In order to calculate compound interest on a quarterly basis the interest rate of 8.25% is divided by 4
to obtain the quarterly rate of 2.06%, which then produces a compound interest formula of (1.0206)n
where ‘n’ represents the number of quarters over which the interest is calculated.

10 Letting agent’s fees

These fees relate to the cost of the agent letting the building to new tenants. The actual amount will
vary depending on factors such as the number of letting real estate agents competing for the letting
rights (e.g. the profile of the development in the marketplace), as well as the demand by tenants to rent
space in the development. If joint agents are involved then these fees are usually 15% of the rental
value achieved at letting. If only one real estate agent is involved then the fee is reduced to 10% of the
rental value achieved at letting. In some circumstances the developer may negotiate a fee with the real
estate agent on an incentive basis. At times the tenant will pay the developer’s legal fees relating to the
completion of the lease documentation.

11 Promotion costs
The developer needs to make an assessment of the likely sum of money to be spent on promoting the
project in order to let the property; very often this element of the evaluation is underestimated at the
initial stage (note: see Chapter 10 on ‘Marketing and sales’ for further details). This amount will be
affected by the perceived level of demand for the development (e.g. where a high-profile development
may be in higher demand and require less promotion) and the location of the prospective tenants (e.g.
the use of advertising via the internet or direct marketing via email).

12 Sale costs
All costs associated with selling the completed development need to be included if the developer
intends to sell the building after it is fully let. These will include any real estate agent’s fees together
with those of the developer’s solicitor, often equating to between 1% and 2% of the Net Development
Value (NDV).

13 Other development costs

The inclusion of other costs within the evaluation will depend on the nature of the development and be
specific to the project. For example this may include inter-tenancy party wall agreements, planning
agreements with the government planning authority and rights of light agreements.
If the developer anticipates there may be a void/vacancy in the time period between completion of
the development and letting the property, then associated costs relevant to maintenance and insurance
must be included. If a lengthy void/vacancy period is anticipated then an allowance will be made for
additional costs such as maintenance and management expenses. If the property development scheme
has been forward-funded by a financial institution then, under the terms of the funding agreement, rent
may be payable to the fund until 100% occupancy of the completed development is achieved. Refer to
Chapter 4 for further details.

14 Contingency allowance
In reality there are relatively few property developments completed exactly on time as originally
planned nor are they likely to adhere exactly to the initial budget forecast. This is partly due to
assumptions about variables incorporated in the original planning phase including forecasts about
future expenses and rental levels. Therefore it is essential to include a contingency allowance to cover
any unexpected costs. However the actual contingency itself is an assumption and will vary between
each project depending on variables such as the risk profile of the developer, the developer’s ability to
plan and execute an accurate development plan, the associated time period, the level of risk/return
built into the proposal and the level of flexibility. In Example 3.1 a flat contingency allowance of 1%
is adopted.

15 Developer’s profit/risk allowance

The residual in an appraisal model is often the developer’s profit/risk allowance and usually expressed
as a percentage of the total development costs or as a percentage of the net development value (NDV).
In accordance with standard economic theory, the level of profit a developer requires will depend
largely on their exposure to risk for the same property development scheme. A higher level of risk will
be commensurate with a higher level of return and vice versa. It is difficult to generalise here but often
developers will seek between 15% and 25% of the total cost. Note that this proportion increases in
correlation with the level of perceived risk. The profit may also contain an element for contingencies
rather than a separate allowance for contingencies.
If the developer is an investor wanting to retain the development after completion, then profit may
be assessed by reference to the yield on development cost (in Example 3.1 it is 9.93%). The yield or
return on cost is the total development cost (excluding profit) divided into the first year’s rental
income. The resulting yield needs to be higher than the yield applied to obtain the net development
value (NDV) (which is comparable to the yields on other similar standing investments) since the
difference between the two yields represents the profit to the investor.
In Example 3.1 the land price used in the evaluation is the asking price and remains unchanged.
However in most scenarios the developer needs to establish what the land price actually is so they can
achieve a fixed target rate of profit. At the same time the landowner or vendor will be seeking to sell at
the highest sale price and may not even quote an asking price. In Example 3.3 we assume the
developer wishes to ensure a rate of profit (risk/return) of 20% on total development costs, so a
residual land evaluation is undertaken to determine an affordable land price.

Example 3.3 Alternative residual valuation

£$ £$
(a) Net Development Value (NDV)
(i) Estimated Rental Value (ERV)
Net lettable area 46,274 ft2 (4,299 m2) @ £$33 per ft2 (£$355.21 per m2) 1,527,048
(ii) Capitalised @ 8.0% YP in perpetuity 12.50
19,088,097
(iii) less purchaser’s costs @ 2.75% 524,923
Net Development Value (NDV) 18,563,175
(b) Development costs
(c) Building costs
Estimated building cost
Gross area 49,500 ft2 (4,599 m2) @ £$145 ft2 (£$1,561 m2) 7,179,039 7,179,039
(d) Professional fees
Architect @ 5% 358,952
Structural engineer @ 2% 143,561
Quantity surveyor @ 2% 143,561
M & E engineer @ 1.5% 107,686
Project manager @ 2% 143,581
897,380
(e) Other costs
(iv) Site investigations - say 21,175
(v) Planning fees – say 7,260
(vi) Building regulations 36,300
64,735
(f) Funding fees
Bank’s legal/professional fees - say 72,600
Bank’s arrangement fee 108,900
Developer’s legal fees – say 60,500
242,000
(g) Finance costs

(i) Interest on (c) building costs, (d) professional fees, (e) other costs and (f) 356,651
funding fees divided by a half (= £$8.38m/2) over building period of 12
months @ 8.25% compounded quarterly = (1.0206)4
(ii) Interest on (c) building costs, (d) professional fees, (e) other costs and (f) 713,303
funding fees (£8.38m) over void period of 12 months @ 8.25% compounded
quarterly = (1.0206)4
1,069,954
(h) Letting and sale costs
Letting agents @ 15% ERV 229,057
Promotion 135,000
Developer’s sale fees @ 1.5% NDV 278,448
642,505
Net total development costs excluding land costs and interest on land costs 10,095,613
(i) Developer’s profit
@ 20% on net total development costs (£$10,095,613) excluding land costs and 2,019,123
interest on land costs
(j) Net Total Development Costs (NTDC) 12,114,735
(k) Residue i.e. NDV less NTDC 6,448,440

This residue is made up of the following elements:

Land price = 1
plus cost of acquisition @ 2.5% 0.025
1.025
multiplied by cost of interest of holding land for development period and void 1.226
(30 months) @ 8.25% compounded quarterly (1.0206)10 =
Total land cost 1.257

multiplied by profit on total land cost @ target rate of 20% 1.2

1.508
The residual land value i.e. the price the developer can afford to pay to ensure
the target rate of profit, is therefore derived as follows:
Residue 6,448,440
Divided by factor (calculated above) to take account of land price, acquisition 1.508
costs, interest and profit as calculated above
Residual land value 4,276,210
Say 4,276,210
This calculation can be checked as follows:
Land price 4,275,000
plus cost of acquisition @ 2.5% 106,875
Total land costs 4,381,875
multiplied by interest for 30 months @ 8.25% compounded quarterly = 992,426
(1.0206)10 = 1.226
Total Land Cost (TLC) 5,374,301
plus Net Total Development Cost excluding profit 10,095,613
Total Development Cost (TDC) 15,469,914
Net Development Value, as above 18,563,175
Less Total Development Cost (TDC) 15,469,914
Developer’s profit 3,093,261
Developer’s profit on cost 20.0%
Note: this result confirms that at a land price of £$4,275,000 the target level of profit of 20% can reasonably be expected
to be achieved.

Discussion point
What is the relationship between risk and return from a developer’s perspective?
3.2.2 Cash-flow method
The conventional method of evaluating a proposed property development, as shown in Examples 3.1
and 3.3, has two basic weaknesses and requires further discussion. The first weakness is being
inflexible regarding the handling of timing relating to when both the expenditure and revenue actually
occur. As a result the calculation of interest costs is inaccurate and may vary substantially. In other
words the evaluation is incorrect unless the projected time period is the exact same length in reality.
Second, by relying on single-figure ‘best estimates’ this hides the uncertainty and assumptions that lie
behind the calculation.
The problem associated with inflexibility as stated in the first point can be overcome by carrying
out a cash-flow appraisal or evaluation that enables the flow of expenditure and revenue to be spread
over the entire period of the development. Therefore the model can present a more realistic and
accurate assessment in tracking development costs and income against the variable of time. As
commonly accepted the amount of compound interest accrued over an extended period of time can
have an adverse effect due to the time value of money and also a compound interest on interest
scenario. Therefore the conventional evaluation shown in Example 3.1 can be presented as a cash-flow
appraisal as shown in Example 3.4.

Example 3.4 Cash-flow approach

Monthly 0.680%
Interest
Rate
Months 1 2 3 4 5 6 7 8 9 10 11 12 13
Cost (£
$000)
Land cost 4,305
Building 200 226 336 541 684 556 563
cost
Professional 58 53 79 50 51 66 105 101
fees
Other fees 10 9 9 9 13 9 6
Funding
fees
Letting fees
Promotion
Sale fees
Tax paid 682 2 0 8 0 46 45 84 50 89 107 109 97
Tax 0 0 0 −682 −2 0 −8 0 −46 −45 −84 −50 −89
reclaimed

(a) Sub- 4997 10.65 0 −606.7 −1.65 99 246.1 388.9 401.3 635.8 782.3 725.4 672.7
total
(Month)

0 5,031 5,076 5,110 4,534 4,564 4,694 4,974 5,399 5,840 6,520 7,352 8,132
(b) Balance
B/F

(c) Total (a 4,997 5,042 5,076 4,504 4,533 4,663 4,940 5,363 5,801 6,476 7,302 8,077 8,805
+ b)

(d) Interest 34 34 35 31 31 32 34 36 39 44 50 55 60

Balance 5,031 5,076 5,110 4,534 4,564 4,694 4,974 5,399 5,840 6,520 7,352 8,132 8,865
C/F (c
+d)

In Example 3.1 by enabling the expenditure to be allocated more accurately over varying timelines
then a better assessment of interest costs is possible. The ‘rule-of-thumb’ conventional evaluation
assumes that building costs would be spread in this way. However in practice the building and other
development costs are seldom spread evenly over this period. In Example 3.4 some of the
development costs are incurred before or at the start of the building contract period, e.g. funding fees
and some of the professional fees. Often the majority of professional fees are incurred during the pre-
contract stage and early in the building contract period since most of the design and costing work is
completed then. Note that in Example 3.4 only 40% of the building cost has been incurred after six
months of the contract, which is the half-way point. The building costs actually follow a normal ‘S’-
curve irregular pattern of expenditure as shown in Table 3.3.

Table 3.3 Normal S-curve irregular pattern of expenditure

Months 1 2 3 4 5 6 7 8 9 10
% Total 3 10 14 22 31 40 48 60 73 85
Costs

The remaining 3% of the costs represent the standard practice of holding a retention sum under the
building contract, usually for a period of six months. The retention sum and period may vary and is
often perceived as ‘insurance’ on the overall property development process.
In normal practice a quantity surveyor is engaged to assess the timing of building costs. Computer
programs are used to accurately calculate the ‘S’-curve for a particular project and then convert these
amounts into expenditure flow. The project manager can assist in assessing the flow of other costs
directly related to the building costs. The timing of all other costs should be capable of assessment by
the developer based on experience.
The cash-flow method enables the developer to budget for an irregular pattern of costs, therefore
allowing for a more explicit presentation of the flow of expenditure and an accurate assessment of
interest costs. It is the nature of property development that the timing of cash-flows is irregular and
uneven. For example a capital outlay for a parcel of land is usually unavoidable as most buildings
cannot be constructed unless the land is owned outright in the first place. In Example 3.4 the total
interest figure (£$2,053,000) is higher than calculated in the conventional evaluation (£$2,049,725) in
Example 3.1. However if based on a different pattern of expenditure with professional fees and
funding fees being incurred later on, then the total interest figure may be lower than shown in Example
3.1.
It is not possible to generalise or include additional assumptions since the conventional ‘rule of
thumb’ method is simplistic but at the same time relatively inaccurate. In this cash-flow example the
interest is calculated on the outstanding balance (including the interest component) at the end of each
month at the rate of 0.68% per month being calculated as12√.00847 in order to equate to the effective
annual rate of 8.47% per annum in Example 3.1.
In this above example the project is a single office development and therefore cash inflows, in the
form of final sale or rent to a tenant, would not generally occur until the entire building is constructed
and ready to occupy. The advantages of the cash-flow method are more clearly demonstrated in
relation to developments where receipts or cash inflows occur during the development period and prior
to final completion of the scheme, e.g. a development of phased industrial units, a major retail scheme
and a residential scheme. Another example would be a large and complex mixed-use development
scheme taking a number of years to complete and therefore could be developed in individual stages. In
this case it may be possible to let or sell the early stages while construction for ensuing stages
continues.
For most businesses the maintenance of a regular cash-flow is critical due to the higher costs
associated with repaying borrowing funds and the effect of compound interest over an extended period
of time. The option of developing a property in stages can be a major advantage in ensuing the overall
viability of the project. Recent developments in construction technology have assisted many building
types to be developed and released in phases. For example some offices in high-rise buildings can be
let or even sold-off therefore allowing the new owners to occupy the lower floors, even though the
upper floors or other sections of the building are still under construction. This example applies to
larger scale projects that can take years to complete where the developer has been creative in their
project management with a desire to commence cash inflows at the earliest available opportunity.
There are other advantages when adopting the cash-flow method. For example this model enables
the developer to easily adjust for variations in the level of interest rates over the development period or
for different sources of finance within the appraisal. In addition, this method requires the developer to
think carefully about the nature of the cash-flow of the project. It highlights, where applicable, the
need to delay outgoing payments and bring forward receipts or cash income. In addition it shows the
developer that cash-flow is an important tool in identifying a competitive advantage over competitors,
which can be achieved both by maximising profitability and reducing the cost of borrowing.
A developer will normally have to produce a cash-flow appraisal to meet the requirements of
potential finance providers where a detailed ‘business case’ is a standard request prior to funds being
advanced. In reality many developers actually use both conventional and cash-flow techniques. They
will use the cash-flow method to calculate the interest cost and input the resulting figure into a
conventional evaluation for presentational purposes. In addition the cash-flow method will be used
throughout the development period to constantly evaluate the project as costs are gradually incurred
and influencing variables vary, such as changes in the level of interest rates in the broader economy.
It is important for the developer to assess the impact of taxation on the project since this may
involve many separate charges for different government authorities and is constantly subject to
change. Rates of taxation are also likely to vary depending on the type of developer and also the type
of scheme under consideration. Furthermore different developers will adopt different vehicles for the
operation of their business. For example a smaller developer may be operating as a private operator
under their own personal name, rather than forming a private company with limited shareholders.
Larger development companies may list on the equities market where shareholders have an option to
buy shares in the company. There are also considerations for insurance and public liability relating to
the decisions about which organisational structure to use, where a company structure may provide
some distance between the company and the personal assets of the developer.
Due to the complexities associated with taxation it is essential for a developer to remain fluent and
up-to-date with all taxation implications or government restrictions relating to money and financial
decisions. The property developer should enlist the services of an accountant, financial advisor and/or
legal advisor to ensure they avoid paying additional taxation costs that could otherwise be minimised.
The objective here is tax avoidance rather than tax evasion. A developer paying higher tax than a
competitor, when other variables (e.g. land cost, building costs, interest rates) remain unchanged, will
be unable to compete in the marketplace and be unable to generate a healthy profit to ensure their own
longevity.
Taxation costs can have a distinct impact on the cash-flow in different stages of a development
project. In some regions it will be possible to recover the tax paid on land transactions and
construction costs if the developer, when subject to approval, elects to then pass on the tax assessment
to occupiers either upon final sale of the completed building or on the rent received from the letting of
the completed building. However a cash-flow implication may occur since there could be a delay
between the initial payment of tax and its subsequent recovery. In Example 3.4 there is a three-month
delay in recovering the tax from the final occupier. In this model the delays have no effect on the
overall interest figure since on larger schemes the delay in repayments will almost certainly impact on
the interest calculation due to the leverage involved. Tax legislation is a very complex area and beyond
the scope of this book to examine all of the implications for each region and country in detail. It is
important to emphasise that a developer must fully assess all tax implications and the direct or indirect
effects on a particular development project when undertaking an appraisal.

3.2.3 Discounted cash-flow methods

A discounted cash-flow (DCF) can analyse and evaluate detailed cash-flow models since they are all
discounted back to the present day using a present value formula to a common point in time to
facilitate an even comparison or analysis. The discounting component acknowledges the relationship
between time and money being especially relevant in property development. For example there is
usually an extended period of time between when the land is purchased and when the building is
completed and cash inflow actually commences.
The ‘cash-flow approach’ in Example 3.4 calculates interest on a month-by-month basis to reflect a
normal development pattern so at any point in the development programme the developer can
determine the level of outstanding debt at that particular time. The time periods can be modified to suit
any time period, such as days or years depending on the intended complexity of the DCF. In addition
to this ‘cash-flow approach’ there are two other cash-flow techniques available, namely the ‘net
terminal approach’ and ‘discounted cash-flow’ (DCF) methods. As Example 3.5 shows, the ‘net
terminal approach’ simply calculates the interest in a different way but produces basically the same
result as the normal cash-flow method. The interest is calculated on each month’s total expenditure
until the end of the development period, i.e. when the development is let or sold and the debt is fully
repaid plus an allowance for profit and risk. Note that the ‘net terminal approach’ will overstate the
amount of debt outstanding at the end of each month and has no advantage to the developer over the
normal cash-flow in Example 3.4. The model displayed in Example 3.4 is in the format of a traditional
cash-flow where the time periods are on the X axis and the variables for each time period are assigned
to the Y axis.
The DCF method is distinctly different as it does not calculate interest on the monthly expenditure.
It sums the income and expenses for every month and then discounts the amount for each month back
to present-day equivalents to determine the value of the profit in today’s money, as opposed to
aggregating at the end of the development. The discount rate used equates to the cost of borrowing the
money and the formula used to convert costs and values to the present day is known as the ‘Present
Value of £$1’, which is 1/(1+i)n (or alternatively (1+i)-n), where i represents the prevailing interest
rate (e.g. 0.075 for 7.5%) and n represents the number of periods (e.g. in months). This formula is the
reciprocal of the amount of £$1 used for compound interest.

Example 3.5 Net terminal approach

Months Cash-flow (£$000) Interest until completion at 0.68% Total (£$000)
1 4997 1.2255 6124
2 10.65 1.2172 13
3 0 1.2090 0
4 −606.67 1.2008 −728
5 −1.65 1.1927 −2
6 99 1.1846 117
7 246.05 1.1766 290
8 388.85 1.1687 454
9 401.3 1.1608 466
10 635.8 1.1529 733
11 782.3 1.1452 896
12 725.4 1.1374 825
13 672.65 1.1297 760
14 828.85 1.1221 930
15 804.1 1.1145 896
16 948.65 1.1070 1050
17 606.65 1.0995 667
18 432.95 1.0921 473
19 −91.3 1.0847 −99
20 −7.2 1.0774 −8
21 −1.25 1.0701 −1
22 405.4 1.0629 431
23 286.45 1.0557 302
24 590.8 1.0486 620
25 −6.6 1.0415 −7
26 0 1.0345 0
27 −75.9 1.0275 −78
28 0 1.0205 0
29 0 1.0136 0
30 278 1.0068 280
Total Development Cost 15,403,006
Net Development Value 18,563,175
Profit 3,160,169

Using the same figures as those contained in Example 3.4 it is possible to build a DCF as presented
in Example 3.6.
Example 3.6 Discounted cash-flow approach
Months Cash-flow (£$000) Interest until completion at 0.68% Total (£$000)
1 4,997 0.9932 4,963
2 10.65 0.9865 11
3 0 0.9799 0
4 −606.67 0.9733 −590
5 −1.65 0.9667 −2
6 99 0.9602 95
7 246.05 0.9537 235
8 388.85 0.9472 368
9 401.3 0.9408 378
10 635.8 0.9345 594
11 782.3 0.9282 726
12 725.4 0.9219 669
13 672.65 0.9157 616
14 828.85 0.9095 754
15 804.1 0.9033 726
16 948.65 0.8972 851
17 606.65 0.8912 541
18 432.95 0.8852 383
19 −91.3 0.8792 −80
20 −7.2 0.8732 −6
21 −1.25 0.8673 −1
22 405.4 0.8615 349
23 286.45 0.8557 245
24 590.8 0.8499 502
25 −6.6 0.8442 −6
26 0 0.8384 0
27 −75.9 0.8328 −63
28 0 0.8272 0
29 0 0.8216 0
30 278 0.8160 227
31 −18563 0.8105 −15,046
Net Present Value (Profit) −2,561
Net Present Value with interest @ 0.068% for 31 months = 3,160,169

The main advantage for a developer employing this approach is where it allows for a subsequent
calculation of the ‘internal rate of return’ (IRR) since this is the barometer used by most financiers and
developers to assess the profitability of a proposed development. Most importantly the IRR considers
both the timing of all individual cash-flows and also the magnitude of each cash-flow. This is in
contrast to examining only a percentage return on overall cost without full consideration to the actual
timing of the cash-flows or alternatively examining the present value of the profit since it doesn’t fully
consider the initial financial outlay and the amount of risk the developer is exposed to. Therefore the
DCF method is more likely to be used by investors wishing to retain a development in their portfolio
and also seeking to analyse the return on their investment.
To calculate the IRR the discount rate is varied by trial and error to identify a rate used to discount
all the future costs and income back to a present value of zero. In other words this is the percentage
return when the project does not make or lose any money after the initial outlay. The IRR is also ideal
when comparing different potential property developments with their own variations in the timing and
size of the cash-flows; for example comparing a small residential development with a large multi-story
office building with both having different construction costs, time periods for construction and final
values. However the disadvantages of this method include that the DCF method does not usually show
the outstanding debt at a specific time and the profit is displayed in today’s value rather than in the
actual sum that will be received at the end of the development.

3.3 Role of uncertainty and risk

Although the relatively simple cash-flow method allows a somewhat accurate and explicit form of
calculation, it does however rely upon a set of fixed variables. The variables acknowledged as the
important components in the calculations, such as building cost and final rent or sale price, are
presented as ‘best estimates’ although without giving a true indication of the range or variance from
which they have been selected. If closely examining a basic example of a conventional evaluation as
set out in Example 3.1 then we can observe that this model is based on a considerable number of
variable factors as listed below.

1. Land costs
2. Rental value
3. Building area based on square footage or square metres
4. Investment yield
5. Building cost
6. Professional fees
7. Time including pre-building contract, building and letting/sale periods
8. Short-term rates of interest
9. Real estate agents’ fees
10. Promotion costs
11. Other development costs.

In this example the land purchase price is fixed and so these 11 variables can be reduced down to the
four main groupings listed below since they will mainly affect the overall profitability of a
development project:

1. Short-term rates of interest

2. Building cost
3. Final rental value or sale value
4. Investment yield.

It is important that the financial information entered into the cash-flow model is as reliable as possible.
In many instances the level of reliability depends on the developer’s experience and assumptions
behind the sources of information the developer uses. Recent developments successfully completed by
a property developer are often a good starting point, however allowances must be made for changes in
supply levels and costs occurred over the time period since the development was completed.
 To a large extent each property developer relies on the professional advice of their development
team to estimate the cost of the main variable groupings outlined above. For example the quantity
surveyor and project manager possess the qualifications and expertise to advise on building costs and
other related costs. The agent will advise on current market rental value and investment yield as well
as the potential final development value. Ultimately the final decision rests with the developers who
must form their own judgement about an estimate of each variable factor. They have to assess the
likely risk of the main variables changing when deciding on the required level of return in the
evaluation process. Therefore it is the property developer who has the largest exposure to risk.
It is essential that the developer uses current and up-to-date rental values and accurate building
costs to reflect income and expenses in every development appraisal. Whilst it is possible to value the
present or historical value of an asset, what happened yesterday is often referred to as ‘driving a car
forward using a rear vision mirror’. What was historically on the road behind us is of little relevance
to what is in front of us now. Therefore future changes in property and rental values will always
remain uncertain due to complexities in the property market and the interaction of many variables and
influencing factors. Accordingly it would not be advisable for a developer to predict future rental
values, even when building costs in the appraisal are inflated at current inflation rates, since this would
expose the developer to a higher level of risk. It cannot always be assumed that increases in building
costs during the period of a development, which is a standard practice approach due to rises in
inflation levels, will be equally met by increases in the final value of the property. The links between
inflation and the property market are very weak.
The rental income, investment yield and building costs are usually the most sensitive variables and
are commonly subject to external fluctuations outside the control of the property developer. In order to
fix the level of rent for the development upon completion, the developer may be able to secure a pre-
let commitment with a tenant. On the other hand to fix the investment yield if the property
development is to be sold on completion, it may be possible to pre-fund the scheme with an
appropriate institutional investor. Either one or both of these options may be achieved before or during
the period of the development project. With this approach, as opposed to the developer placing the
emphasis on the financial risk with the property development, they can now focus on the project
management aspects such as ensuring the project is built within budget and on time. Much of this will
depend upon the quality of project management, but in some cases a fixed price construction or
building contract may be secured. The downside to adopting either one or both approaches is that by
reducing or effectively sharing the risk then the developer must also expect to share the profit, thus
limiting their potential reward.
An understanding of the complexities of risk is essential for a successful developer. This is not to
be overstated. Risk is embedded throughout the property market and is the starting point for every
analysis involving property and practically all investment decisions. The two major types of risk
affecting a property are broadly referred to as either systematic (i.e. market) risk or unsystematic (i.e.
property-specific) risk. Most importantly a developer should never underestimate the effect of risk
therefore the level of risk in every development scheme should be carefully identified and, if possible,
contained or reduced. It is important to remember that as the development process progresses then the
developer’s commitment increases and the possibility of variation decreases, where these both equate
to a higher degree of uncertainty and associated risk.

Land cost
As previously discussed in Chapter 2 the purchase price of the land, either vacant or partially
improved with an existing structure of some form and condition, is usually the first major financial
commitment. In order to reduce exposure to risk a site should not be purchased until the appropriate
planning permission has been obtained and the detailed building cost confirmed. If this is not possible,
the developer should try to negotiate a conditional contract subject to the obtaining of a satisfactory
planning consent; this approach is standard procedure for many property sales. If the outcome of the
planning application is uncertain at the date of agreement then it may be possible to negotiate an
option to purchase the land before a future date once planning permission has been obtained. On the
other hand a joint venture arrangement might be entered into with the landowner whereby the land
value plus any accumulated additional ‘notional’ interest might be calculated at a future date during
the development period.
Once the land is purchased then the developer is fully committed to a particular location and cannot
be changed, which in turn has a major influence on the highest and best use of the land. In other words
the value of the land and any new property development scheme constructed upon it may be affected
by external physical factors such a new road or rail network. Depending on market conditions the
developer may be able to make a profit by simply selling the land prior to the commencement of the
development scheme. Once planning consent has been obtained then the value of the scheme can be
established, although further applications may be made to improve the value of the site. Planning
applications take time and any improvement in value that might be obtained needs to be balanced
against the costs of holding the site over an extended period of time. To gain some cash-flow some
developers acquire short-term incomes via the use of carparking or providing areas for takeaway food
trucks.

Building cost
The building construction cost is the second major financial commitment or capital outlay in
combination with a number of other costs (e.g. professional fees) relating directly to the final sum.
After signing the building contract then the developer is committed to certain construction costs that
invariably will trend upwards although rarely downwards, partly due to the effect of inflation over the
construction time period. Furthermore many of the cost increases incurred during the development
period result from the developer’s variations or late production of information by the professionals
responsible for the design. These are matters over which the developer must exercise very tight
control. There are ways of making the building cost more certain including passing some or all of the
risk and design responsibility onto the building contractor, although greater certainty of cost usually
means a higher building cost. These aspects are described in greater detail in Chapter 7.
Project management skills are of vital importance when preventing both increased building costs
and time delays, as well as decreasing the risk the builder may pay additional penalty rates for a late
handover, i.e. the date of the handover is substantially longer than the agreed contract date. In many
instances the employment of an experienced project manager is strongly advisable. Furthermore it is
important that the developer and/or project manager constantly monitor every aspect of the building
contract in order to identify and contain any problems before or when they arise.

Rental value
It is essential to obtain the most reliable up-to-date estimate of rental value. Due to the relatively large
space and net lettable area (NLA) of some property developments, any small errors in the rental
estimates on a rate per m2 basis can have an adverse effect on the final estimated aggregate income. A
reliable estimate of rental value must be undertaken via a thorough analysis of the prevailing market as
well as in consultation with the nominated real estate agents if they are to be appointed. However the
level of uncertainty associated with achieving an estimated level of rent can be removed if a pre-
letting to tenants upon completion is achieved.
Due to the nature of the property market when the development is eventually completed there may
be an over-supplied market and the property may be difficult to let. There is no central register of
developments in a decentralised property market so a competing development could commence
anytime. Some developers might not proceed with a particular development until a pre-letting is
achieved to reduce a considerable element of the risk involved. For example a developer of an office
business park scheme or a large industrial scheme may initially provide all of the necessary
infrastructure and landscaping and then build each additional element as required on a pre-let or a
‘design and build’ basis in order to meet demand. At times a property developer may build one or two
speculative units to show potential occupiers the type of building that could be provided and then
adapted to suit their individual requirements. Quite often the developer of a major shopping scheme
needs to secure the major tenants or anchor tenants for larger units at an early stage in order to later
attract other retailers to invest in the smaller ‘unit’ shops. Financiers and lenders are often reluctant to
commit to lending money unless there has been a substantial level of pre-let or pre-commitment in
order to reduce the perceived leasing risk.
The developer needs to evaluate the benefits of achieving a pre-letting, and therefore reducing risk,
against the opportunity costs of achieving a potentially higher profit in a rising market. For example
during the period of time it takes to complete the development scheme the level of market rents may
increase. Alternatively there may be higher tenant demand when the development is nearing
completion and therefore a prospective lessee can actually visualise the lettable area, rather than just
using architectural drawings or 3D visualisation. In the case of anchor tenants in a shopping scheme
the developer may have to pay a ‘reverse premium’ to the retailer to secure a pre-letting and ensure the
overall property development will receive approval from the financier. Clearly the cost of such a
premium must be accounted for in the development appraisal. An additional advantage of securing a
pre-letting is to reduce the overall development timetable before any income is received, since the
building will be handed over on completion without the added risk or uncertainty of a void/vacancy
period and unknown additional interest payments.

Short-term interest rates

Unless the property development scheme is being entirely financed by the developer, funding
arrangements need to be in place before any major commitment is made. In obtaining the essential
finance to acquire the land and build the scheme, the developer will be exposed to fluctuations in
short-term interest rates. However, at a cost, the developer has the option to either fix or restrict the
level of interest rates (see Chapter 4). If the developer agrees to an agreement with a lender based on
the forward-funding of a property development scheme, then the interest rate agreed with them may be
fixed.

Investment yield
Investment yields are dictated by decisions of stakeholders in the property investment market, being
the relationship between the total value of the completed property developments (including
improvements) and the total annual rent received. This relationship may vary at any particular point in
time according to market factors such as the supply of competing developments, investor
demand/sentiment and rental growth. However the uncertainty of the yield changing over the period of
the development can be removed if the scheme is pre-sold or pre-funded. If a development scheme is
pre-sold to an owner-occupier then the developer is actually performing the role of project manager.
With a pre-funding the developer secures both short-term and long-term finance by agreeing to sell the
completed and fully let development scheme to the financial institution/lender. Although the developer
still bears the risk of securing an acceptable tenant on satisfactory terms and controlling building costs,
as with pre-letting, the terms negotiated prior to the commencement of the scheme are likely to be less
favourable to the developer than those negotiated at the end of the project. The developer’s chances of
securing pre-funding substantially improve if a pre-letting is undertaken.
 When a developer is evaluating how to reduce their exposure to risk, a balance needs to be struck
between profit and certainty being commonly referred to as the ‘risk/return ratio’. In general terms the
greater the level of certainty then the lower the amount of potential profit. This scenario can be
observed throughout society from gambling on horse racing to evaluating the odds of success with
teams in sporting events. The level of risk a developer is prepared to accept will depend largely on
their motivation at that specific point in time. Occupiers, contractors, financial investors and the public
sector involved in the property development process will each be seeking to reduce risk as low as
possible, although property development companies typically will often be willing to accept a much
greater degree of risk in return for higher rewards. Risk is accepted as a major part of the property
development process.
The level of risk is usually directly related to the complexity and scale of the proposed
development. For example at one extreme there is a small self-contained office block pre-let to a major
corporation, which therefore represents a very limited degree of exposure to risk by the developer. At
the opposite extreme there is a substantial degree of risk involved in assembling, over a substantial
period of time, a large town centre site suitable for a comprehensive mix of uses including shops,
offices and residential. In instances where a high degree of exposure to risk is perceived it is common
for a developer to seek additional development partners in order to share both the risks and rewards.
Uncertainty to some degree is unavoidable in the process of appraising development opportunities
and substantial attention is given to pre-project evaluation to identify and evaluate the optimal balance
between risk and reward. The fewer assumptions to be relied upon will directly reduce the overall risk
associated with a particular development scheme, which in turn will increase the likelihood of
successfully completing a development scheme. The cost of a detailed evaluation and the additional
time requirement usually leads to greater savings of cost and time. However the additional time
available to the developer at the pre-project evaluation stage is usually very restricted, especially in a
competitive tender situation. In this type of scenario the developer’s judgement and expertise are
critical.
Establishing the economic viability of a proposed development scheme and the particular
characteristics of the marketplace, prior to committing to the major financial liabilities associated with
land and building costs, is essential. Only after this evaluation has been prepared and closely examined
by the development team can a decision be made as to whether or not it is prudent to purchase or lease
a particular site and, if so, under what terms and conditions. Often a financial component of a property
development, such as the initial land purchase price, may be higher than initial market expectations.
Any additional money outlaid for the land purchase must be deducted directly from the developer’s
profit, which in turn may result in the project not being viable. It is essential for individual variables in
the assessment to be accurate and each variable reflects current market value since the income
components will be based on their current market value.

Discussion point
Why is risk considered to be unavoidable in a property development?

Sensitivity analysis
A critical question within the evaluation process relates to how a developer measures the level of
uncertainty involved in a particular property development scheme and therefore how much profit is
required to balance the resultant risk. Developers are often criticised for not sufficiently understanding
and analysing their exposure to risk. This is a valid criticism as property developers can underestimate
the level of risk and therefore a project may not reach completion due to unforeseen problems. As a
result it may remain half-completed and will perhaps have a negative value since it needs to be
demolished. On the other hand a developer cannot afford to be too conservative as they may never be
successful in securing a site. A careful balance has to be struck that relies entirely on the developer’s
judgement and experience. It is important to identify and examine possible methods of analysis
currently available to assist the developer to accurately quantify the level of risk.
Once the land price is confirmed then the main variables of the evaluation can be identified
including the short-term rates of interest, building cost, rental value and investment yield. In most
cases the financial outcome of the development is more sensitive to their variability than to the
variability of the other factors previously stated since they are the highest proportional values/costs in
the evaluation. For example a 10% increase in the interest rate is likely to have a larger overall impact
on profitability than a similar increase in building costs.
The common reference allocated to the procedure for testing the effect of variability is ‘sensitivity
analysis’. Given the nature of the property market with many variables constantly in a state of change,
the assessment of a potential project must acknowledge this risk and have an in-built capacity to adapt.
Accordingly if one or more factors in the evaluation or appraisal model can be varied then the effect
on the viability can be measured and recorded. This procedure can then be repeated with the different
outcomes compared. For example if we take the appraisal set out in Example 3.1 then we can carry out
the sensitivity analysis shown in Table 3.4.

Table 3.4 Sensitivity analysis and effect on adjusted developer’s profit

Original value less Original value plus
Variable (original value) 10% 10%
Land price (4,200,000) 25.02% 16.72%
Interest rate (8.25%) 22.45% 19.04%
Building costs (£$1,421 per m2) 28.33% 13.98%

Rent (£$322.92 per m2) 9.02% 32.37%

Gross area and net lettable area (4,599 m2 / 49,500 ft2 and 4.299 m2 15.90% 24.99%
/46,274 ft2)
Professional fees and other costs 21.59% 19.89%
Capitalisation rate (8%) 33.88% 9.94%
Funding fees 20.95% 19.95%
Letting and sale costs 21.02% 20.45%
Developer’s sales fees 20.95% 20.51%

This analysis confirms the outcomes of the appraisal model are most sensitive to changes in
investment yield, rent and building cost. For example if it is assumed a change in investment yield is
unlikely over the total development time period then it is possible to concentrate on the effect of
possible variations in rent and construction costs. Suppose the range of possibilities a development
team considers appropriate is a range of rents between £$330 and 380 per m2 per annum and a range
of building costs between £$1,300 and 1,800 per m2. At this stage the discussion is about
‘possibilities’ and not ‘probabilities’ where the range of each is likely to be rather wide. The matrix in
Table 3.5 shows the level of developer’s profit expressed as a percentage, i.e. profit as a percentage of
total development value.
The potential range of possible outcomes for the developer’s profit is extremely wide and varies
between +9.02% and +33.88%. The next step for the developer is to narrow the focus by concentrating
on the most likely or most probable outcomes. For example as a result of discussion among the
development team, the outer limits of the ranges of rent and building cost are excluded as being
possible but unlikely. The developer can now concentrate on a narrower range of outcomes in Table
3.5.

Table 3.5 Level of developer’s profit expressed as a percentage (i.e. profit as a percentage of total
development value)

Rent (£$) per square metre

330 340 350 355.21 360 370 380
Building cost (£$) per square metre 1,300 24.82% 24.87% 32.11% 34.00% 35.74% 39.37% 42.99%
1,400 19.76% 23.27% 26.77% 28.59% 30.26% 33.74% 37.22%
1,500 15.10% 18.47% 21.84% 23.59% 25.20% 28.56% 31.91%
1,561 12.43% 15.73% 19.02% 20.73% 22.30% 25.59% 28.86%
1,600 10.78% 14.04% 17.28% 18.97% 20.52% 23.76% 26.99%
1,700 6.78% 9.92% 13.05% 14.68% 16.18% 19.70% 22.42%
1,800 3.06% 6.09% 9.12% 10.69% 12.14% 15.16% 18.17%

Although this approach seeks to narrow down the focus to what is more probable, the actual range
of possible outcomes still remains wide. A developer’s profit ranging between +3.06% and +42.99%
gives an indication of the real uncertainty behind the appraisal model. The developer must now try to
evaluate all possible outcomes and assign to them, either objectively or subjectively, some level of
probability for each estimate of rent and building cost. However the original ‘best estimates’ of £
$355.21 per m2 per annum rent and £$1,561 per m2 building cost in the final model may be selected
since the context of possibility and uncertainty is now better understood. On the other hand an attempt
may be made to fix one of the variables in one of the ways discussed above. For example if a pre-
letting contract is agreed at £$340.00 per m2 per annum this will narrow the range of likely outcomes
to between +6.09% and +24.87%. Based on these figures the maximum profit of +34.00% decreased
to +24.87% however the minimum level of profit only decreased from +10.69% to +6.09% and the
degree of uncertainty has been reduced. It is this evaluation of trade-off scenarios made possible by
using a sensitivity analysis and by the understanding of probabilities, particularly when they are
matched to the use of cash-flow appraisal models.
This was an introduction to the concept of sensitivity analysis based on relatively simple examples.
When conducting a sensitivity analysis in the initial evaluation stage the developer evaluates the
relationship between risk and reward. The level of uncertainty in the project is therefore a very
important factor. Uncertainty can be reduced if it is possible to improve any of these above-mentioned
four identified variables.
Conventional methods of evaluation do not provide any indication of the uncertainty that is an
inherent part of the development process. Whilst cash-flow methods of appraisal overcome the
inaccuracies of the conventional approach, they still only represent a ‘snapshot’ of the viability of the
scheme. Conducting a sensitivity analysis is an important tool the developer can utilise in the decision-
making process to provide a reliable measurement of the risk of the development scheme. It ensures
the developer is very specific about the assumptions and estimates made in its role as a decision-
support tool. Note it assists but does not replace a balanced and informed decision-making process.
There is a danger of relying too heavily on the output figures produced in the financial evaluation of
a scheme. A developer must avoid the danger of using this evaluation process to justify a development
project that may look good on paper, often referred to as listening to their own warning signals or their
‘gut’ feeling. Although an evaluation modelling process must be thorough and based on the best
information available it should be approached from the point of view of downside risk or worst-case
scenario, i.e. what can possibly go wrong can therefore actually go wrong. Even if the figures indicate
a viable scheme the developer should always research the market for other proposed competitive
developments in the particular location (see Chapter 8).

3.4 Reflective summary

This chapter examined conventional methods of evaluation used by developers to assess the
profitability of a development scheme and/or identify the maximum initial purchase land price,
given a required return, for a specific site. It has been acknowledged that some aspects of the
conventional methods of evaluation are rather basic and inaccurate. This inaccuracy in the
calculation of interest costs can be addressed by using cash-flow modelling techniques including
the net terminal approach and the DCF. All methods discussed only produce a residual figure
based on best estimates at the date of the evaluation, therefore hiding the true level of uncertainty
regarding the final outcome of the completed development. Sensitivity analysis and
comprehensive modelling of underlying market conditions can improve the developer’s
understanding and provide important insights into the level of their exposure to uncertainty and
risk.

3.5 Case study: contaminated land risk – Barkly Street development

The risks associated with contaminated land, at times being quite substantial and expensive to
remediate, are usually not clearly visible on an initial site inspection as the contamination is located
beneath the land surface. If this contamination is ignored or underestimated in any respects, there may
be adverse effects on any future property development. As many property developments are usually
conducted on land that was previously in use (e.g. similar land use or alternative land use), including
rural land, it can be argued that practically all land in developed countries are contaminated to some
extent. Based on a worst-case example some level of contamination may later be identified after the
project has commenced, however decontamination can usually only be comprehensively undertaken
with vacant land (i.e. no structural improvements). Hence there would be a major problem with
rectifying this type of scenario. If a property development was nearing completion with accompanying
new structures erected, then to correctly decontaminate the land these structures would need to be
demolished prior to occupancy. Consequently the developer would need to provide funds for two sets
of new structures and the demolition of one structure, decontamination costs and substantial interest
costs over a long and extended period or many years. The end result would be a failed property
development where this scenario forms the basis for this case study.
This case study examines a large completed project constructed on a highly contaminated site that
was not adequately decontaminated prior to constructing structural improvements for the property
development. After considerable financial outlay over two decades, the development was eventually
completed some years later and all 65 residential units in the second development were then sold. For
this project the total time period included the initial construction of 49 residential units to final
completion stage by the first developer, demolition of these same buildings (before any occupancy), a
period of uncertainty and disrepair over some years, decontamination phase, followed by construction
of 65 residential units by the second developer and then the final sale. Note the final sale of the
development was recognised as an award-winning project by industry and claimed as a success by the
second developer (ID_Land 2020). The initial underlying contamination can be traced directly back to
the previous use of the site by a long-standing high-profile dry-cleaning business; therefore with this
‘red flag’ the site was never suitable for residential use without addressing the obvious contamination
question. In other words there were clear errors of judgement made in the initial property development
that should not have proceeded before extensive decontamination. Refer to the timeline of events in
Figure 3.2 that highlights the flawed decision-making process.

Figure 3.2 Timeline of events (note: not to scale)

(Status in 1992) A large, high-profile dry-cleaning business that operated for many decades ceased
operation on the development site. The dry-cleaning business potentially contaminated its own site via
chlorinated hydrocarbons and also degraded white spirit or naphthalene. Both contaminants are
extensively used in the dry-cleaning business.
(Status in 2001) Planning permit was granted to first developer for construction of 49 units.
Construction then commenced.
(Status in 2003 – see Figure 3.3) Construction was completed, however final approval to occupy
was not granted by government authorities due to the existence of contamination in the soil.
Figure 3.3 Status in 2003

(Status in 2006 – see Figure 3.4) In desperation the first developer attempts to sell entire
development of 49 units at a discount due to the existing contamination in the soil.
Figure 3.4 Status in 2006

(Status in 2007) The completed project remains unsold and then falls into a state of disrepair for
years. After an extended period of uncertainty the vacant development is vandalised and occupied by
squatters.
(Status in 2012 – see Figure 3.5) The original new structures were demolished and
decontamination then commenced. Deep excavation was undertaken to remove the decontaminated
soil.
Figure 3.5 Status in 2012

(Status in 2013 – see Figure 3.6) Eventual decontamination of the site was completed by the
second developer.
Figure 3.6 Status in 2013

(Status in 2014 – see Figure 3.7) A completed development consisting of 65 units was promoted
by the second developer following decontamination. Note this is an increase of 16 units over the
previous design.
Figure 3.7 Status in 2014

(Status in 2016 – see Figure 3.8) Completed award-winning development bysecond developer. All
65 units were marketed as ‘The Barkly’ and in high demand by prospective purchasers. All units were
fully sold within three months.
Figure 3.8 Status in 2016

This case study has highlighted the challenges associated with failing to undertake a thorough due
diligence process from the start of the development process. Most often if a property development
opportunity appears to be priced well below market value or the property has been on the market for
some time, there are unforeseen reasons for this. Clearly this particular site was never suitable for
development without (a) the previous owner acknowledging the need for decontamination of the site
and (b) the property developer allocating sufficient funds for the decontamination. In this case study
there were substantial indirect and unavoidable costs that can adversely affect the property developer’s
viability as well as their long-term reputation. Another downside is the overall uncertainty associated
with the development when seeking project closure. The length of this period could equate to years or
decades, resulting in a detrimental effect on holding costs and then cash-flow.
At times a contaminated property may have a negative value and may not be viable as a potential
development site without substantial external stakeholder (e.g. government) involvement. Some
contaminated sites may remain vacant over the long term until the market improves and a
development (including decontamination costs) becomes financially viable. The engagement of
specialised advice to examine the soil below the surface is essential since this expertise is clearly
outside the expertise of most property developers. A successful developer must fully consider all risks
associated with a site, both direct and indirect, prior to deciding to acquire a site or pass on the
opportunity. With contamination there are no shortcuts, as highlighted in this case study.

References and useful websites

BOMA (2020) BOMA Floor Measurement Standards, Building Owners and Managers Association International,
www.boma.org/BOMA/BOMA-Standards/Home.aspx (last accessed 29 April 2020).
Hudson, P. (2020) ‘The affordability of flood risk property-level adaption measures’, Risk Analysis, 40:6, pp.
1151–67.
I-Chun, C., Chuo, Y. and Ma, H. (2019) ‘Uncertainty analysis of remediation cost and damaged land value for
brownfield investment’, Chemosphere, 220, pp. 371–80.
ID_Land (2020) www.idland.com.au (last accessed 4 August 2020).
International Valuation Standards Committee (2019) International Valuation Standards, London,
www.ivsc.org/standards.
IPMSC (2020) International Property Measurement Standard, International Property Measurement Standards
Coalition, https://ipmsc.org/standards/ (last accessed 29 April 2020).
Lakshmanan, T.R. and Button, K.J. (2019) ‘Institutions and regional development’, in Handbook of Regional
Growth and Development Theories, 2nd edn, Edward Elgar, pp. 527–49.
Popovic, G., Stanujkic, D. and Karabasevic, D. (2019) ‘A framework for the evaluation of hotel property
development projects’, International Journal of Strategic Property Management, 23:2,
https://doi.org/10.3846/ijspm.20197435.
Puschel, V. and Strobel, J. (2019) ‘Real estate economics’ in Proceedings of the 26th Annual Conference of the
European Real Estate Society, 3–6/07/2019, Paris.
RICS (2020) RICS Property Measurement, Royal Institution of Chartered Surveyors, www.rics.org/uk/upholding-
professional-standards/sector-standards/real-estate/rics-property-measurement-2nd-edition/ (last accessed 27
April 2020).
Sari, Y. and Prayogi, L. (2019) ‘Application of value management by real estate development practitioners: a
review of enticing factors’, International Journal of Built Environment and Scientific Research,3:1,
https://doi.org/10.24853/ijbesr.3.1.15-20.
Yoe, C. (2019) Principles of Risk Analysis, 2nd edn, Taylor & Francis.
Chapter 4

Development finance

4.1 Introduction

The majority of property developments can only be undertaken with the assistance of funding from an
external third party source. This is because a developer does not normally possess 100% of the cash or
liquid financial capital readily available required to pay for all development costs incurred during the
lifetime of the development. This third party provider is most often a lender/financier, institution or
syndicate with funds to lend in return for interest on the capital plus administration costs. This capital is
required to fill the financial difference between the developer’s available equity, or cash equivalent, and
the total cost of the project including all associated expenses over the development period until
completion (Barnett and Sergi 2019).
There are two main forms of finance required for undertaking a property development:

a. short-term finance to pay for the initial development costs, i.e. land purchase, construction costs,
professional fees and promotion costs; and
b. long-term finance to enable a developer to repay their short-term borrowing/loan and either realise
their profit via selling or retain the property as an investment with tenants.

The decision about selecting one of these options depends on variables such as the developer’s
motivation, their financial situation and the prevailing market conditions. In this chapter we examine the
different sources of finance available to developers and discuss the various methods of financing a
development scheme via worked examples.

4.2 Sources of finance

Most developments are funded by a combination of equity (i.e. supplied by the developer) and finance (i.e.
supplied by the lender) (Parsons 2014). In these scenarios the lending institution has exposed their funds to
part of the risk associated with the development, although at the same time it also charges the developer an
interest and service charge expense designed to commensurate for the level of risk exposure, inflation (ONS
2020) and an allowance for profit (Reed 2014). As with other service providers there is a diverse range of
financial lenders of varying size and expertise where each financial lender will have its own acceptable level
for exposure to risk and may specialise in certain lending projects over varying timeframes. A developer must
consider their choice of financier carefully to ensure the type of funding is best suited to an individual
project. For example after the global financial crisis (GFC) the lending restrictions were tightened even
further due to the very high number of bad debts. As a result any borrowed funds were harder to obtain, were
more costly and also required a larger proportion of equity outlay from the developer.
In many countries the clearing and merchant banks have been providers of short-term development
finance where long-term investment finance was provided by financial institutions (e.g. insurance companies
and pension/superannuation funds) and property investment companies. At times financial institutions also
assume the role of short-term financier by forward-funding development schemes; for example where they
provide the necessary interim development finance to a developer and then agree to purchase the property on
completion of the scheme. Real Estate Investment Trusts (REITs) have increasingly been an additional and
alternative source of funding for property (LSEG 2020).

4.2.1 Historical perspective

The role of the development financier varies depending on factors such as the position of both the business
and property development cycle at any particular time in relation to the credit cycle. It is important to note
that financiers are in the business of making money where real estate is only one of a number of assets they
can invest in and also lend money against, with other competing assets including equities/shares and cash
(Brueggeman et al. 2018). However real estate generally offers the financier a relatively secure form of
investment since each financier can hold a binding mortgage or first claim over the land component including
any improvements affixed to the land. The real estate security is linked to restrictions placed on the property
title, where the property owner is unable to transfer or sell the land without first removing the mortgage and
any other temporary encumbrances on the title. In other words the first step for a prospective purchaser is to
undertake a search and ensure the property’s ownership title is clear and mortgage-free; this ensures a first
mortgage has a priority claim to be repaid even before money is received by the existing property owner.
Each of the various financier groups will have different motivations and liabilities, which in turn
influences their policy towards property as either an investment or as a security against a loan. Developers in
most countries have the ability to move from one financial source to another, depending on the
investor/lender’s attitude and lending policy at any particular time. Many decades ago the roles of the short-
term financiers (e.g. the banks) and the long-term financiers (e.g. insurance companies) were quite separate
where developers usually retained their completed developments as long-term property investments. Short-
term finance was typically provided by clearing or merchant banks in the form of loans secured against the
site and sometimes also the buildings. Long-term funding, often pre-arranged, can be provided by insurance
companies via the use of fixed-interest mortgages. In certain scenarios a development would not be retained
by the developer however sold as an investment to an insurance company or alternatively directly to an
occupier. With the exception of some merchant banks it is not common for the financiers to participate in the
profit or risk of the development.
Since inflation has become a permanent feature of the economy in many western countries (World Bank
2020), many insurance companies acknowledged the disadvantages of granting fixed-interest mortgages and
sought to benefit from the rental growth. At the same time long-term interest rates rose and developers were
faced with an initial shortfall of income over mortgage interest and capital repayments, often referred to as
the ‘reverse yield gap’, which has practically remained a permanent feature of property financing.
Consequently insurance companies were less inclined to grant mortgages forcing property developers to give
away some share of future rental growth in order to close the ‘gap’. In turn the insurance companies became
more directly involved with the direct ownership of property. In addition an increasingly active property
investment market emerged and the traditional division of the roles began to blur.
To initially attract the optimal investments available in the marketplace many long-term investors
competed with and took on the additional role of the short-term financiers. Simultaneously some of the
traditionally short-term financiers, such as the clearing banks and the merchant banks, began to seek a share
in the equity of the development itself. As the competition for the blue chip or prime investments increased
then some of the insurance companies and pension funds, either on a project basis or by the acquisition of
property companies, began to take on the role of the developer and accepted an additional element of risk in
return for a marginally improved long-term yield. The funding of developments on a long-term basis became
dependent on the property satisfying the criteria of investors so developers initially had a much wider choice
of financial sources.
Generally speaking, property markets are cyclical in nature and also increasingly globally interconnected
partly due to technological advances and the instant availability of information about other markets including
financial details. The provision of funding for property development has become more challenging since
banks and other financial institutions have been less willing to lend money than in previous cycles when it
was freely available. Following the lessons learnt in market downturns limitations and restrictions were put in
place in relation to development finance. The cyclical nature of the property market in the twenty-first
century, including the GFC, included periods when much of the proposed development was bought to an
abrupt halt and only those developments already in progress or with funding previously arranged were able to
continue. The reluctance on the part of investors to fund schemes in market downturns will continue to
prevent large-scale development and governments may also be less willing to invest in infrastructure to
support new developments. At times some developers will also face higher risk premiums and greater
constraints on proposed schemes. For example in some sectors the level of public sector spending has been
cut therefore developers can no longer expect financial support from the public sector. This has forced
developers to look elsewhere for development finance.
Despite institutional lenders’ risk-aversity and reluctance to fund new developments, the first two decades
of the twenty-first century witnessed a variety of new financiers entering the marketplace who were keen to
increase their market share, coupled with the availability of immediate up-to-date information via the
internet. In the present day there is a large amount of information available about different funding sources,
as well as third party organisations and websites reviewing the attributes of each option. Whilst the global
information age may offer an enormous selection of financiers who are not necessarily even based in the
same country, it is important for a borrower to be fully aware of the regional conditions attached to any loan.
For example, fee structures can vary considerably between financiers and the developer should pay attention
to the detail in the loan documents.
The increased level of competition has also opened up the lending market to a myriad of new products,
which in turn have associated lending fee structures and loan lengths. Whilst the borrower has benefited from
the wider choice and availability of different financial products, such as REITs, it still remains fundamentally
critical for a developer to spend adequate time reviewing the risk profile and suitability of each financier.
Over time there were variations in different sources of finance for real estate developments and it is
worthwhile to reflect on historical trends. For example in many instances the traditional banking sector was
the dominant source of finance during the late 1980s development boom being further encouraged by the
rapid increase in rents and capital values caused by occupier demand. This was during a period in the mid-
1980s when institutions reduced their lending for property investment in exchange for the superior
performance of other forms of investment such as equities (i.e. stocks and shares) compared with the poor
performance of property in the early 1980s. At the same time many real estate developers preferred to obtain
short-term ‘debt’ finance from banks to enable them to sell their completed development in a rising market.
Alternatively some real estate developers were able to secure medium-term loans or refinance initial short-
term loans so they could retain their developments as investments. It is commonplace, in accordance to
economic supply and demand principle, for new financiers to enter the commercial property market including
foreign banks, foreign investors and to a lesser extent building societies.
With a cyclical downturn in the property market occurring in 1990 there was reference made to the
combination of the economic recession, high interest rates and an over-supply of new buildings. This was a
similar scenario with the GFC in the early twenty-first century as well. In both scenarios the banks were
exposed to excessive ‘bad’ property debt and many development companies went into receivership. In turn
this had the effect of driving yields down, although there was a period of relatively stable yields in the next
phase of the cycle. This stability is due to numerous factors including increased competition for and lack of
availability of ‘prime’ stock, a tighter monetary policy and enhanced research information available to lessen
investment risk.

Discussion point
What is the relationship between property cycles and the availability of finance to real estate
developers?

4.2.2 Financial institutions

A ‘financial institution’ or ‘financier’ are the generalised terms used in the property and real estate industry to
describe pension or superannuation funds, insurance companies, life assurance companies, investment trusts
and unit trusts. These entities invest in property both directly and indirectly through the ownership of shares
in property investment companies and property development companies, being different from investment in
REITs as traded on the stock/share market. Direct property investment includes the ownership of completed
and tenanted/let developments, the forward-funding of development schemes and the direct development of
sites and existing properties.
Pension funds vary considerably in size and include the individual occupational funds managed
exclusively for the employees of former/present nationalised industries and large publicly quoted companies,
together with company and personal pension schemes managed by insurance and life assurance companies.
They invest the premiums paid by the clients to achieve income and capital growth in real terms so they can
meet the future payment obligations of pensioners on retirement. In many ways real estate is ideally suited as
this type of vehicle since it is a secure and long-term investment. Many pension funds and schemes have
been under pressure due to the approaching maturity of their schemes (i.e. the ratio of expenditure on
pensioners to income received from premiums is increasing), since this has placed the emphasis on cash-flow
and real income growth. In addition many pension schemes are linked to the final salaries of employees
therefore adding to this pressure as incomes have generally continued to rise above the inflation rate. Listed
in Appendix 1 is the level of CPI by country between 2010 and 2019. This table highlights the variations in
CPI on an individual country basis; for example in 2019 this ranged from a high of 60.50% (Angola) to
-379.85% (South Sudan). Reference should also be made to the volatility over this period for each country
and the subsequent effect on overall investment sentiment. Life assurance companies and insurance
companies invest premiums they receive from life and general insurance policies, respectively, to ensure
long-term income growth to meet payment obligations if and when they occur.
Unit trusts are typically managed by financial institutions offering investment management services, e.g.
merchant banks. A unit trust comprises of unit holders, such as smaller individual investors and institutions,
who are unable to take on the entire risk of direct investment by themselves. The trust will manage a portfolio
of shares on behalf of the unit-holders so they benefit from diversification and obtaining a reasonable spread
of risk. There are two types of unit trust specifically investing in property as follows:

a. authorised property unit trusts being unit trusts that are strictly regulated to ensure they invest in a
diversified portfolio of low-risk prime income producing property as part of a balanced portfolio, since
their investors include private individuals; and
b. unauthorised unit trusts being unit trusts that are unregulated, investing directly in a portfolio of
properties and therefore are attractive to tax-exempt financial institutions such as charities and small
pension funds.

The underlying primary goal of these financial institutions is to maximise returns to their shareholders whilst
at the same time minimising exposure to risk and adopting a conservative approach with every investment,
especially since they are trustees of other people’s money and are therefore under constant pressure to
perform. In other words the emphasis is placed on providing a return commensurate with a relatively low
degree of risk. They invest in property and real estate as an alternative to other forms of investment, such as
stocks and shares (equities), together with bonds and gilts (fixed-interest income). The extent to which a
financial institution or lender will invest in property largely depends on their investment strategy, the size of
the fund and the nature of liabilities in their overall portfolio. It will also vary according to the state of the
economy and the historical performance for property investments relative to other alternative investments.
Even though they are long-term investors they take a short-term view of performance, being strongly
influenced by the recent performance of each type of asset however they do forecast future trends.
We need to consider the advantages and disadvantages of investing in property from a financial
institution’s point of view. It is important to identify and appreciate factors influencing the investment
decisions of financial institutions since this affects the funding and also sale of completed development
schemes.
Hedge against inflation
One of the main reasons why an institution would initially enter the property investment market is because
property represents a ‘hedge against inflation’ (Reed 2014). In other words the level of rental growth for a
certain property may outstrip inflation and therefore represent an opportunity to achieve income gains in real
terms when the level of inflation is deducted. During periods where the consumer price index is relatively
volatile, price levels for goods and services grow rapidly and the direct costs associated with labour and
materials for constructing a new building also increased over the same period, which in turn adds to the total
cost of a new property development. As the level of the interest rate is linked to the prevailing inflation rate at
a given point in time, this also adds further costs to the project. However over the last couple of decades and
coupled with the heavy reliance on global technology then the level of inflation has been kept relatively
under control, being consistently below 5% in many western countries. This is due to a number of reasons
including the closer monitoring of inflation being an indication that governments acknowledged any sharp
increases in inflation (i.e. volatility) could have an adverse effect on the economy. Accordingly a property
developer in a low inflation environment is more likely to have less volatility with future building costs as
well as lower interest rates.

Institutional lease
A lease is a binding agreement enforceable by law where the property owner is guaranteed a future income at
an agreed rate with associated property rights, usually also with the ability to change the rent to reflect
current market conditions. Furthermore one of the principal advantages of real estate, as opposed to receiving
cash-flow from an alternative investment, is the existence of a binding long-term lease usually with rent
reviews therefore guaranteeing annual returns with increments. However this scenario also assumes each
tenant continues to pay their rent. The legal doctrine of ‘privity of contract’ ensures that in the event of a
default by any tenant (unless it is the original tenant) the landlord will normally be able to require the original
tenant, followed by any assignees in turn, to pay the outstanding rent. However some countries have taken
steps to alleviate this perceived heavy and somewhat unfair financial burden placed on the original tenant.
In many regions a tenant may assign their interest in the lease to a third party provided they have received
the prior approval of the landlord although it usually cannot be unreasonably withheld. The most common
test for such approval is the financial standing (i.e. covenant) of the tenant and typically institutions require
the potential assignee to demonstrate that their most recent trading profits (e.g. over the past three years)
exceed three times the rent payable. As a result a property investor is guaranteed a secure stream of income
over the long term with very limited risk of voids associated with tenant default.
Another reason why property has traditionally formed part of an institution’s investment portfolio is
diversity of performance risk. In other words if total returns from property are compared to equities and gilts
then this confirms property investment is not prone to short-term fluctuations. Note investors are fully
conversant of the exact returns from each investment category, as well as the corresponding levels of risk.

Illiquidity and indivisibility

When compared to other investment options there are always other factors to be considered when investing in
property, the most significant being the poor illiquidity of property. Each property represents a large single
investment in financial terms. One of its characteristics is being locked into a long-term investment since the
property market is not liquid, therefore if required a property cannot be sold quickly in response to market
trends. This is in direct contrast to the relatively short time period required to sell equities or stocks and
shares. It is common for the sale of a property to take months and it may not be possible to sell at all if the
market conditions are not favourable. In addition the sale of a property usually involves high transaction
costs such as an agent’s fees being often in the form of commission or a percentage of the total property,
solicitors’ fees and associated government charges/taxes. Other fees may also be applicable.
Another significant barrier in the real estate market also linked to illiquidity is the indivisibility or
‘lumpiness’ of every property. Many parcels of land, especially smaller allotments, are unable to be divided
into smaller portions and sold individually due to planning restrictions that dictate the minimum area
permissible. Therefore it is usually relatively impossible to sell off only a small proportion of a property to
increase cash flow, especially if the property development has not yet been completed. This is in direct
contrast to cash at bank where part of the funds can be withdrawn at any time and the remaining balance is
retained.
This investment characteristic alone reduces the involvement of the smaller funds being directly involved
in the property investment market. The indivisibility and illiquidity of property has become a major challenge
for stakeholders in the industry seeking to improve the attractiveness of property as an alternative investment
to equities as that market is both singular and divisible. Therefore direct property investment in high value
real estate, such as a multi-storey office building, is usually limited to large pension funds or syndicates
because of their illiquid and indivisible inherent characteristics. Such investors do not need a regular cash-
flow from all of their property.

No centralised marketplace
In contrast to equities traded on a centralised stock market where all buyers and sellers meet to carry out their
transactions, there is no common meeting place for buyers and sellers to transfer property. Buyers and sellers
generally meet via the co-ordination of an agent and agree to transfer ownership privately between each
other. Further complications can arise since there is limited knowledge about the current state of the market
and also information about what is the volume of trading or the current level of prices being achieved. At the
same time the lack of a centralised marketplace also places additional pressure on the seller to pay high
marketing expenses to advertise their property and ensure it reaches the attention of prospective buyers.

Management
Property investment is relatively labour-intensive as it also involves a high degree of management expertise
being measured in both time and cost. Advances in technology, access to information via the internet and
specialised computer programmes have greatly enhanced the role of the property manager, especially with
regard to monitoring payments and keeping up to date with the current market rent or capital values of
comparable properties. Although most management costs can be directly recovered from tenants under the
terms of their lease, they are generally viewed as a disadvantage to the investor. It is generally accepted that
active management of a property asset will improve the overall level of return received, at least in relation to
reducing vacancies and minimising expense costs.

Research and performance measurement

Research into property markets has grown rapidly in the first quarter of the twenty-first century, mainly
because this specialised information is highly sought-after by developers, investors, tenants and stakeholders
as well as being readily available via the internet. Many stakeholders, including financiers and banks,
acknowledge the value associated with providing property-related information to their customers. One of the
main differences between property and other assets is the manner in which returns are measured, therefore
making it challenging at times to accurately compare property with other alternative assets (e.g. equities) on a
‘like for like’ or ‘direct comparison’ basis. Two primary indicators of the current state of the property market
are regular returns in the form of rents and yields. The yield of a property investment is the relationship
between the total value and the rent, which is generally defined as the annual rental income received from a
property expressed as a percentage of its purchase price or capital value. In many ways the yield is a measure
of the property investor’s perception of the future rental growth and capital growth against future risk,
management expenses and illiquidity. Figure 4.1 highlights a comparison of returns between 1980 and 2019
for residential land use in Australia, Britain, Canada, New Zealand and the United States (based on The
Economist 2017). Although NZ provided the largest overall gain over this 39-year timeframe, there are other
important observations. For example the effect of the GFC is evident for all five countries, however Canada
recorded the smallest downturn, whilst the United States recorded a long extended downturn where prices
recovered after a decade of recovery.
Figure 4.1 Global House Price Index (1980 = 100) (Source: based on The Economist 2017)

Figure 4.2 highlights a long-term trend in industrial capital values between 2003 and 2019 where the
comparison is focused on the following markets: (a) Global; (b) Americas; (c) Asia Pacific; and (d) Europe,
Middle East and Africa (EMEA). In a similar manner to Figure 4.1 the effect of the GFC can be observed for
all regions although the Asia Pacific region recovered best post-GFC and maintained a similar level of
constant growth over the following decade. The Americas and the Global indexes tracked at a high level of
similarity over the entire period.

Figure 4.2 Global Industrial Capital Value Index (Q1 2003 = 100) (Source: based on CBRE 2019)

Prime yields are calculated by analysing market transactions in ‘prime’ properties. Such properties are
those conforming to the following specialised criteria:

1. modern freehold or long leasehold property;

2. good location and access to services and amenities including transport;
3. highest quality and specification; and
4. fully let and income producing to tenants with good covenants.

It should be noted that prime properties usually represent only a very small proportion of the aggregate
property investment market. The movement of ‘prime’ yields represents a benchmark against which the
yields of all properties can be measured and compared. In this scenario the movement of yields generally
represents market sentiment about a specific type of property where the better the perceived prospects for
either capital or rental growth, then the lower the yield or the ratio of higher capital values relative to income.
When making the actual decision about how much money to allocate to real estate in the overall portfolio,
often the financial institutions will pay close attention to the performance of both the property investment
market and the current proportion of property in their portfolio. Note that there are several established
performance measurement indices measuring the performance of institutional property portfolios.
With reference to expectations about levels of future performance, institutions hold regular meetings to
review performance forecasts and reallocate funds to different and alternative asset classes. However
investment in property is long term and not as flexible as other investment vehicles, therefore does not sit
easily with such a rapid review timetable. In addition the integration of property into a wider, multi-asset,
context generally is made more difficult and complex by differences in terminology and valuation practice
between property and other assets. This has partially been overcome by the increasing acceptance of
accounting based valuation techniques, such as the discounted cash-flow (DCF) approach in order to predict
the investment’s internal rate of return (IRR).
Previously the value of property or real estate was generally viewed using a relatively static approach,
being the ‘capitalisation of income’ approach, which in turn may affect the level of a fund’s assets held in
property. It could be argued that issues relating to the different terminology and valuation practices still result
in lower exposure to property by some fund managers than otherwise would be the case, although this
resistance has gradually changed over time and many investment firms now have a department focusing
specifically on real estate investment.
The integration of property into wider multi-asset investment policy is an accepted means of diversifying
to reduce exposure to risk. A typical portfolio would include equities, cash and a substantial property holding
due to the inherent stability of property as long-term asset and a ‘hedge against inflation’. This also permits a
direct comparison between property and returns from other alternative asset classes.
When a decision has been made about the proportion of money to allocate to property investment, then it
remains the responsibility of the property fund manager to make the decision about what type of property to
purchase and, importantly, in what location. Property investment policies are usually based on an analysis of
property type and region focusing on recent performance and future forecasts of growth. More importantly, a
major consideration is the different policies and investment criteria that each institution adopts. However
each strategy tends to seek a balanced portfolio of property types in order to diversify investment and reduce
risk, although the portfolio is usually weighted towards the property type performing well at a particular
point in time.
The actual decision about which property type to invest in is based on a large number of variables,
especially the task of predicting the future and also unforeseeable risks. This discussion commences with an
analysis of change in UK residential prices (via an annual index) over a 29-year period between 1990 and
2019 as shown in Figure 4.3. Many smaller property developers and investors can confidently develop
residential properties due to (a) their long-standing and mainstream knowledge about residential markets; and
(b) the perceived ongoing demand for residential by occupiers (i.e. either owner/occupiers or tenants) who
need to obtain shelter. Note that this is in contrast to other property types, such as industrial, which can
remain vacant for extended time periods due to specialised and limited demand. In Figure 4.3 it can be
observed that UK residential is generally correlated with the total returns for all property types in the UK,
although notably with less volatility since 2010 and also confirming a residential boom in the period between
1993 and 2003.
Figure 4.3 MSCI Annual Property Index: residential vs total returns (UK), 1990–2019.
(Source: based on MSCI 2020)

With analysing residential property returns it is important to view the market as two separate markets
competing for the same product, being (a) owner-occupiers and (b) tenants. The cost of mortgage borrowing
rates had a limited effect on the market in comparison to previous decades, however the largest overall driver
is population demand being linked to immigration, emigration, births and deaths. An analysis of
demographics in an area can provide a reliable insight into residential demand for the short to medium future.
Although residential is the most common land use, property developers also diversify into other land uses
including the retail, office and industrial sectors as shown in Figure 4.4. While each of these land uses have
their own supply and demand interactions, the levels of investment returns can differ. Most importantly they
are relatively independent; for example an office building cannot be converted into an industrial land use
when office demand is low, nor readily converting an industrial building into retail space. The level of
volatility (Figure 4.4) is pronounced for the industrial sector, being closely linked to activity in the
manufacturing sector, just as office demand is associated with the level of white-collar employment.
Generally speaking, retail land use is tied to both essential and discretionary household income although
these types of associations need to be fully understood and monitored by both property developers and
investors.
Figure 4.4 MSCI Annual Property Index: retail vs office vs industrial returns (UK), 1981–2019 (Source:
based on MSCI 2020)

In order to highlight returns from other property types, Figure 4.5 displays returns from (a) hotels and (b)
other land uses in contrast to total returns for (c) all land uses. While hotel investment is even more
specialised than investment in other sectors (e.g. industrial), this creates opportunities for property developers
who can also specialise in this area. This discussion about land use sectors is designed to broaden the
approach of property developers who may have traditionally limited their scope to only a single land use. In
other words this limitation does not apply to property investors who are able to successfully diversify away
some of their risk by investing in different land uses. Therefore a similar approach should be undertaken by a
successful property developer; for example when the residential sector is under-performing, then they can
focus their organisation’s attention on other performing land use sectors.
Figure 4.5 MSCI Annual Property Index: hotel vs other vs all segments (UK), 1981–2019 (Source: based on
MSCI 2020)

Figure 4.6 shows the annual accumulated index for all UK property types (less residential) between 1980
and 2019 where the index commenced at 100 in 1980. The largest total increase was for the hotel sector
where accumulated returns equated to nearly three times the next closest sector (industrial). In Figure 4.6 the
other three sectors (i.e. retail, office, industrial) displayed a relatively similar level of accumulation. A broad
statement can be made about the relationship between risk and return where hotel investment is often
considered higher risk, then followed by industrial and other sectors thereafter. The data presented in these
figures is limited to retain simplicity, therefore excludes reference to the size of each investment, the varying
grades of property (e.g. classifications of office) and the exact location of the property. How each property
sector reacts to a market downturn, such as lower demand due to the COVID-19 crisis, is a completely
separate consideration and discussion for property developers and investors. For example there will be
careful monitoring needed regarding the space requirements for office property; however a holistic approach
needs to be undertaken. For example with reference to office property, lower demand (due to increased
acceptance of ‘working at home’) may be offset by the increased requirement for social distancing in the
office building, i.e. equating to a larger space usage on a rate per square metre basis.
Figure 4.6 Accumulated Annual Property Index (UK), 1980–2019 (Source: based on MSCI 2020)

Most investors will also seek to spread their investments geographically. For example a retail investor will
often invest in shopping centres in different regions or countries rather than put all their ‘eggs in one basket’
in only one region or country. Most institutions tend to adopt very rigid selection criteria when making
decisions about exactly which property investments to purchase. Many will only search for ‘prime properties’
being those in demand and accordingly priced at the upper end of the scale. They will search for the best
located properties of the highest quality being fully let on institutionally acceptable lease terms to tenants
with good covenants. However, as properties falling within the definition of ‘prime property’ usually account
for less than 10% of all properties at any one time, institutions may have to compromise on one or more of
the following factors:

location of the property;

quality of specification and design;
lease terms including length of lease and security; and/or
tenant quality.

It is not always possible to obtain ‘prime property’ either because there is an under-supply or the asking or
‘for sale’ price is too high (i.e. market yield is too low) relative to the perceived levels of potential future
rental growth. Some investors may be willing to take a balanced view on a specific property via an analysis
on its own merits and then adjusting the yield they are prepared to accept in order to reflect any additional
risk. Other investors may allocate different weights to each of the above factors depending on individual
investment requirements. For example fund investors concerned with the security of income rather than
capital growth prospects will put a higher emphasis on the quality of the tenant covenant. The characteristics
of a good location in relation to the various property types have already been examined in Chapter 2. Some
institutions may be prepared to consider other options based on what may be perceived in the market as
‘secondary locations’, such as where there is an under-supply of quality stock although accompanied by
strong prospects of future potential rental growth.
 The risk associated with every lease needs to be fully evaluated. For example a higher level of flexibility
given to a tenant will equate to added risk for the investor. However many tenants demand increased
flexibility in recent times, such as shorter lease lengths as opposed to the extremely long leases (e.g. 20 years
or longer are available in some countries) and are resisting traditional upwards only rent reviews. In reality a
tenant would generally have to pay higher rent for such flexible terms and yields that in turn would increase
to reflect the added risk of fluctuating incomes.
As well as purchasing completed and partially/fully let developments as an investment, many institutions
also conduct their own developments or provide development finance. Some institutions primarily restrict
their development activity to the redevelopment of properties in their own portfolio. Involvement in a
development, whether directly or indirectly, will depend largely on a particular institution’s attitude to risk
and their perception of the development cycle at any one point in time. Once again the level of research into
the property market is a critical and essential task for a property developer and investor (see Chapter 8),
especially when the core objective should always be to decrease unnecessary exposure to risk where possible.
Undertaking a proposed property development is generally a riskier proposition than buying an existing
completed property as an investment. Building costs and land values are comparatively lower when
compared with the prices being currently sought for prime standing investments. In addition, undertaking a
new development provides the institution with an opportunity to specifically tailor a property to fill a gap in
the market for suitable property ‘for sale’ either now or in the near future. However it is important to bear in
mind that development only represents a small proportion of all institutional property investment held in their
portfolio.

4.2.3 Banks and building societies

Banks participate in the funding of property developments due to the potential for growth in capital and
rental values; in addition property offers a relatively secure and low-risk investment, especially when it is
‘prime’ property, i.e. with limited supply, high level of demand and premium capital and rental values.
Initially most bank loans provided only short-term finance, however the property boom in the late twentieth
century encouraged many banks to became involved in medium- to long-term loans. Due to exposure to bad
debts in market downturns they became understandably cautious about investing in speculative developments
and the trend is for most banks to restrict lending to high-risk borrowers to reduce their overall level of bad
debt. After a market downturn many property developments remain vacant or unsold for an extended period
of time, or eventually sell at a loss and declared a bad debt. Alternatively there may be a delay until the
market picks up again and such property can be sold, less interest and holding costs.
Following a major downturn each property developer may need time to re-establish trust amongst lenders
who also conduct due diligence on each property before advancing funds. In addition, most banks adopt a
‘hands-on’ approach to understanding the property development industry and are assisted by their own in-
house valuers and research teams. Also banks are very unlikely to lend on purely speculative development
without the provision of a sound business case with comprehensive and industry-supported market data and
reliable market forecasts. There has been a paradigm shift, especially since the GFC, where many financiers
will only lend on low-risk developments or where there is a significant pre-let, e.g. around 70% or more. If
the developer is unable to reach the agreed proportion of pre-let or pre-sold then the development may be
reconfigured to meet market demand. For example this may require modifying the quality or scale of a
development.
It is accepted that banks and financiers are in the core business of making direct financial gains from
lending money. Overall the lending of funds to property companies has been viewed as profitable, although at
times subject to market fluctuations. Bank lending may take the form of ‘corporate’ lending to a company by
means of overdraft facilities or short-term loans. Alternatively a loan may be made to enable a specific
development project to proceed or for a developer to retain a development as an investment. To reduce
exposure to risk the banks will use the development or the investment property and/or the assets of the
company as security for loans in case of default. Property is attractive as security for banks as it is a large
immovable and identifiable asset with a practically guaranteed minimum resale value, but importantly it
cannot be sold or transferred to a third party unless it has a clear unencumbered title of ownership.
 Due to the cyclical nature of property markets and the interaction of supply and demand, there will always
be periods where property values will increase and decrease. Accordingly a bank’s willingness to lend money
to developers is directly affected by varying factors such as their confidence in the property market and the
state of the underlying economy at any particular time. Another consideration is a bank’s exposure to
property as a proportion of their overall portfolio since this affects their risk profile and strategy.
In different property markets it is important for the real estate developer to understand how the market
operates and what the process is for obtaining reliable access to competitive funding. Based on a UK example
it has been observed that clearing banks, due to their large deposit base, were historically the major providers
of corporate finance loans to development and property companies. At the same time a limited amount of
project finance was provided by the clearing banks on small schemes developed by established customers.
The merchant banks, with some being subsidiaries of clearing banks and specialist property lenders, have
smaller funds but possess more property expertise. Accordingly they are more inclined to provide project
loans and because of their expertise will take on higher risk loans in return for an equity stake in a project.
Merchant banks on large development projects have previously assumed the role of the ‘lead’ bank and
assembled a syndicate of banks to provide finance. In this scenario a merchant bank may underwrite the loan.
In addition merchant banks at times also undertook investment management on behalf of institutional
investors through investment funds and unit trusts. However in this example it should be noted the respective
roles of both the clearing banks and merchant banks could overlap, particularly if they are associated with
each other. Many foreign banks are represented in major global cities throughout the world and also operate
in a similar manner to clearing banks. Financial intermediaries act as agents or financial advisers and
structure development finance with banks and other sources for a developer in return for a fee; for example at
say 1% of the total value of the loan. Several of the large global property and real estate firms offer different
services to clients in the form of consultancies as well as having financial service arms.
In some regions the building societies or similar entities have been allowed to provide corporate loans and
loans secured on commercial rented property, however this is usually based on the condition that such loans
comprise a relatively small proportion of their overall total loan portfolio. In the past some building societies
have been left exposed to substantial risk due to the ups and downs of property cycles, particularly with
residential developers, and as such have somewhat withdrawn from providing development funding. Other
societies are still willing to fund commercial property investments. Typically such funders restrict themselves
to smaller loans and tend to be less competitive than banks in relation to the interest rates they charge,
although this varies between regions and also between different societies or banks. The lender’s primary task
is to ensure a return on their loan to compensate them for their exposure to risk and organising the loan. The
risk evaluation will be primarily based on the possibility the borrower/s will (a) not be able to meet agreed
regular payments, (b) not be able to pay back any money whatsoever and/or (c) the minimum amount the
property could be sold for if the borrower defaults on (a) or (b). The financiers’ criteria for issuing loans will
vary depending on their own operating policy and a range of unique factors including the size of the
development company, the track record and history of the development company, the nature and size of the
development, the total length of the loan, the amount of deposit paid upfront by the developer and the
strength of the security being offered (often referred to as the loan-to-value ratio or LVR).
In assessing the risk associated with corporate loans a bank will be concerned with the financial strength,
property assets, track record, profits and cash-flow of the development company. In relation to loans on
specific developments the banks will also be concerned with the level of security of the development project.
The banks need to be convinced the property is well located, that the developer has the ability to complete the
project on time and the overall scheme is viable. An in-house team of property experts with additional
external advisers, if necessary, will conduct an assessment and valuation of the project in the form of due
diligence (RICS 2019). In the case of medium-term loans, where the developer wishes to retain the
completed property until the first rent review or alternatively loans on investment properties, a bank will also
be concerned as to whether the rental income will cover the interest payments. Previously in periods of
market upturns as part of the property cycle the banks were prepared to provide loans where the rental
income did not cover the interest payments, often referred to as ‘deficit financing’, since they were satisfied
both rental and capital values were rising rapidly. However following the inevitable downturn, this policy
changed to reduce risk and the banks are seeking to quantify their exposure to risk in both a buoyant and a
depressed market.
 In general the banks often tend to take a short-term view in relation to their lending policies, being
concerned primarily with the underlying value of the development company and/or development project.
Note they are focused on maximising the return provided to their shareholders on an annual basis, rather than
over five or ten years as per a conventional property development/investment timeframe. In some countries
there was substantial criticism of the banks’ lending policies during the late twentieth century with many
stakeholders apportioning blame upon their lending practices for the boom-bust situation. Some LTV ratios
were exceptionally high (100%+) whilst other lenders arguably did not pay enough attention to assessing the
risk attached to both borrower and the proposed property development itself. Some banks were quick to
blame the valuers whose opinions formed the basis for approving loans evidenced by the many negligence
cases against valuers. However, on occasion, the courts felt that lenders had partially contributed to their
financial loss through their own improvident lending policies.
To limit their exposure to risk in a constantly changing property market the banks and their advisers
constantly review their policies to reflect the current level of risk and prevailing market conditions, as well as
being supported by high quality research and forecasting methods including the use of detailed discounted
cash-flows (DCFs). The role of the valuation industry is also included in the debate from a risk perspective,
where the valuer is supposedly accountable for any difference in price between the final sale price and the
valuation amount stated when the original valuation was carried out at the commencement of the loan.
Property loans usually account for a relatively small proportion, as low as 10%, of all commercial lending
by the banks and financiers. During a downturn in the property market some unsuccessful development
companies default on loans and the value of their developments/properties can be less than their outstanding
debts. In this scenario a bank would obviously want to mitigate their losses, however, rather than force the
borrower to default the bank is often willing to restructure loans by a combination of measures such as
renegotiating loan terms, refinancing loans, swapping ‘debt’ for ‘equity’ (i.e. converting part of the debt into
mortgages) and also forcing the sale of assets in worst-case scenarios. During the last market downturn many
companies, particularly those with large development programmes and specific projects, went into
receivership. Trader developers were particularly vulnerable and of those remaining, many were tightly
controlled by their banks.
In a severe market downturn where the banks decided to stand by and support a developer or a specific
project, then the problem of vacant or over-rented property continues until the next market upturn occurs. An
additional complication occurs when institutional investors are not interested in purchasing over-rented or
secondary vacant property. Accordingly many banks often have to make major write-downs after a downturn
and have become increasingly reluctant to be exposed to this type of risk in the future. More recently the
banks have also developed a flexible range of different financing products in order to meet the changing
demands of the market and in response to an increasingly competitive financing environment.

4.2.4 Property companies and the stock market

There are two broad categories of company who participate as a funding stakeholder in property
development, namely investors and traders. The investor type of company, usually referred to as a property
company, is also a source of long-term finance as some purchase property investments for their portfolio as
well as retaining their own developments. Their capacity to purchase property depends largely on their ability
to raise finance. Property companies and development companies alike are partly financed by their own
capital and also from their shareholders, as well as partly financed by borrowing money either as short-term
or long-term loans. The level of acceptable ‘gearing’ (i.e. relationship between borrowed money and the
company’s own money) varies between companies. Property companies, in contrast to ‘trader’ development
companies, tend to have a lower level of gearing due to the strength of their asset base.
Property companies vary from small private firms up to large publicly quoted companies. Some specialise
in a particular geographical location, such as a quadrant in a city, while others hold large portfolios of a cross-
section of property types in international markets. Their prime objective is to make a direct profit from their
investment and development activities, although others will take a long-term view in relation to the extent to
which they ‘trade on’ their investments and completed developments. Most importantly they always have a
responsibility to their shareholders to ‘increase shareholders’ wealth’ by maintaining a respectable share price
and providing regular dividends. Property companies view property investment both as a source of income
and also as an asset providing security for borrowed money. Property companies, particularly the larger ones
quoted on the share/stock market, will tend to concentrate their investment activities on prime and good
secondary properties. However, in contrast to the institutions, they consider the management aspects of
property investment to be an advantage. Therefore they have both the management and development skills
in-house to improve the value of properties. Also they are not averse to multi-let properties provided they are
well located and of high quality. They may purchase investment properties that are not fully let or are nearing
the end of the lease with redevelopment potential.
Shareholders of property companies are typically a combination of financial institutions and private
individuals. Financial institutions invest in property company shares instead of or in addition to their direct
property investments. However it is not always tax-efficient for pension or superannuation funds to invest in
property company shares when compared with investing in direct property. This is usually because
corporation tax is paid on the company’s profits before dividends on the shares are paid and capital gains tax
is paid on property sales. Tax-paying shareholders will be taxed on the dividends and on any capital gains
from selling the shares. The tax implications are very different for each region and an accountant should be
consulted to ensure the optimal taxation structure is achieved.
With a quoted or listed property investment company the shares are commonly valued by the stock market
below the value of the assets of the company attributable to the shares, also known as the NAV or ‘net asset
value’ per share. This discount to asset value is due to the tax disadvantage of the company since capital
gains tax might be payable on the sale of their assets. Importantly the amount to which shares are discounted
varies with stock market conditions and the state of the property market. However the value of property
company shares fluctuates more widely than the value of property, regardless of the state of the property
market. Other factors affecting the value of the share price of property companies are the financial strength of
the company, including its level of gearing as evidenced by the balance sheet, as well as the perceived
strength of the management team. In a similar manner to other companies listed on the stock market, the
‘price-earnings’ ratio (P/E) is the main yardstick used to assess the market’s perception of the future earning
potential of property trading companies.
Equity finance can be raised by issuing various forms of shares in a company where investors directly
participate in the profit and risk associated with the company. New property companies may float on the
stock/share market and raise money by selling shares, often referred to as an IPO or ‘initial purchase
offering’. Quoted companies can issue new ordinary shares or preference shares to raise equity finance for
their development activities, however depending on stock market conditions, the overall performance of
property company shares and the NAV per share of a particular company. Such finance may also be used to
repay bank borrowings and other debts, or alternatively to retain strategic developments in an investment
portfolio. Furthermore different companies can also raise debt finance using various methods via the stock
market. Long-term debt finance is capital borrowed from investors and usually involves fixed interest and
may be secured on the company or unsecured. Debt finance usually has to be repaid by a certain date or
converted into shares (i.e. equity). Debt finance instruments became popular as an alternative means of
providing long-term finance to hold developments as investments.

4.2.5 Real Estate Investment Trusts (REITs)

Real estate investment trusts, commonly referred to as REITs, have been a successful vehicle over many
years for the securitisation of property or real estate in many countries including the United States, UK,
Australia and Singapore. The increased popularity of REITs is linked to many advantages including taxation
incentives and the availability of up-to-date information about the REIT and being traded on the central stock
market (KPMG 2015).
In contrast to the United States, REITs were introduced into the UK on 1 January 2007 in accordance with
the Finance Act 2006. The UK REITs have many of the benefits of other REITs including greater flexibility
and liquidity. However one of the most sought-after benefits was from a taxation perspective. For example
UK REITs are treated as normal corporate vehicles and require an election to confer exemption on taxation
from relevant company profits; in return the REIT must withhold tax from distributions paid to shareholders
out of these profits. The requirements to qualify for a UK-REIT are as follows:
 the company is a UK tax resident (and not dual resident);
listed on a recognised stock exchange;
it must not be a ‘close’ company;
not an open-ended investment company;
the only shares it can have in issue are a single class of ordinary share capital and various classes of
relevant preference shares;
distribute 90% of its net taxable rental profits (not capital gains) during the relevant accounting period
or within 12 months of its end;
derive at least 75% of its total profits from its tax-exempt property letting business;
at least 75% of the total value of assets held by the REIT must be held for the tax-exempt property
letting business;
it must not be party to any loan where the results are dependent on the profits of the business; and
additional conditions also apply (LSEG 2020).

To qualify as a US REIT a real estate company must have the bulk of its assets and income connected to real
estate investment and be organised as follows:

must be formed in one of the 50 US states or in the District of Columbia and be an entity that would be
taxable for federal purposes as a corporation;
be managed by a board of directors or trustees;
have shares that are fully transferable;
have a minimum of 100 shareholders after its first year as a REIT;
have no more than 50% of its shares held by five or fewer individuals during the last half of the taxable
year;
invest at least 75% of its total assets in real estate assets and cash;
distribute at least 90% of its taxable income to shareholders annually in the form of dividends;
derive at least 75% of its gross income from real estate related sources, including rents and interest on
mortgages financing real property;
derive at least 95% of its gross income from such real estate sources and dividends or interest from any
source;
have no more than 25% of its assets consist of non-qualifying securities or stock in taxable REIT
subsidiaries; and
a REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation
other than another REIT, a taxable REIT subsidiary (TRS) or a qualified REIT subsidiary (QRS). Also a
REIT cannot own stock in a corporation (other than in a REIT, TRS or QRS) where the value of the
stock exceeds more than 20% of a REIT’s assets (U.S. Securities and Exchange Commission 2020;
NAREIT 2020).

Although REITs have been widely accepted as a vehicle for funding properties via listing on the stock
market, some limitations need to be acknowledged. For example the expenses associated with listing on the
stock market are substantial including marketing and statutory charges, being additional to a risk the IPO will
not be fully subscribed by investors. Also investment in direct real estate in a buoyant market may offer a
higher yield at times, therefore a REIT could struggle to offer a competitive yield regardless of tax
advantages. Over time many property developers have evolved from relatively small organisations and are
now large enough to be listed as a global REIT (e.g. Multiplex, Westfield).

4.2.6 Overseas investors

The property market now operates within a truly global economy. In today’s real estate market the overseas
investors have become substantial participants in the property investment market. No longer is demand for
property limited to a prospective purchaser’s geographic location since this barrier has been practically
removed (subject to legal approval). For example it is commonplace for an overseas investor to be just as
fluent with a property market on the other side of the world as with their own local market. At times there are
other reasons, such as tax implications or a lack of perceived local market demand, as to why an investor may
be interested in a market in an overseas country. A property development may be located in a particular
region although some of the relevant stakeholders (e.g. lender, architect) could also be physically located
anywhere in the world.
The source of overseas investment has changed since the late twentieth century if using the UK market as
an example. The Japanese and the Scandinavians led the way during the boom period between 1987 and
1990. The UK government’s favourable treatment of foreign investment together with the lifting of Japanese
government’s restrictions provided the impetus for Japanese investors, developers and contractors. The lifting
of restrictions by the Swedish government on overseas investment by their property companies and life funds
led to the higher Scandinavian interest. They were both attracted by the performance of the UK’s economy
and its relative stability during that period. Their development companies became involved in direct
development either in partnership or on their own account. However since then many have fallen into
receivership following the collapse in the market in 1990 following a high-profile economic crisis in Asia
(Das et al. 2019).
European investors, particularly Germans, became significant investors after 1992 due to the relative
performance of the UK economy against their own economies and the continuing deregulation of cross-
border investment by the European Union. They were joined by American, Middle Eastern and Far Eastern
investors in 1993 and 1994. All have tended, in contrast to the early Japanese and the Scandinavian investors,
to invest in standing investments rather than developments and are interested in ‘prime’ properties let on
institutional leases to good tenants.
More recently global investors have not been restricted from any one particular country and this trend in
many ways mirrored the explosion of information transfer and availability, primarily due to the widespread
use of the internet and high-speed data transfer. In a relatively short period of time internet marketing has
become a prime advertising medium, which in turn has enabled an investor on the other side of the world to
access detailed information about proposed and existing real estate developments. Importantly this includes
high-resolution digital photographs, three-dimensional videos and virtual reality demonstrations assisting
non-local and overseas investors to commit substantial funds, even though they possibly have never
physically inspected the property in question.
Expanding the market to global investors also has other benefits. This includes increasing the number of
prospective purchasers by enlarging the marketplace, increasing the potential borrowing capacity of the
purchasers (as opposed to the lenders in the local market) and ensuring the development is perceived as truly
international. Furthermore, many overseas investors are more likely to invest in larger properties at the higher
end of the market rather than restricting the pool of potential purchasers to the local market only.

4.2.7 Private individuals

In reality the majority of private investors actually purchase property investments at the lower end of the
market, with a large proportion being ‘mum’ and ‘dad’ investors who are borrowing against the equity in their
principal place of residence in the form of the family home. In many instances they tend to concentrate their
purchases on secondary and tertiary commercial property that produce high yields but are often located in an
area with the perceived potential for capital growth. These purchasers tend to be precluded from the ‘prime’
market due to the substantial capital sums involved and the existence of the ‘reverse yield’ gap. Private
individuals are attracted to high yielding properties as income will very often be in excess of interest rates.
However, participation in the lower end of the property market is very risky and involves high management
resources and regular voids.
Unfortunately many private investors often place too much focus on the relationship between return and
capital outlay, therefore making a direct but incorrect comparison with the return from a standard bank
deposit. This is partly due to the lack of an in-depth understanding about the fundamentals of property
investment including depreciation of the building component over time and associated risk. For example
understanding the links between the inevitable increased building age and associated requirement for ongoing
regular maintenance. Many investors are not fully conversant with an understanding about how risk is
reflected within the yield rate however a higher yield equates to a higher risk, not lower risk as per a standard
cash deposit in a bank. In this scenario where there is a narrow focus on the yield only and also ignoring the
long-term maintenance and upkeep costs, some private investors have a smaller initial outlay but a
substantially larger cost of maintenance. This is another reason why smaller investors are predominantly at
the bottom end of the perceived ‘bargain’ market for investment properties.

4.2.8 Joint venture partners

A development company may raise finance or secure the acquisition of land by forming a partnership or a
joint venture (JV) company where a third party conducts a specific development or a series of development
projects. The basic principle behind forming a partnership from the developer’s point of view is to secure
either finance or land in return for a share in the profits of the development scheme or the joint venture
company. The joint share allocated to the third party will depend largely on the value of their contribution
combined with the extent they wish to participate in the risk of the scheme.
There are many methods and approaches of forming partnerships or joint ventures for the purpose of
successfully funding and completing a property development. Nevertheless it is beyond the scope of this
book to examine each in detail for all regions and it is recommended the reader consults a specialised text or
expert in this field. However we will briefly examine the reasons behind forming partnerships and joint
ventures.
A partnership may involve any combination of sharing the risks and rewards of a scheme via many
different contractual and company arrangements. In addition the partners in a scheme may either take an
active or a passive role, however other factors such as tax and financial considerations may determine to a
large extent the formal structure of the partnership arrangement. A joint venture may also take many forms,
but in its ‘purest’ form the parties participate in the development and distribute the profits in equal shares
usually by forming a joint company.
Most developers are typically reluctant to share profits with third parties, unless it is the only way of
securing a particular site or finance for a development scheme. Partnerships with landowners may be required
if the landowner wishes to participate in the profits of the development scheme or wishes to retain a long-
term legal interest in the property preferring income to a one-off capital receipt. Local authorities and other
public bodies, for example with reference to railway line infrastructure, may only grant long-term leasehold
interests to developers due to their need to retain an underlying continuing interest in the property for
financial or operational reasons. It should be noted there are restrictions placed on local authorities in relation
to capital receipts and the formation of joint venture companies. Most often the ground rent and profit-
sharing arrangements will be determined by the amount of risk the landowner wishes to be exposed to.
If a developer is involved with a particularly large or complex development, then a prudent approach is to
partake in an arrangement to spread the risk through a partnership arrangement. However this arrangement
will often exceed the financial capability of all but the very largest companies. With such schemes either one
or more partners could be involved and this may also include the landowner, contractor or another
development company. Developers may also form joint venture companies with other development
companies who may have the expertise or experience required for a particular type of development and are
considered vital to the success of the scheme. There are also previous examples of developers forming joint
venture companies with retailers to combine their respective experience and market knowledge.
Previously some joint venture companies were formed for large property developments to enable the
partners to arrange ‘limited’ or ‘non-recourse’ finance off-balance sheet so the borrowings did not appear on
either of the partner’s respective balance sheets. The rules were tightened up on these arrangements and the
opportunities to benefit from such schemes has reduced substantially or been eliminated.
Regardless of the reasons for forming a partnership to finance a scheme, it is essential for the developer to
ensure the definition relating to the profit is clearly detailed and understood. In the case of a joint venture
company the profit will be distributed through the company accounts. A developer must rehearse every
possible outcome of the scheme to ensure any partnership arrangement will definitely be successful and the
true intentions of the parties, as agreed, have been carefully documented by all parties involved.

4.2.9 Government assistance

At any given time there may be different government grants available, largely dependent on the level of
available funding and the perceived ability of government assistance to be a catalyst for change. Many of
these projects are designed to encourage private developers to proceed with a proposal, such as renewal or
gentrification of all older buildings or in a specific geographical area. In many cases the financial incentives
in isolation would not be sufficient for the developer to undertake a viable project, although a government
may acknowledge there would be wider community benefits if a developer would proceed with the project.
Examples include the construction of low-cost rental housing or a new shopping centre that would provide
substantial local employment. The property developer is strongly encouraged to contact the local government
body that is usually willing to provide information about current and planned future schemes in the
immediate region of the property development.

Discussion point
List and discuss the traditional sources of finance available for real estate development.

4.3 Methods of development finance

A number of various sources for development finance have already been discussed. However there are other
methods of obtaining development finance from the above sources and in recent years an increasing number
of innovative techniques have emerged. It is important to examine the various well-established methods and
briefly consider different finance options available.
The decision about both source and method of development finance will depend on the total amount of
equity (i.e. the developer’s own capital) a developer is willing and able to commit to a scheme. If the
developer has insufficient capital then the next step is to secure as much external finance as possible in order
to meet all costs associated with the property. At the same time the priority is to retain as much of the equity
as possible without giving away bank or personal guarantees. A decision has to be made as to how much risk
the developer wishes to pass on to the financier in return for a share in the financial success of the scheme.
The availability and choice of finance will depend largely on variables such as the company’s size, financial
strength, track record, characteristics of the development scheme to be funded and the duration of the
scheme. Whichever method is selected, the developer will always need to be fully up-to-date with all aspects
of taxation.

4.3.1 Forward-funding with an institution

‘Forward-funding’ is the term given to the method of development finance involving a pension fund or
insurance company agreeing to provide short-term development finance and then purchase the completed
property as an investment. It occurs at the commencement or at least in an early stage of the development
process. This method of finance reduces the developer’s exposure to risk where the terms usually agreed with
the institution reflect this. From the institution’s point of view this approach towards acquiring a property
investment has several advantages over purchasing a ready-made investment. From the outset it provides the
institution with a slightly higher yield than a ready-made investment, therefore reflecting a slightly greater
risk. By being involved in the development process the institution can influence the design of the scheme and
also selection of the tenant. In addition, if there is an increase in rents during the development period then the
institution benefits from this rental growth.
 The proposed development must fall into the ‘prime’ or ‘premium’ category if the developer is to succeed
in securing forward-funding, however if the proposed scheme is very large in terms of its lot size then the
number of funds in the market is reduced. Therefore it is essential for a developer to fully consider this aspect
when purchasing a site since it will affect the approach to evaluating the development opportunity.
Based on the assumption the developer is purchasing, or has just purchased, a site in a prime location with
the benefit of a planning consent, then the next step is to approach an institution directly or via their agents.
Therefore agents have an important role to play in the forward-funding of a scheme since they have a
thorough knowledge of the institutional investment market. Because many agents are retained by institutions
then they should have established good contacts over time. The developer may also have established a good
working relationship with particular institutions they may have worked with previously. Institutions will tend
to adopt a proactive approach and directly (via agents) pursue development opportunities themselves in
accordance with their individual investment criteria. They will have identified via their own research the
property type and location they are interested in (MSCI 2020).
The developer will usually prepare a high-quality website presence and a full colour presentation brochure
for those institutions who express initial interest in the scheme. The website and brochure will typically
describe the nature and location of the development with supporting illustrative material. In addition it
outlines planning consents, site investigation reports and specifications. During this process the institutions
will identify the level of risk associated with the potential development, including its appeal to purchasers
and the underlying level of demand the completed development could generate.
Most importantly, each developer will need to sell their track record and extensive experience on similar
schemes. For example there will often be an additional risk component associated to a new developer who
does not have the perceived track record through their development history to successfully undertake and
complete a property development from start to finish. It is essential each developer provides an analysis of
the market reflecting the balance between supply and demand for similar development schemes. An initial
appraisal of the scheme will also be included as a starting point for negotiations on the value and cost of the
proposed scheme, along with any supporting evidence such as cost plans. However each institution will not
rely on either the market analysis or appraisal by the developer and will also conduct their own evaluations to
examine risk levels based on an analysis of hypothetical sensitivity scenarios.
An institution, if deciding the development proposition aligns with its investment criteria, will need to
confirm the proposed development is viable, there is a demand for the development, the specification and
design of the building is of the highest quality and also the developer has a satisfactory track record and
expertise. Once again the institution will be continually re-assessing its level of exposure to risk and seeking
to reduce it, if possible. A developer may need to be able to guarantee the investor’s return at the end of a
development period depending on the terms negotiated, so the institution will need to examine the
developer’s financial standing. The institution will ask the following question: is the developer able to
produce the scheme both within budget and on time?
After a particular fund has agreed in principle to forward-funding the developer’s scheme, negotiations
can then commence regarding the financial details of the agreement. There are different types of
arrangements that can be entered into although the final decision depends on variables including the current
state of the property market, the nature of the scheme and the financial standing of the developer. Funds will
tailor the arrangements to suit each particular development and their view of the market. There are standard
conditions commonly included in most agreements and the variation between arrangements will be reflected
in the balance of risk and reward between the parties.
We shall now examine each of the typical elements of a funding agreement.

Yield
The fund and the developer will agree at the outset what is the appropriate yield and therefore the
capitalisation rate to be applied to the scheme. This is commonly referred to as the relationship between the
total capital value and the net operating income. The yield will usually be determined after a thorough
assessment of recent market evidence and the fund’s perception of current and future risk. From a valuation
perspective the yield or capitalisation rate, also referred to as the ‘all risk yield’, is designed to reflect all risk
associated with the development. The yield is a measure of the institution’s perception of risk weighed up
against the rental growth prospects. In forward-funding arrangements it is common for yields to be
discounted by around 1–2% (i.e. 1–2% higher) from the market yield for standing investments to reflect the
additional risk the institution is taking by participating in the development process. The yield will be fixed at
the agreed level. It is essential the property developer has a clear understanding of how yields are calculated,
and importantly the relationship between the yield rate and risk.

Rent
What is commonly referred to as a ‘base rent’ will be agreed upon after careful analysis of current market
evidence, being a comparison between newly constructed floorspace and recent lettings of similar properties
in the area. At times there will be pre-letting undertaken with the rental level agreed with the tenant in the
‘agreement to lease’. Even though there may be provisions for a review on final completion of the property
development, this would be more likely to occur after an extended time period, e.g. for a large-scale
development.
If the market rent achieved on the scheme exceeds the base rate there is normally a provision to share this
benefit. This element of the rental income is commonly referred to as ‘overage’ and usually shared between
the fund and developer. However the fund may limit the ‘overage’ rent to a specified level because the
developer will then be motivated to achieve a higher rent. At the same time the fund will seek to safeguard
against ‘over-renting’ the property since this would be detrimental to rental growth prospects in the future. In
other words, there is a trade-off between achieving the highest possible level of rent and retaining a long-term
tenant. Usually such a tenant would relocate to less expensive accommodation at the first available
opportunity, thereby creating an increased potential for voids.

Costs
It is essential the developer presents a detailed estimate of current and reliable development costs to the fund
to be analysed by the fund’s in-house building surveyors or externally appointed consultants. At times the
institution will seek to limit total development costs at a certain level, although including an allowance for
interest costs. The developer will be under an obligation not to exceed these costs, however if the maximum
agreed limit is exceeded then the developer will be responsible for funding the balance. There may be a
provision within the agreed development cost for the developer’s own internal costs, such as project
management fees, overheads and a contingency allowance. The maximum agreed development cost will
typically relate to previously agreed plans and specifications. Note the developer will be under an obligation
not to vary either the plans or specifications without prior approval of the fund. There may be a provision
enabling a variation of agreed costs due to certain variations.
The fund will provide the short-term finance at a stated interest rate to reflect their opportunity cost of
money but not the cost of borrowing. This is because institutions do not need to borrow money although they
consider the provision of short-term development finance as part of their investment. Money will be
advanced to the developer on a progress basis, commencing with the production of architect’s certificates in
respect of the building costs and invoices relating to all other costs. Interest will accrue and be aggregated
until practical completion of the scheme or until it is fully let, depending on whether the developer is
responsible for any shortfall in rent. At the same time the developer will receive any profit, calculated as the
development value less the development costs advanced in accordance with the terms of the funding
agreement, although the fund will keep a retention fee being equivalent or greater than the amount agreed
with the building contractor where this depends on any defects or work outstanding.
Depending on market conditions, the developer may be able to secure a profit on the value of the land if
the value of the land at the time of the funding agreement exceeds the initial cost of acquisition.

Developer’s profit
The calculation of the developer’s profit can vary and ultimately depends on the type of funding arrangement
entered into. The developer and fund will reach an agreement via either (i) a base rent or (ii) a priority yield
method of funding.

(I) ‘BASE RENT’ ARRANGEMENT

On completion of a scheme based on a ‘base rent’ arrangement then the total development cost, including
interest, up to a maximum agreed limit will be deducted from the agreed net development value for the
scheme. The net development value is the total rent achieved up to the agreed base rent multiplied by the
agreed Year’s Purchase (i.e. a reciprocal of the yield) less the institution’s costs of purchase. The balance of
the calculation will represent the developer’s profit, often referred to as the ‘balancing payment’.
Using an example we will look at the evaluation in Chapter 3 on the assumption of a forward-funded deal
with an agreed base rent. Assume the developer has agreed with the institution a base rental value of £
$1,633,620 per annum, based on a net lettable area of 4,299 m2 (46,274 ft2) at a base rent of £$355.21 per m2
(£$33 per ft2) and a yield of 8.0%. It is also agreed all rent achieved above the base rent will be divided
evenly with 50% to the developer and 50% to the institution. If the rent achieved is £$1,800,000 per annum
and the development cost is £$16,805,426 then the developer’s profit is calculated as shown in Example 4.1.

Example 4.1 Developer’s profit analysis

Base rent plus (£$ per annum) 1,633,620

50% overage (i.e. £$1,800,000 p.a. - £$1,633,620 p.a. divided by 2) 83,190
1,716,810
Capitalised at 8.0% 12.50
Gross Development Value 21,460,125
Less purchaser’s costs @ 2.75% equals 20,869,972
Less development cost 16,805,426
Balancing payment to developer (i.e. developer’s profit) 4,064,546
Developer’s profit as a percentage of cost 24.19%

The fund’s profit is represented by the movement in the initial yield from 8.0 to 8.62% being calculated by dividing the rent achieved by
the development value and then multiplying by 100. For example £$1,800,000/£$20,869,972 = 8.62%.

(II) ‘PRIORITY YIELD’ ARRANGEMENT

A ‘priority yield’ arrangement provides the fund with the first or ‘priority’ slice of the rental income before
the developer takes a profit, providing a guaranteed return yield on the institution’s investment. The ‘priority
yield’ is often used where the costs or rents are perceived to be subject to a greater uncertainty, e.g. with
lengthy schemes. Therefore it presents a higher exposure to risk.
Alternatively the fund will agree with the developer the priority yield (see Example 4.2) and will receive
as a priority slice (7.75%) of the development costs. Then the developer will receive as the next slice an
agreed percentage of the development cost; in this example 0.5% is then capitalised at the agreed base yield.
This represents the developer’s required profit as agreed with the fund. The remaining rental income is split
50/50 or as otherwise agreed, then capitalised at the agreed base yield. Once again based on the evaluation in
Chapter 3 we now rework Example 4.1 on the basis of a ‘priority yield’ arrangement. The developer’s profit
is calculated as shown here.

Example 4.2 Developer’s profit analysis

Development cost (£$) 16,805,426

Achieved rental income (£$ per annum) 1,800,000
Fund receives first slice of rental income
@ 7.75% of development cost 1,302,421
Developer receives next slice of rental income
@ 0.5% of development cost 84,027
Developer/fund share balance of rental income 50%-50%
(i.e. £$321,887 divided by 2) 206,776
Developer’s profit is the share of rental achieved 290,803
Capitalised at 8.0% 12.50
Developer’s profit 3,635,041
Developer’s profit as % of cost 21.63%

(The fund’s profit is represented by the movement in the initial yield from 8.0 to 8.62% as in Example 4.1).

Developer’s guarantees and performance obligations

In addition to controlling their maximum funding commitment by capping costs, the fund may require certain
guarantees from the developer. Unless the scheme is entirely pre-let then the fund may require the developer
to guarantee any shortfall in rental income until the scheme is fully let or until about 3–5 years after
completion, whichever occurs first. Alternatively the fund may require the developer to enter into a short-
term lease for approximately 3–5 years after completion. Bank guarantees or parent company guarantees may
also be required to support the potential rent liability to meet any costs exceeding an agreed limit.
If the developer decides not to provide such guarantees or enter into a lease then a ‘profit erosion’
arrangement may be entered into. Under this arrangement both interest and costs will continue to accrue until
the scheme is income-producing or until about three years after completion, whichever comes first. At this
point any profit due to the developer will be calculated and may have been entirely eroded through an
increase in the development costs above any agreed limit or a decrease in the rent actually achieved.
However the developer will then be able to completely walk away from the development without any further
commitments.
Typical of most funding arrangements is an obligation by the developer to perform. In other words, the
developer must build the scheme in accordance with the agreed specification and plans within a specified
time and agreed budget. Furthermore the developer must ensure the professional team performs optimally
and collateral warranties are procured for the benefit of the fund. During the development process the fund’s
interest will be protected by their surveyor who will oversee the project and attend site meetings as an
observer; this ensures the developer is performing in accordance with the agreed specification and plans.

Lettings
The developer will need to obtain approval from the fund for all lettings or leases. The funding agreement
will usually specify the exact terms the fund will use to grant leases where a standard form is usually attached
to the funding agreement. Note there may be a provision allowing a particular type of lease; for example over
a minimum time period with agreed rent reviews. However, increasingly more flexible lease lengths are
allowed with or without breaks. From a lessor’s perspective the longer and more rigid the lease, then the less
risk of a void. On the other hand, from a lessee’s perspective, it is important the lease is as flexible as possible
to allow for changing circumstances (e.g. additional area needed for more staff) as this would decrease the
lessee’s risk. The agreement may also specify an acceptable tenant. A typical arrangement may specify that
the tenant’s profits for the last three years must exceed a sum three times the rent or total liability including
service charges. The fund may specify that only single lettings are acceptable, although floor-by-floor lettings
may be acceptable after a certain length of time has elapsed after practical completion.

Sale and leaseback

As an alternative to the previously described arrangements, a sale and leaseback arrangement may be entered
into where the developer retains an interest in the investment created by a development. This type of
arrangement varies depending on variables such as the availability of land, the amount of money available
and so forth. However the arrangement is not suitable for all stakeholders; for example where institutions
prefer to retain total control and dictate the details of the leasing arrangements. A sale and leaseback involves
the freehold of the scheme passing to the fund on completion with the fund simultaneously granting a long
lease to the developer, who in turn then grants a sublease to an occupational tenant. There are many possible
variations to this arrangement depending on the method of sharing the rental income. Sale and leaseback
arrangements may be either ‘top sliced’ or ‘vertically sliced’. With a ‘top slice’ arrangement the fund receives
rent from the developer in accordance with the required yield. The developer is then able to retain any profit
from letting the property at a higher rent than the amount payable to the fund. Note if using upward-only rent
reviews in the developer’s lease with the fund then the developer’s profit rent may rapidly erode over time.
This means the developer’s interest is only saleable to the fund. Therefore the ‘vertical slice’ arrangement is
superior from the developer’s viewpoint since both the fund and the developer share the rental income drawn
from the property in relation to an initially agreed percentage during the length of the lease. Institutions are
more likely to enter into sale and leaseback arrangements directly with the occupiers in order to create
attractive property investments with tenants with good financial standing.
When undertaking a property development, the cyclical nature of the market is a major consideration and
the state of the market at any one particular point in time must be evaluated. In a property market when there
is an over-supply of space, although often in a secondary classification, many institutions would then enter
into forward-funding deals on the basis of a pre-letting. Alternatively they would be prepared to enter into
arrangements with a developer of good financial standing if the rent is guaranteed by the developer for about
3–5 years. However forward-funding deals are sometimes achieved on the basis of speculative schemes
provided there is a lack of ‘prime’ space on the market and there is proven demand, where this risk is
quantifiable by the institution.

4.3.2 Bank loans

In recent decades the banks have received increased competition due to the globalisation of the banking
sector, as well as other types of lenders entering the market with hybrid products. The clearing and merchant
banks can provide short-term development finance, either on a ‘rolling’ or project-by-project basis, by means
of overdraft facilities or short-term corporate loans secured against the assets of the development company or
alternatively project loans secured against a particular development. With the dramatic increase in bank
lending and wider acceptance of debt, various different methods of bank lending have been introduced. One
example is development companies seeking bank finance beyond the construction period up to the first rent
review. Another example is the popularity of mezzanine finance being accepted now as an ideal vehicle to fill
the gap between equity and a first mortgage.
For many developers, especially smaller operators, it is difficult to access forward-funding since they are
unable to provide the requested guarantees. In addition the ‘prime’ or ‘premium’ properties acceptable to
institutions actually represent a very small part of the market and to some extent tend to be geographically
restricted. For example in many cities the prime real estate is often located near the city centre where is very
limited supply but high demand. Large development projects with extended planning and construction phases
are beyond the capacity of all but a few of the larger funds. From a developer’s point of view, borrowing
from a bank allows greater flexibility and enables the developer to benefit from all of the growth, unless some
of the equity has been allocated elsewhere. The developer can repay or refinance the debt at the optimal time
and sell on the completed investment at a higher price. In addition, the developer will not be subject to the
same level of supervision during the development process. In a rising market where rents and capital values
increase rapidly, it is more profitable for developers to arrange debt finance as opposed to equity finance for
the reasons listed above.

Corporate loans
Development companies can arrange overdraft facilities or loan facilities with clearing banks that are secured
on their assets. In contrast, with corporate lending a bank is concerned with the strength of the company
including its assets, profits and cash-flow. Accordingly, obtaining bank loans in this way is more appropriate
to investor-developers and large developers rather than trader-developers and smaller developers. This is due
to the large asset bases of investor-developers and larger developers providing the necessary security for bank
loans. Usually corporate loans can be obtained at lower interest rates than project loans.
Project loans
As an alternative a development company can arrange project loans secured against a specific development
project. Banks normally provide loans representing about 65–70% of the development value or about 70–
80% of the development cost. Therefore developers need to provide the balance of funds required from their
own resources. The bank will limit the maximum amount of the loan to allow for potential risk associated
with a reduction in the value of the scheme during the period of the loan. In addition, by insisting on an
equity injection from the developer then this confirms their high level of commitment to the overall
development. This equity provision is normally required at the outset of the development to motivate the
developer to complete the scheme. Also note the developer is 100% responsible for any cost overruns.
The LVR depends on the level of risk perceived by the bank and can vary substantially depending on the
risk profile of the borrower, the perceived risk in the project and prevailing market at the time. Clearly a pre-
let or pre-sold development represents less risk than a totally speculative one. At times it has been possible to
secure between about 85% and 100% of development costs through various layers of bank finance using a
combination of insurance, ‘mezzanine’ finance and profit-sharing arrangements. However in a period of a
sustained downturn this high LVR would be considered to be too risky by the financier. Lending conditions
will vary according to the banking sector’s knowledge and overall confidence in the property market
(systematic risk) and also risk in the actual property itself (unsystematic risk).
Project loans are attractive to the smaller trading companies since they are not large enough to fund the
full development programme through corporate loans. For many larger companies, these loans are not listed
on the parent company’s balance sheet since it is possible to form joint ventures with the bank via a
subsidiary company. Therefore the borrowings associated with the property would not appear on the parent
company’s balance sheet. Historically this approach has enabled property development companies to have
development programmes that would have otherwise been impossible since the level of ‘gearing’ would have
increased to an unacceptable level. In this example ‘gearing’ is commonly referred to as the relationship
between borrowed money (liabilities) and the company’s own money (equity). At times some investments are
negatively geared, such as where outgoings exceed income. Note in some countries this loss can be offset
against other income to reduce tax.
When a bank lends against a particular development project, clearly this will form all or part of the
security for the loan. The developer needs to provide similar information to the bank as is provided to a
funding institution. A bank will seek to ensure each property is well located, that the developer has the ability
to complete the project and most importantly the overall scheme is viable. This requires the bank to have
knowledge of the property market either through in-house staff or external advice from firms of valuers,
appraisers or chartered surveyors in order to examine the risk involved. The developer will need to present
the proposal to the bank in the form of a package being very similar to that required by a funding institution.
Since the bank will view the scheme as a form of security and not as investment, it is primarily concerned
with the underlying value of the scheme rather than details about the specification. The valuation or appraisal,
therefore, forms the most important part of the presentation together with all the supporting information and
market analysis. Importantly it must reflect all of the risk in the proposal with supporting market research to
reduce the unknowns. Equally important is the track record of the developer in carrying out similar schemes.
The bank will also examine the financial strength of the development company, although this may not form
part of the security of the loan.
The bank will employ either its in-house team of experts or external surveyors/valuers to report on the
proposal and provide a valuation of the proposed scheme. Part of the process will be an analysis of the risks
involved and this should be reflected in the terms offered to the developer. The bank will need to be satisfied
there is sufficient contingency and profit/risk allocation built into the appraisal to provide a sufficient margin
for cost increases over the period of the loan.
Another element of the risk involved in bank loans is represented by fluctuations in interest rates which
the bank may be concerned about and therefore limit. Interest rates on bank loans can be at a fixed
percentage, a variable percentage or a combination of both. However if the rate is fixed it is only in relation
to the base rate and often centrally controlled by the government. Generally interest rates will be higher on
project finance loans than corporate loans due to the higher uncertainty and therefore the increased risk the
bank would face. The interest rate margin may be lower if the developer pre-lets or pre-sells the property
before completion since this substantially reduces a bank’s exposure to risk. Also the interest-rate margin on
an investment loan would be comparatively lower than on a speculative development loan. Interest rates on
short-term loans are likely to be floating although on long-term loans they are more likely to be fixed.
The bank should also consider how the loan will be repaid, being either by the sale of the completed
scheme or by refinancing via another bank. It should be noted that on completion of the scheme the initial
rental income will usually be insufficient to cover the interest costs on the loan; this is due to the ‘reverse
yield’ gap problem where yields on property investment tend to be lower than medium to long-term interest
rates.
The bank will also need to protect its ‘security’ by obtaining a first legal charge, mortgage or lien on the
site and development. It is important for this to be legally recorded on the title or deed to the property,
therefore alerting any prospective purchasers undertaking a search who will be aware of this liability before
buying the property. In the event of default on the loan the bank will be able to obtain ownership of the
development if required. It may also require a floating charge over the assets of the development company.
The bank will need to be able to be legally capable of assuming total control of the development in the event
of any default so may require legal assignment of the building contract and any pre-sale or pre-letting
agreements. Similar to a funding institution the bank will also require collateral warranties (i.e. secure
guarantees) from the professional development team.
Guarantees may be required from the parent company or a third party, especially if the financial strength
of the development company is not considered adequate due to a perceived higher risk. A full recourse loan
will involve the parent company providing a full guarantee covering the developer’s capital and interest
payments together with a guarantee the project will be completed.
Previously limited and non-recourse loans became an attractive proposition for developers seeking to
finance their development projects while providing limited or no guarantees. With a ‘limited recourse’ loan
the parent company may only have to guarantee cost and interest overruns. Limited recourse loans were
normally granted for the construction period of a project and up until first rent review. A ‘non-recourse’ loan
involves no guarantees with the only security for the bank being the development project itself. However, in
practice the parent company is still responsible and it would be very difficult for a developer to simply walk
away from the scheme without damage to their long-term reputation.
The developer needs to take account of the considerable loan establishment costs involved in accessing
bank finance and these establishment costs are usually paid upfront. Such costs vary between funders but will
cover internal costs incurred by each bank on behalf of the borrower. The developer will also pay for the cost
of carrying out their own appraisal and a presentation to the bank. In addition there are several fees payable
to the bank although some fees will vary depending on the size and type of the loan. For example if multiple
banks are competing to fund a large development project then one bank may lower or remove the fees
altogether to increase their level of competitiveness. In addition an arrangement fee will normally be charged
by the bank to cover the cost of conducting a valuation and assessment of the project. This fee may include
an element of profit depending on the risks involved. There will also be a management fee to cover the bank’s
costs in monitoring the project consisting of mainly surveyor’s fees. Such charges can represent up to about
3–10% of the value of the loan. In some instances there may be a ‘non-utilisation’ or ‘commitment’ fee on the
part of the loan not drawn down initially as the bank will have to retain the full loan facility and cannot
commit the funds elsewhere.
Note there are some variations on the basic project loan described above and these require further
discussion.

(I) INVESTMENT LOANS

Development companies seeking to retain a development can secure the option to convert the project loan
into an investment loan on the completion of the project once it is fully let and usually up until the first rent
review. On the other hand a developer may agree a combined project and investment loan from the outset.
Also the developer may be able to refinance a loan on completion on better terms than a previous short-term
development loan. For investment loans the banks will normally lend up to three-quarters of the agreed value
but there is always a problem since the rent will not usually cover the interest payments. Banks often prefer
the interest to be covered by the rental income and therefore can limit the size of the loan. This limit may be
relaxed where the property is reversionary (i.e. let below market value) or the parent company guarantees the
shortfall interest. Otherwise a bank may require the developer to limit the interest rate or re-arrange the
payments on the loan (see below). The interest rates on investment loans are usually lower than on
substantially riskier speculative project loans therefore the assessed risk to the bank will depend partially on
the financial standing of the tenant.

(II) ‘MEZZANINE’ FINANCE

A project loan may be split into different layers known as ‘senior’ debt and ‘mezzanine’ debt if the developer
is unable to provide the normal equity requirement or wishes to increase the amount of the loan above the
normal loan to cost ratios. The ‘senior’ debt usually represents about the first 70% of the cost of the
development scheme in a similar manner to a straightforward project loan. ‘Senior’ debt is usually provided
by the major banks and is commonly referred to as the first mortgage, since it takes priority over other forms
of debt if the property is sold to reclaim funds. This debt may represent more than 70% if the development is
pre-let or pre-sold. When a developer wants to borrow more of the cost of the project than 70%, additional
money may be raised in the form of ‘mezzanine’ finance. Also the bank may increase the ‘senior’ debt
exposure to about 85% of cost with a commercial mortgage indemnity scheme. Mezzanine finance may
involve the developer losing some of the equity, or alternatively, taking out an insurance policy. This
mezzanine element is normally provided by merchant banks and specialist property lenders. As this
mezzanine level of finance is more risky and often referred to as a second mortgage, the bank will charge a
higher interest rate often equating to about 1–2% higher than the rate on the senior debt. Alternatively they
may require a share in the profits of the development. The banks will also require full guarantees from the
parent company.
If a mortgage indemnity insurance policy is taken out this will reimburse the lender if the loan is not
repaid in full, although it involves the developer paying a substantial one-off premium to a specialist
insurance company. The policy may cover the mezzanine layer of the loan or the entire loan. Equity sharing
with the bank may involve a profit share or an option over a legal interest in the scheme. The type of banks
usually willing to participate in the equity of a scheme are limited to those with sufficient property expertise.
Very often, due to tax complications, the profit share will be expressed as a fee. In this scenario the bank will
become part of the development team and be involved in the decision-making process.

(III) SYNDICATED PROJECT LOANS

The required development finance may need to be borrowed from more than one bank. In particular, larger
loans are more likely to be syndicated among multiple financiers or a group of banks by a ‘lead’ or agent
bank. Each bank shares a proportion of the risk of the development project depending on their initial
contribution. In addition, their profit is also commensurate with the proportion of their initial contribution. As
a further complication the loan may be limited to ‘senior’ debt or it may include a layer of ‘mezzanine’
finance. The ‘lead’ bank, usually an established property lending bank with the necessary expertise employed
in-house, will arrange the syndication of banks. The ‘lead’ bank may underwrite the entire facility or agree to
use its ‘best endeavours’ to secure the syndication. It is common for the ‘lead bank’, which may participate in
the syndicate, to have the final responsibility when making decisions on behalf of the syndicate over the
period of the loan.

(IV) INTEREST RATE OPTIONS

A development company may wish to protect itself from the risk of changes in the borrowing rate over the
period of the development project, particularly if the market is uncertain or there are indications that future
interest rates may increase. In this scenario the developer may seek fixed interest loans. However it must be
acknowledged this development company may be locked into a high rate of interest over an extended period
so it would be unable to benefit from subsequent interest rate reductions. On the other hand, a fixed interest
rate can remove uncertainty for the lender regardless of external unknown forces affecting the level of
interest rates. Some developers may compromise and try to ‘hedge’ the risk due to interest rates increasing
during a development period, but this usually results in an added cost. The usual form of interest rate hedging
is the ‘cap’ and this limits the amount of interest the developer will have to pay and is similar to an insurance
policy. It is an interest rate ‘option’ that has to be paid for at the outset, either to the bank providing the loan
or to another bank altogether. For instance the bank will reimburse a developer the cost of interest over and
above the ‘cap’ rate. Hedging is more difficult on a speculative development loan than on loans for income-
producing investment properties due to the uncertainty of the amount of loan outstanding at any one time.

4.3.3 Mortgages
Mortgages originally provided the most common form of long-term development finance. A mortgage is a
loan secured on a property where the borrower has to repay the capital loan plus accumulated interest by a
certain date. However not all lenders are interested in long-term non-equity participating loans such as
mortgages. From the lender’s point of view a mortgage is a fixed income investment and very illiquid. Some
banks, the larger building societies and many life or insurance companies provide mortgages on commercial
properties. However the availability of mortgages is limited due to challenges associated with the ‘reverse
yield’ gap. It is not always commonplace to access fixed rate interest mortgages, although some life funds
provide long-term fixed-term interest mortgages depending on prevailing interest rates. Demand for
mortgages has been mixed in the past due to changing economic circumstances.
Mortgages may normally be granted on a LTV basis between about 60% and 80% based on the risk
involved. The amount of mortgage secured will depend on the security being offered by the borrower in
relation to the quality of property, the financial standing and track record of the tenant and borrower.
Mortgage loans are normally about 20–25 years in line with the length of occupational leases, although this
time period is open to negotiation.
Different methods have been developed to overcome the initial ‘deficit’ problem caused by the difference
between rental income and interest repayments during the first 5 or 10 years. Interest payments may be fixed
for a certain period and then converted into a variable rate. However some borrowers do not want to be
exposed to variable interest rates and may negotiate what are termed ‘drop lock loans’; these allow a
borrower to switch from a variable rate of interest once the rate reaches a certain level.

4.3.4 Corporate finance

As noted previously there are various available methods of raising equity and debt finance from institutional
investors via the stock exchange, which we will now examine briefly.

Equity finance

(I) NEW SHARES

Companies may raise money by selling shares to investors via a flotation or share float on the stock market or
in an unlisted securities market. The majority of new share issues are underwritten by financial institutions
for a fee who then purchase any shares not bought.
Generally speaking there are two types of shares: ordinary and preference shares. An ordinary share is a
share (or portion) in the equity, or in other words part-ownership of the company. Ordinary shareholders have
voting rights and share in both the risks and profits of the company. Profits are usually after tax and are
distributed via dividends, usually half-yearly. Companies may also issue convertible preference shares at a
fixed dividend which, within a specific period, may be converted into ordinary shares. Note that preference
shareholders rank above ordinary shareholders in entitlement to dividend payments. However preference
shareholders do not participate in any growth in the company profits and normally have no voting rights.

(II) RIGHTS ISSUES

A company can raise additional capital by offering existing shareholders the right to purchase a number of
additional shares in proportion to their existing shareholding although at a discounted price. As with new
issues, a rights issue is normally underwritten. The net asset value (NAV) per share will be diluted. The
ability of a company to raise capital via a rights issue will depend on many factors including stock market
conditions, the state of the property market as measured via property share performance and the NAV per
share. In the past some companies have been able to successfully raise capital on the stock market via rights
issues since property share prices have performed well, while only marginally diluting the NAV of their
shares.

(III) RETAINED EARNINGS

One source of finance is the company’s own resources generated by profits. However some amount of the
profit will usually need to be distributed to shareholders as dividends. The decision about determining how
much of the profit is paid out as dividends or retained is up to the company to decide, however they must be
aware of the interests of their shareholders by maintaining a reasonable dividend.

Debt finance
Debt finance instruments may be secured on specific property assets or the property assets of the company as
a whole. Alternatively, they may be unsecured where investors then rely on the financial strength and track
record of the company.

(I) BONDS
A bond is considered a relatively low-risk investment and often the return is also low in comparison to other
investment options. Effectively it can be compared to an ‘I owe you’ note, being secured on a specific
investment property or completed and let development owned by the company. Investors in a bond receive
interest on a regular basis (e.g. each year) and their initial investment is repaid at a specific date in the future.
Bonds are securities so can be traded on the stock market. The interest payments (known as the ‘coupon’) can
be structured to avoid the usual problem of rental income shortfall. With ‘stepped interest’ bonds the investor
receives a low interest rate initially that increases at each rent review. An alternative is a ‘zero coupon’ bond
where no annual interest is repaid but investors are repaid on the redemption date with a premium. Both types
of bonds rely on rising property values although this does not always occur due to the cyclical nature of the
real estate market.

(II) DEBENTURES
Debentures are securities that can be traded on the stock market. Debentures are issued by companies to
institutional investors; in this arrangement the institution effectively lends money at a rate of interest below
market levels in return for a share in the company’s potential growth. The money is typically lent over the
long term, usually up to 30 years, at a fixed rate of interest and is secured upon the company’s property
assets. Normally the security is specifically linked to designated properties, but sometimes provision is made
to allow the company to substitute one property for another although subject to agreement after the valuation.

(III) UNSECURED LOAN STOCK

Property companies may issue unsecured loan stock (i.e. not secured on the assets of the company) to
institutions at a fixed rate of interest which, within a specific period, can be converted into the ordinary shares
of the company although this decision is at the option of the institution. However, to reflect the increased
level of risk attached to the absence of a high level of security, the interest rate is also higher. This higher
interest rate also covers scenarios where the lender is unable to recover all or part of the loan, mainly due to
the absence of security.

4.3.5 Unitisation and securitisation

The property markets and financial markets have developed equity financing techniques to reduce the
challenges associated with the illiquidity disadvantages of property investment. Hence they are attempting to
make property investment more comparable to other investments and overcome some of the inherent
obstacles including lack of a central marketplace, indivisibility (i.e. either purchase the entire property or no
purchase at all), transparency (i.e. lack of information about the product) and illiquidity (i.e. to access the
money tied up in the property would normally take months to access and include advertising, negotiation and
the contract stage). Another obstacle when seeking to finance large individual developments with a funding
institution are the fewer opportunities for developers unless two or more funds become involved. At times
this may mean that larger individual properties are valued at a discount compared with smaller investments
due to the limited number of potential purchasers.
Many global markets have accepted that securitisation and unitisation of property investment is a means of
broadening the demand for property beyond the existing financial institutions who are large enough to
participate. For example a REIT listed on the stock market allows smaller investors the opportunity to buy
part thereof. Simply explained, unitisation means the splitting up of ownership of a property or a portfolio of
properties amongst several investors. Securitisation is a general term used to describe the creation of
securities that can be traded on the stock market, e.g. shares, bonds, debentures and unit trusts. Therefore the
creation of securities is one means of achieving unitisation. Furthermore, with each approach the investor
receives a return in exact proportion to their original investment.
It is worthwhile to discuss the background to various securitisation and unitisation techniques that have
been introduced so far. There have been various attempts at ‘unitisation’ of large properties, i.e. splitting the
ownership of the property into small manageable chunks, therefore allowing several stakeholders to invest in
the property. However, often due to legal complications, it has proved very difficult in practice to actually
separate ownership of an individual property. Examples of earlier attempts at the unitisation of individual
properties in the UK have included SPOTS (Single Property Ownership Trusts) and PINCS (Property Income
Certificates). SPOTS involve a trust owning a property and spreading the ownership among investors in the
form of units similar to unit trusts, although these were not widely adopted and faltered in the UK due to tax
complications. A PINC is a security consisting of an income certificate, a contract to receive a share of
income of the property after management costs and tax, as well as an ordinary share in the management
company that manages the property. As a security it was capable of being traded on the stock exchange
founded on the concept that investors receive the benefits of ownership, in the form of a share in the income
and capital growth, however without owning the direct property.
Previously there have been other ways of unitising a portfolio of properties via unit trusts targeted at small
pension funds and private investors. Predominantly there are two main types of unit trusts: authorised
property unit trusts (PUTS) and unauthorised unit trusts. PUTS invest directly in property on behalf of their
investors and may include private investors. They are strictly regulated to ensure they invest in a diversified
portfolio of low-risk prime income-producing property as part of an overall balanced portfolio including
property securities. A PUT is treated as a company for the purposes of corporation and income tax, but is
exempt from capital gains tax. On the other hand, unauthorized unit trusts are unregulated trusts investing in
a mixed or specialised portfolio of properties. They are attractive to tax-exempt financial institutions such as
small pension funds and charities, however lack the funds to invest in direct property. When all investors in a
trust are tax-exempt then the trust is exempt from capital gains tax. Unit trusts are managed by a committee
of trustees elected by the unit-holders (investors) under the terms of the trust deed.

4.4 The future

The property development industry is widely acknowledged as an essential and integral component of the
aggregate real estate market, being subject to changing supply and demand levels resulting in often clearly
defined property cycles. History has shown that poor timing by a property developer can result in final project
completion at the bottom of the cycle when rents are low and demand is scarce. Minimising exposure to risk
is the core objective here. After each property downturn the lenders, primarily in the form of banks, take an
increasingly vested interest in the projects they are lending ‘their money’ on. Accordingly most lenders now
take an active role in clearly understanding the dynamics of the property market and assess the likelihood a
development will reach its full potential. Thus a borrower must provide detailed market evidence and provide
detailed projections in order to convince the lender the stated profit levels will actually be achieved.
It is essential for a borrower to emphasise and fully understand the role of a lender in order to borrow
funds on the most suitable terms. Simply explained, the lender is seeking at all times to decrease their
exposure to risk, primarily in the form of either property-specific (unsystematic) risk or market (systematic)
risk. In return for accepting a perceived higher exposure to risk, the lender will charge a higher interest rate
commensurate to the level of risk. Whilst many forms of risk are unavoidable, such as risk due to the time
needed for development or the COVID-19 pandemic, often a proportion of the risk can be identified and
reduced by the borrower. For example completing the task of pre-letting or pre-selling a development will
practically remove most risk associated with both the final rent/sale price as well as the likelihood the
property will not remain void after completion.
At any given time there will be a range of financially strong companies operating in the market. This
includes new players embarking upon development schemes on the basis of pre-lets and, in some cases,
speculative schemes. There are a large number of established and emerging lending products being ideally
suited for each project and actively promoted for lending money. At the same time there are property
developments viewed in the market as high risk and that may not succeed. Accordingly many lenders will
avoid funding these projects, forcing the property developers to rethink their proposal or even to find
innovative approaches to proceeding with the project in the existing property market climate. Many vacant
sites are testament to property developers waiting patiently for the optimal time to initiate a proposal or re-
approach a lender when the market is on the rise.
Property developers have a wide variety of lenders and associated products available to them, although the
market is constantly changing and adjusting to its own supply and demand forces. At all times the property
developer must be constantly seeking to keep abreast of regular changes in the lending market, especially
when considering the constant and unavoidable changes in the taxation and legislation in each region. Only
then will the property developer be able to develop a competitive product to realistically compete with other
property developments, especially after acknowledging that interest and borrowing costs are such a large
proportion of the overall costs associated with any property development. Arguably banks will remain as
short- to medium-term debt financiers, although at the same time both securitisation and unitisation are now
accepted in both the property and equity markets. The rapid growth of REITs throughout the world should
continue, especially since this investment medium has the ability to overcome many of the negative benefits
associated with direct property investment and is ideal for larger pension funds.

4.5 Reflective summary

There are a variety of sources and methods of financing property development both over the short term
or long term. The choice and availability of funding will depend on the nature of the scheme, how much
risk the developer seeks to share, as well as the confidence level of (a) financial institutions and (b)
banks in relation to the underlying economic conditions at any particular time. The most secure route
from the developer’s point of view, provided the development is considered ‘prime’, is forward-funding
with a financial institution, an approach combining both short-term and long-term funding. However if
the developer decides to retain flexibility, either seeking to retain the investment or sell when market
conditions are favourable, then debt finance is usually more appropriate over the short term.
The terms and method of debt financing will depend largely on the financial strength of the developer
and the value of the security being offered. Most often a pre-let scheme being conducted by a financially
strong developer represents the best proposition. The greater the risk then the less likely the developer
will be able to obtain debt finance on favourable terms, unless the developer either contributes its own
capital or shares the eventual profits. If debt finance is used then both the developer and financier must
have regard to the availability of long-term finance and the requirements of property investors. Property
has to compete with other forms of investment that offer more liquidity to the investor, therefore funding
and valuation techniques must be developed to improve the attractiveness of property as an investment.

References and useful websites

Barnett, W.A. and Sergi, B.S. (2019) Asia-Pacific Contemporary Finance and Development, Emerald Group Publishing.
Brueggeman, W.B. and Fisher, J. (2018) Real Estate Finance and Investments, 16th edn, McGraw-Hill.
CBRE (2019) Global Rent and Capital Value Indices,
http://cbre.vo.llnwd.net/grgservices/secure/CBRE%20Global%20Rent%20and%20CV%20Indices%20Q4%202019.pdf?
e=1588378920&h=fe3abd4e87c8afce90668899394f4149, 4th quarter 2019.
CBRE (2020) Research and Reports, www.cbre.com/research-and-reports (last accessed 4 May 2020).
Das, P., Aroul, R. and Freybote, J. (2019) Real Estate in South Asia, Taylor & Francis.
The Economist (2017) Global House Price Index, www.economist.com/graphic-detail/2017/03/09/global-house-prices
(last accessed 2 May 2020).
KPMG (2015) Insights on Real Estate Investment Trusts, https://home.kpmg/xx/en/home/insights-on-real-estate-
investment.html (last accessed 2 April 2020).
London Stock Exchange Group (LSEG) (2020) Guidance on Real Estate Investment Trusts, www.gov.uk/hmrc-internal-
manuals/guidance-real-estate-investment-trusts (last accessed 5 February 2020).
MSCI (2020) Research and Insights, https://msci.com/research (last accessed 31 June 2020).
NAREIT (2020) How to Form a REIT (Real Estate Investment Trust), www.reit.com/what-reit/how-form-reit (last
accessed 1 May 2020).
Office for National Statistics ONS (2020) Inflation and Price Indices, www.ons.gov.uk/economy/inflationandpriceindices
(last accessed 19 January 2020).
Parsons, G. (2014) Estates Gazette Property Handbook, Taylor & Francis.
Reed, R.G. (2014) Valuation of Real Estate, Australian Property Institute, Canberra.
Royal Institution of Chartered Surveyors (RICS) (2019) Valuation of Development Property.
Sergi, B.S., Popkova, E.G., Borzenko, K.V. and Przhedetskaya, N.V. (2019) Public-Private Partnerships as a Mechanism
of Financing Sustainable Development,Palgrave.
U.S. Securities and Exchange Commission (2020) Investment, www.investor.gov (last accessed 30 January 2020).
World Bank (2020) Inflation, Consumer Prices (Annual %), https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG (last
accessed 1 February 2020).
Chapter 5

Property cycles

5.1 Introduction

The actual, private object of most skilled investment is to beat the gun, as the Americans so
well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the
other fellows.
John Maynard Keynes 1936

Despite being commonly accepted that property cycles exist, surprisingly they receive relatively
little attention and have a low profile in the property and real estate discipline. Due to the
underlying nature of property development and the critical element of ‘time’ in the development
framework, an understanding of property cycles is essential since these two primary aspects are
directly related to risk. First, it will allow an opportunity for property developers to maximise
their return (i.e. lower risk), either to end purchasers or renters, by completing the project at the
best possible time for release onto the market. Second, at the other end of the spectrum it will
help to avoid the worst possible completion date i.e. exposure to higher risk. A developer who
comprehensively understands the nature of the property cycle is able to plan a project ensuring,
as much as is possible, it is completed and released into the market at the best possible time
therefore reducing risk and also maximising the return on the development. Even though property
cycles are an accepted component of property markets throughout the world, often there is a
relatively poor understanding about the status of a property cycle within the actual submarkets
where a property development is undertaken.
This chapter examines concepts relating to property cycles and informs the property developer
about the underlying theory behind property cycle behaviour. Quite often a property developer
will be operating in a market with little available information about prevailing property cycles,
however it is essential they identify the existing status of relevant cycles. For example as a
minimum they should ask the following questions: Where is the market currently positioned
today (and in the future) in the relevant property cycle? What is the length of time between each
peak in each property cycle? What is the amplitude of each property cycle (i.e. the difference
between the highest point and the lowest point in each cycle)? Company reports and forecasts
may provide some insights into these questions but a successful developer will also conduct their
own research to establish the impact of a property cycle on their business and then adjust their
development strategy accordingly. Only then can a developer make decisions to both minimise
their exposure to risk and maximise the likelihood of success. The focus of this chapter is placed
on how to identify cycles in a particular marketplace and to minimise associated risk to a
property developer due to cyclical market behaviour.
5.2 Background to property cycles
In general, property cycles can be defined as:

Processes which repeat themselves in regular fashion.

However this raises an obvious question:

If these processes are so regular, why can’t property developers predict them?

Note this question is more applicable to some property markets than others, especially when there are
easily distinguishable supply and demand players. For example the commercial property market has
always been particularly prone to the boom-bust cycle that can cause very destabilising economic
effects (d’Amato et al. 2019). Even so, forecasting the timing and magnitude of these rises and falls in
the market has never been accurately achieved to absolute perfection on a regular basis in any global
property market. In contrast there is more research undertaken into financial cycles in asset markets
(Beirne 2020) however with an inability to accurately predict the timing of cycles. The behaviour of
the financial markets in the twenty-first century (e.g. due to COVID-19, the global financial crisis
(GFC)) is a good example of this observation.
Surprisingly the existence of ‘cycles’ is traditionally much more complex than at first may be
anticipated (Alqaralleh and Canepa 2020). This is largely due to a high level of heterogeneity or
uniqueness in terms of duration, amplitude and co-movements. Furthermore, variations can differ
substantially across cyclical episodes and observed recessions are by no means mirror images of
expansions. The perfectly symmetrical example of a cycle in Figure 5.1 would therefore be totally
unrealistic in the ‘real world’ since it does not promote any irregularities or the traditionally sharper
‘bust’ periods.

Figure 5.1 Characteristics of a typical cycle phase

The underlying nature of the property market, the behaviour of the stakeholders and the process of
property development collectively provides an ideal environment to support the existence of property
cycles. The starting point here is to consider both the limited supply of land and also the level and type
of demand, where both aspects are further considered in the next sections. In addition there are other
property market characteristics contributing to property cycles behaviour to be examined.

Limited availability of reliable property data

In comparison to markets for other investment goods or assets, both the amount and quality of
information available about transactions in the property market is substantially below average. For
example if you intended to start a new company to be listed on the equity market, today there is a
wealth of information easily accessible to all interested parties about currently listed companies
including financial data, their trading share price and quantity of shares traded. Furthermore this
observation also applies to other investment mediums including the monetary exchange rate being
quoted on an up-to-date basis every minute during a trading day. Other examples include the gold
price, the oil price and so forth.
The availability of information in the property market is restricted. It is relatively difficult to find
out information about the operation of every single property in the real estate market with a high
degree of reliability. Partly this is due to the highly confidential nature of property transactions and
difficulties in gaining access to reliable financial data for individual transactions (sales and leases)
between two separate parties. Probably the largest barrier is the lack of a central marketplace for the
property and real estate market, which in turn makes it possible for property transactions to occur
between two parties anywhere and not be openly disclosed. In most instances each property
transaction will also be subject to some form of tax although there is no requirement for all
government bodies to disclose individual details. However with the increasing importance of privacy
legislation, improved access to this data becomes even less likely.
It is possible for a successful property developer to partly overcome this barrier by (a) purchasing
property transaction data from a third party or from the government (where available) or (b) rely on
their developed networking skills and established trust relationships to access this information. The
advantages associated with networking should not be underestimated from a property and real estate
perspective. Clearly ‘knowledge is power’ and a distinct advantage in the process of property
development.

A time lag between the purchaser-seller transaction occurring and the release of this
information into the public domain
Unlike other financial assets transferred directly between a buyer and a seller, the actual period of time
between (a) the initial signed agreement to transfer a property between two parties and (b) final
completion of the transaction will be weeks, often months and sometimes years. However only after
final completion at (b) is the information freely available (if at all) to third parties. At times this period
may be extended to multiple months or any agreed time period. Due to the period required to conduct
due diligence checks of the subject property (e.g. confirm ownership, encumbrances, checks with local
authorities on future planning proposals which may affect the completed development, finance
approval, etc.), arguably there will always be a time lag between (a) and (b). Note the use of online
searches can reduce the period between agreement (a) and transfer (b) and release of information onto
the market (c), however the period required for due diligence searches can never been removed. The
main effect on the cyclical nature of property markets is where purchasers are today making finalised
transfer decisions although this information is only released onto the market a considerable period of
time later. If there is a scenario involving a proposed property development (i.e. a purchaser pays a
deposit and then pays the balance upon completion) where the time between (a) and (b) can be up to a
year or more, the market may have changed substantially over this period. In turn this will cause an
imbalance between supply and demand since decisions are based on very dated information. An added
complication occurs when multiple separate and competing property developments commence at the
same time, albeit are oblivious to each other and will adversely affect the overall market supply.

Unique nature of each parcel of land and also each building

Unlike other assets (e.g. gold, cash) each parcel of land is unique. This is due to the combined factors
of location, geology and the buildings both on and surrounding each plot. This difference provides
challenges for analysing supply and demand interaction. In theory any land parcel located in close
proximity should have a similar value if all other variables are held constant. However there are many
attributes that can potentially increase or reduce demand for a specific parcel of land including the
total area, shape, topography, distance to transport and services (e.g. retail shops), view, access and
planning/land use restrictions.
A common scenario is a property’s actual view of the ocean or a river, where a premium exists for a
property with a ‘view’ but a ‘close view’ cannot be compared. On the other hand a location near a high
voltage overhead transmission line (HVOTL) will often decrease in value but the amount of reduction
will depend on factors including how close the HVOTL is positioned to the plot in question and
whether the pylons are visible (Wadley et al. 2019). These factors can influence the amount to which a
parcel of land is affected by market trends both complicating and increasing the error rate in a market
analysis.
A building, especially a larger building such as a multi-level office or retail shopping centre, is
relatively unique and difficult to compare to normal market benchmarks. Unique development
characteristics include the date of construction, design, building material and location/aspect. While
certain residential products, such as units/flats or detached housing, may be practically identical in
design and construction it remains that larger buildings have a substantial ‘point of difference’
between other buildings. As a result property developers often face a challenge in determining how the
demand for a proposed new building development can accurately be measured. If a direct comparison
cannot be made with an identical product then an allowance for error will need to be factored in the
analysis.

Property and real estate is a large ‘lumpy’ asset

In comparison to property and real estate, other competing assets in the investment market are usually
divisible into smaller components. This applies to cash, equities and other mediums (e.g. gold, silver).
However land and buildings are considered a ‘lumpy’ asset; for example a multi-level office building
cannot be developed in smaller stages in a similar manner to a staged residential land development.
The problem therefore arises with a new proposed property development; say for example a high-rise
building or a large residential apartment block. During the development phase it is not possible to
release part of the development onto the market, mainly due to logistical challenges relating to the
construction phase. As a building is constructed from ground level upwards, the building can usually
only be fully occupied when all construction has ceased. In turn this creates a problem for the
developer as the entire asset can only be released together on a particular date. The downside is linked
to the new supply of accommodation being released onto the market only in large amounts at once,
rather than in smaller components. Furthermore if several buildings are released onto the market at the
same time then this can easily cause an over-supply situation in the broader market, irrespective of
demand.

The highest and best use of land is constantly changing

The property and real estate market is in a constant state of change, both in terms of supply and
demand. For example when most towns were originally settled it was generally accepted that housing
and retail services were established in the centre. As the town’s population increased and expanded to
city status causing a need for industry and other associated uses, land use for housing was usually
relocated to the outer areas of the city. This dynamic changing nature of land use in most urban areas
is accepted although it has direct implications for supply and demand fundamentals. In other words
demand for a certain land use today (e.g. light industrial) may be gradually decreasing at the same
time the proportion of a competing land use (e.g. retail) is increasing in the same locality. It would be
a poorly planned property development if it was specifically designed and constructed for the previous
land use, i.e. the focus was placed on the existing, albeit declining, land use rather than the future land
use. The ‘visionary’ skills of a successful property developer come directly into play here.
Each property developer must closely monitor the changing nature of the real estate market and
make a judgement regarding the optimal highest and best land use for the scheme. Often this will
require an application for planning permission for a change of existing land use, however it must be
fully supported by a well-argued submission and also within the existing planning framework.

Land is physically only in one location and can’t be moved

A land parcel is fixed in its location and regardless of how many modifications are made to any
structures erected on it, such as converting an office building to a residential land use, the locational
characteristics of the land or situs cannot be changed. From a property cycle perspective this means
the land component and associated structure/s will be subject to the prevailing market conditions for
where the land is located. An example would be a hypothetical property development on an inner-city
allotment. If an inner-city or downtown area is experiencing a high profile crime rate with associated
stigma attached to a certain precinct, then the market perception of the new development is likely to be
affected. The impact of such factors is outside of the control of the developer and unavoidable.
Regardless of how deep a hole is dug or how tall a building is, the exact location of a parcel of land
cannot be moved to a different marketplace.

Most investment in property is by individuals who infrequently trade

Most landowners trade very infrequently and therefore have limited knowledge about property and
real estate at any particular point in time. Whilst the largest land use in urban society is housing and
most landowners only own a single parcel of land, in general the property and real estate market has
placed relatively little focus on understanding the supply and demand fundamentals in detail. This is in
direct contrast to other investment mediums (e.g. term deposits, exchange rates, equity markets) when
a large amount of information about past, current and predicted future trends is available. Therefore, at
times, poorly informed individuals are making property and real estate decisions with very limited
information and knowledge about the surrounding market conditions. From a property cycle
perspective this can equate to demand for a new property development in the construction phase,
however upon completion the same purchasers may seek to sell their investment and then ‘flood’ an
over-supplied market with resales. In turn this may result in a sharp price decline due to the lack of
knowledge by investors about basic economic market fundamentals.

5.3 Types of property cycles

There are as many different property cycles as there are different property markets, however this
discussion is focused on the theoretical framework supporting property cycle behaviour. Accordingly
each property developer needs to conduct their own research into each individual market to identify
the length and amplitude of the cycles in their prevailing market area. Note that a generic property
cycle simply does not exist.
It is widely accepted the underlying structure and operation of property and real estate markets in
most regions cause the existence of some form of cyclical behaviour due to the constantly changing
dynamics between the supply and demand variables (Asian Development Bank 2019). Even though
cycles are an integral part of the ongoing operation of the property market, they are usually poorly
understood. This is partly due to the challenges in identifying and examining reliable information
about the property market where the development is located. In isolation this aspect is often the main
difference between a good developer and an unsuccessful developer, also being linked to the ability to
forecast and survive a market downturn until the next upswing occurs.
A starting point for property cycle analysis is to consider this statement: ‘everything on the planet
and including the planet will eventually return to dust’.This is especially relevant for the built
environment, including all buildings and structures, since they form a major component of a property
development. In this context it can be argued that every item experiences a period of uprising (i.e.
growing, increasing) and then falling (i.e. shrinking, decreasing). Note some goods (e.g. equity
markets) repeat this cycle many times where others just undertake one cycle (e.g. a disposable item
which cannot be recycled). The former also applies to most property markets where an ongoing and
circular boom-bust cycle occurs. Understanding why and when this occurs in a particular market
sector is critical for success.
Historical evidence confirms that property markets throughout the world experience regular cycles
based on the changing relationship between supply and demand. Many of these boom-bust phases can
be somewhat predicted, especially with the benefit of hindsight. A market downturn as part of a
property cycle is of no surprise to a proven property developer who will be well prepared with their
business survival strategy. An example of a defined property cycle is based on the effect of a new
mining company that just commenced mining in a township. Initially the discovery of rich mineral
deposits, such as gold, will naturally cause a sharp upward swing in the value of property in the town
due to the arrival of many new residents seeking their fortune. After a period of stabilisation where
supply is increased by developers to meet demand, property prices will then even out and flatten. In
some instances the mine itself closes and the property becomes practically worthless, or even has a
negative value. At times the entire area may become a ‘ghost town’ where land is practically
worthless.
There are varying cycle lengths that have been widely discussed in business research. For example
the original notion of a ‘seven year’ cycle was adopted as it represented the difference between good
and bad harvests (Niehans 1992). This period was reflected by a medium of seven years although now
appears to be a rudimentary means of allocating such a defined time period for urban property
markets. According to Burns and Mitchell (1946) it has been long established there are at least four
distinct characteristics of business cycles:

1. can only be found under a capitalist society and not under other systems;
2. not limited to a single firm or industry, but is economy-wide;
3. one cycle follows the other, and marked by a similar sequence of events; and
4. cycles differ in length and amplitude.

A large amount of cycle research has confirmed the existence of four cycle categories and these
require further discussion.

(a) Short-term cycles

Commonly accredited to Clement Juglar (1819–1905), short-term cycles refer to a period of between 7
to 11 years and were typically based on historical financial information (Tylecote 1994). Furthermore,
the ‘Juglar’ cycle was also commonly known as the ‘fixed investment’ cycle. Juglar studied business
conditions and confirmed their actions were not completely random but generally operated within a
number of regular cycles. Importantly Juglar convinced economic science that advanced economies
inherently develop in cycles and persuaded the business world of the existence, persistence and
pervasiveness of these cycles (Niehans 1992). Juglar clearly identified three distinct phases in each
cycle, namely ‘prosperity’, ‘crisis’ and ‘liquidation’.
It was also shown that ‘every cycle in every country is seen to be, to some extent, historically
unique, and in it length has to be explained in light of its particular features’ (Niehans 1992, p. 554).
Juglar was the first analyst to use a combined time series analysis of factors such as interest rates,
prices and central bank balances to analyse a well-defined economic problem (Tvede 1997).
Furthermore, Juglar was also the first to acknowledge that depressions were actually adaptations to
situations created by the proceeding prosperity.

(b) Medium-term cycles

Brought to prominence by Kuznet is the concept of a medium-term cycle being typically over a period
of 15 to 25 years. It has strong econometric support (Solomou 1987) and downswings can be triggered
by sharemarket crashes. The operation of the Kuznet cycle can been explained by the dynamics of
investment in building and land, as well as with other long-term assets such as stocks and shares. For
example the Wall Street crash in 1857 was accepted as a Kuznet downturn with upswings influenced
by changes in immigration and rainfall variations.

(c) Long-term cycles

Early research by Nikolai Kondratiev in the early twentieth century in Russia promoted the existence
of long-term cycles with a complete cycle stretching over a period of approximately 45 to 60 years.
This theory was based on a number of ‘long waves’ where there was a series of oscillations following
an initial over-investment in capital, then a recession until the invention of new technology eventually
led to a new spurt of investment. Subsequent research has continued to support the existence of long-
term cycles.
An overview of the long-term cycle would be as follows:

1. first cycle commenced with the Industrial Revolution;

2. second cycle followed the railroad boom;
3. third cycle started by the electrical power plants and reinforced by industries such as automobile,
steel and textile industries.

(d) Extremely long-term cycles

Although rarely discussed and with a relatively low profile, this cycle is based on international
relations and refers to four generations over a period of 100–120 years (Modelski 1987). Significant
events include the timing of global wars and variations in the balance of global power. These four
generations can be broken down as follows:

1st generation – a global war takes place with the emergence of a new world power controlling
world trade and economic relations
2nd generation – a period of uncontested leadership;
 3rd generation – de-legitimation occurs;
4th generation – a period of de-concentration occurs with a serious challenger emerging. The 1st
generation then follows soon after.

This long-term cycle can draw parallels with historical global trends including the Roman Empire, UK
dominance, the United States and the emerging Chinese cycle.
The property cycles described above are typical examples of cycles that may operate in a particular
market where many cycles will be loosely compared to the cyclical shape in Figure 5.1. Note it is
commonplace for multiple cycles to be operating simultaneously in the same market and this may
further complicate any property cycle analysis undertaken by a property developer. Reference to
Figure 5.2 highlights a relatively simplified interaction in a market over time (as measured in years)
where there are three distinct cycles. The smallest cycle (a) is repeated approximately every four years
although has the smallest level of volatility (amplitude). The next longest cycle (b) is repeated every
12 years although has a much larger level of volatility. The third longest cycle (c) is repeated
approximately every 56 years however has an extremely large level of volatility.

Figure 5.2 Combination of varying length cycles affecting a single market

In Figure 5.2 there are some additional observations that property developers should give further
consideration to as follows:

The theoretical aspects of a property market will not convert directly into practice every time.
Many successful developers have no formal university education concerning economic
fundamentals yet they are able to make reliable judgements about the market status on a daily
basis. Whilst theoretical models as shown in Figures 5.1 and 5.2 are useful as a decision-support
tool, they lack the ‘human factor’ and ‘gut instinct’ input that often forms such a large part of
successful property development decisions.
The cycles displayed in Figure 5.2 and many other models have been smoothed to remove some
of the volatility. For example the largest cycle in Figure 5.2 appears to commence with an
upward cycle, however it actually decreases and then increases again before reaching its peak.
The challenge for any type of analysis is to determine when it is the optimal time to adjust the
data. This can only be resolved with skill and experience since all data can be manipulated to
some extent.
The shape of each cycle itself will vary. Often reference is made to a ‘boom-bust’ cycle and this
typically refers to the ‘bust’ or severe downturn that occurs. The downside shape of the cycle
will not necessarily mirror the upside shape of the cycle; it would be unreasonable to expect such
a simplistic formation.
5.4 Business cycles and structural change
As many property developments and investments are closely linked to economic and business
frameworks, there is usually an observed relationship between property cycles and business cycles.
This relationship is highlighted in Figure 5.3 where there is a clear relationship between (a) the
property market, (b) the overarching ‘real economy’ and (c) financial markets or the ‘model economy’.
Consideration should be given to the direction of the arrows in Figure 5.3 where the property market
has either a passive one-way relationship or alternatively there is a two-way relationship. An example
is an economic upturn or downturn affecting the property market, however it is only a one-way
process. On the other hand the property market has a two-way relationship with both a recession and a
credit squeeze.

Figure 5.3 Property market, financial and economic framework (Source: based on Barras 1994)

History has shown that a high level of interest rates in the business cycle coupled with the negative
effect on the property developer limits their capacity to borrow adequate funds to complete a
development. The interaction of the short-run business cycle with the property cycles creates great
variability in a developer’s plans and the ability to progress schemes at different times. The developer
also needs to be responsive to the evolutionary changes affecting occupier preferences as a result of
short-term and long-term changes in the structure of the economy e.g. GFC, COVID-19.

(a) The business cycle

The linkages between the economic or business cycle and the real estate market have been well
established (for example see Ghent et al. 2019; He et al. 2017). Three important cycles have been
clearly identified, all of which exhibit different periodicity. These include the business cycle (which
drives the occupier market), the credit cycle (which influences bank and institutional funding) and the
property development cycle itself. A simplified cycle discussion can commence with a business
upturn:

1. Strengthening demand, rising rents and capital values trigger the start of a new development
cycle upswing.
2. If credit expansion accompanies the business cycle upswing, it can lead to a strong economic
boom. The banks may also fund a second wave of speculative development activity.
3. However, because of the long lead times in bringing forward new development, supply remains
fairly tight and values continue to rise.
4. By the time the development cycle reaches its peak the business cycle has already moved into a
downswing, accompanied by a tightening of monetary policy to combat the inflationary effects
of the economic boom.
5. As the economy subsides then the demand for property declines. Rents and values fall as a result
and the vacancy stock increases in supply.
6. As the economy moves into recession and the decreases in rents and values continue, property
companies are affected by the credit squeeze, bankruptcies increase and the development cycle is
choked off.

It is possible to refer here to earlier events in the UK. For example, history has shown that a strong
property boom of the scale of the late 1980s is typically followed by a more muted development cycle,
which was again repeated in the early 2000s prior to the GFC. Banks and investors struggle with debts
incurred during a previous recession and therefore are disinclined to fund speculative development. At
the same time, over-supply of property built in the previous boom is sufficient to meet demand during
the whole of the following business cycle. It is only when supply is exhausted, at the start of the next
business cycle upswing, that the speculative development cycle takes off once more and gathers
momentum. Clearly the potential success of development projects will be influenced by where in the
cycle they started and ended.

(b) Structural change

Underlying the short-term business cycle are longer-term shifts in occupier requirements resulting
from underlying structural changes in the economy. For example higher demand levels for very large
warehouses has resulted from strategic reorganisation within the retail and logistics industries, greatly
assisted by the increasing availability of sophisticated information technology. Similarly the changes
in working practices amongst office occupiers, again encouraged by developments in information
technology, will most likely generate demand for new innovative designs of office buildings in the
future. Developers and investors who monitor these long-term changes can begin to create new
visionary types of product/developments before the rest of the market. At the same time they can
avoid being left with buildings with a diminishing ‘shelf life’ and associated high depreciation levels.
This is one area in which property market research can be of great assistance.

5.5 Surviving a market downturn

In most developed countries the media outlets provide regular commentary about the current status of
the real estate market, being typically either (a) experiencing a ‘boom’ in real estate values or (b)
entering a downturn in the property cycle. Since the market constantly fluctuates within this cycle the
central question to be asked is not ‘if’ a market downturn will occur, but ‘when’will this downturn
occur? For example, please refer to long-term cycles in Figure 5.2. Despite evidence that severe
market downturns, such as COVID-19 in 2020, the GFC in 2007–8 and the Asian Financial Crisis
(AFC) in 1997, are also a regular occurrence it is still apparent many real estate developers ignore the
likelihood a downturn will occur in the lifetime of their business.
A natural business cycle results largely from both over-exuberance and also the misguided belief
that markets and associated values will increase in value in a practically straight line. Long-term
fundamentals supporting these increases are sound but the trend is not a linear line. The inevitable
downturn tests the survival skills of real estate developers who must deal with minimal demand for
new projects and little or no cash inflow into the business while somehow meeting their existing
repayment liabilities, i.e. cash outflows. The lack of cash-flow, at a time when financiers are especially
risk-averse with tightened lending criteria and associated higher interest rates, usually forces a
property developer to downsize or immediately cease operations with an obvious loss of goodwill. A
careful understanding of supply-demand fundamentals coupled with retention of access to cash will
assist developers to survive until the next inevitable upswing in the market. The key to survival
includes substantial experience of cycle behaviour and a reliable business or organisational strategy.
The cyclical nature of real estate markets can definitely have a positive or negative effect on the
success of a real estate developer; often it can ‘make or break’ a developer. Undertaking cycle drivers
is very complex and affected by numerous factors including demographics and the prevailing level of
uncertainty or lack of confidence in the marketplace (Ryan and Branigan 2019). Poor property
development decisions, for example initially paying too much for vacant land or over-priced
completed units, can often be hidden in a rising market and covering such inefficiencies for a period of
years. On the other hand a market downturn or ‘bust’ will test the survival skills of any developer who
may seek to wait out the decline until the next upturn. Even though history has consistently proven
there will always be a level of uncertainty about the future (Aye 2019), developers often miss the
opportunity to protect themselves by resisting overexposure to debt or gaining an understanding of the
interaction between supply, demand and the current position within the cycle to enable them to build
this into their calculations. It is a worthwhile exercise to conduct your own investigation into
successful developers who have been in existence for a very long time and review the information on
their website; often their survival strategy is quite obvious and referred to in their mission statement
for example.
It is widely accepted that upturns and downturns in property values are regular and unavoidable
events in real estate markets. It is relevant here to refer to standard economic theory allowing a
property developer to model varying scenarios based on movement along both supply and demand
curves although the most relevant to understanding a market downturn is the shift or movement in
demand. Understanding such models based on the interaction between supply and demand are often
second nature to a successful property developer who will be able to identify and probably already has
identified a certain price point when, for example, a real estate product for sale will be priced out of
the market resulting in no demand. The emphasis should be placed on the point when there is a
decreased level of demand therefore the following question needs to be asked: how will the agreed
sale/rental value affect demand? As observed in Figure 5.4 the optimal scenario for a property
developer is when supply equals demand, i.e. avoiding an under-supply or over-supply relationship.
Therefore the quantity demanded Q(0) equals the cost of each real estate unit P(0). Unfortunately this
optimal scenario, commonly known as ‘equilibrium’, is rarely achieved in reality as there is constant
movement (supply, value and demand) of real estate; in turn this upsets the prevailing balance between
supply and demand. A property developer should be familiar with the shape of the demand and supply
curve for their particular target market such as the office market. For example in Figure 5.4 there is a
minimum ceiling for real estate units to be sold for where it is not possible to purchase or rent a real
estate product below a certain price.

Figure 5.4 The concept of equilibrium in a real estate market

The model in Figure 5.5 highlights the effect an external structural change, such as a decision by
the prevailing government to introduce higher or lower lending interest rates, can have on the real
estate market. This decision will also directly affect the level of market demand. Note this is an
external shock and often not as predictable as a market downturn in a smaller cycle (see Figure 5.2).
For example a decrease in demand and subsequent economic downturn may be linked to a global
catalyst such as an international oil shortage crisis, a stock market crash, a country at war, a pandemic
or pressure on a particular currency (see Figure 5.3). A catalyst typically starts a domino effect,
affecting many other markets and eventually including real estate markets. Usually this also adversely
affects unemployment levels and then filters into the real estate market, e.g. lower demand for office
space, ability to repay a mortgage. Note this is completely out of the control of the developer who is
simply a spectator in such a downturn.
Figure 5.5 External shifts in demand for real estate

After there is a downward shift in the demand curve (Figure 5.5) this creates an over-supply
scenario in Figure 5.6 where this is a clear gap between the original Q(0) and the new Q(1). At the
same time there is a decrease in the agreed sale price of each lot, down from the original P(0) to a
lower P(1). In order to return towards equilibrium there are only two realistic options, being either to
(a) increase demand or (b) decrease supply. Since the real estate market is lumpy and not able to
quickly reduce supply, i.e. it may take years, the property developer must be able to survive a
sustained long-term period of depressed prices until the market recovers to a supply equals (or is less
than) demand scenario.
Figure 5.6 Over-supply scenario due to decreased demand

In most real estate markets there is a commonly used adage that ‘knowledge is power’ and
therefore a successful developer will not freely share information about their survival skills and
approach in the broader market. An analogy with a magician can be drawn here who is typically very
reluctant to share their secrets to third parties. Accordingly it is not possible to list here a successful
remedy in the form of an action plan for every property developer. A large market downturn arguably
strengthens the operation of the market in the post-crash phase where property developers who recover
are stronger and better prepared. The poorly prepared property developers do not manage to survive,
often due to cash-flow problems or shortages.
Every successful property developer has a formal plan for surviving a major market downturn and
prospering on the other side of the cycle during the upturn. The key ingredient here is timing. In
mainstream society one of the most popular sayings when referring to property is ‘location, location,
location’with seemingly less regard for other market characteristics. However a successful real estate
developer would argue the most important three words are actually ‘timing, timing, timing’.This
statement emphasises there is usually long-term demand for most locations where there is already an
established property market, however this demand will only occur when the timing is optimal. But the
question remaining is: timing of what part of the market? There will be different timing for each of the
following submarkets as based on (for example):

a. different land uses, e.g. residential, industrial, retail;

b. different locations, e.g. country, state, city, suburb, block, street;
c. state of the local economy, e.g. employment, tariffs, exports/imports;
d. how the political parties are operating and other factors, e.g. impending election.

The graph in Figure 5.7 clearly shows the peaks and troughs when examining the median house price
in the form of a national US house price index (Aastveit et al. 2019). The first of three phases
commenced with a ten-year boom period between 1996 and 2006, followed by a GFC related
downturn from 2007 to 2012 before another recovery after 2012. Drawing upon the prior theoretical
discussion in this chapter, especially with relevance to the interaction of supply and demand as well as
the absence of equilibrium, then this type of cyclical behaviour is clearly unavoidable yet arguably is
predictable.

Figure 5.7 US house price cycles (Source: based on Aastveit et al. 2019)
Note: Real house prices refer to the FHFA house price index, a weighted, repeat-sales index, deflated by CPI.
The index assumes the value of 100 in 1995q1. The solid line represents the US aggregate index, the light shaded
line the median for the MSA distribution, the bottom line the 10th percentile, and the upper line the 90th
percentile. The vertical lines divide the sample period by phases of the housing cycle.

The successful approach for property developers is relatively straightforward after accepting the
existence of cycles; simply resist selling in a market downturn when supply exceeds demand and the
profit margin is reduced. This is not always easy to avoid especially when many companies face, at
some stage, substantial cash-flow shortage problems. As property developments are typically funded
with the help of a financier and a large exposure to debt, this creates a situation that in turn revolves
around servicing the debt. In a large market downturn a financier is also under pressure due to other
bad debts (i.e. other failed companies unable to repay debt) and therefore the financier increases the
pressure on the property developer to repay debt. The only viable solution is for the property
developer to have reliable access to cash being available until the market recovers. At times this may
take years hence a substantial cash supply, or alternatively another source of finance, is essential for
survival. A seasoned property developer will lessen their exposure to finance loans during a market
downturn although this strategy relies on knowledge about timing of the market downturn and being
prepared.
5.6 Reflective summary

This chapter confirmed it is essential to have a detailed understanding of property cycle

behaviour in the market where a specific property development is being proposed; for example
see Figure 5.7. Failure to accurately understand where the market currently sits in a cycle can
result in a failed development project. Clearly then, spending adequate time to study market
behaviour is closely aligned to minimising exposure to risk and maximising returns. Both
objectives should always remain the primary aims of a successful property developer.
It is surprising that even though property cycles are an integral part of market behaviour they
are poorly understood in the wider marketplace. A property developer, if correctly informed by
accurate research into prevailing property cycle behaviour, may at times delay their
commencement date to ensure the development is released onto the market at the highest point in
the cycle (Figure 5.1). Nevertheless there are usually multiple cycles in operation in a property
market (see Figure 5.2) and selecting the optimal timing can often be the single largest challenge
in the area. The property bubbles and cycles are unpredictable when looking to the future and are
adversely affected by the decisions of others (Li et al. 2019), such as a competing property
developer’s decision to delay (or not to delay) their development.
Since real estate markets do not operate in isolation, their cycle behaviour also has direct links
to other cycles including the economic and financial cycles. The timing of other cycles can
adversely affect the property cycle and must be factored into the long-term planning of the
property developer, as far as it is possible to do so. Historical market downturns such as the GFC
in the last decade highlighted the interlinked nature of the property market from an international
perspective. Property developers must consider the available information and make judgement
calls based on their data, however their final decision will be largely based on their experience
and judgement. The availability of cash to meet loan repayments during a market downturn is
often the difference between survival until the next upturn. Whilst a financier may offer to lend a
large financial sum at a comparatively low interest rate in prosperous times, it is critical to model
the ability to service this loan over an extended downturn period with associated higher interest
rates. As much as there is a large base of information on cycle behaviour, the property market
itself operates largely on the decisions of humans with their associated perceptions. Therefore an
in-depth understanding of property cycles will assist as a decision-support tool, however it cannot
incorporate all future changes in the real estate market.

5.7 Case study: rapid high-rise construction – Empire State Building

This case study considers the property development benchmarks set in the early twentieth century with
the development of the Empire State Building in New York. Often the benefit of hindsight can provide
important insights, especially when proposing to undertake a large property development during the
commencement of a large economic downturn. In direct contrast to today’s market it is accepted that
many property development stakeholders, especially financiers, are relatively cautious and will require
a high level of pre-commitment before a project commences. In other words the low level of leasing
commitments for this proposed project (i.e. less than 20%) would ensure this development would not
have proceeded in the twenty-first century. However in the 1930s depression era there were also many
indirect wider benefits at the time of construction including the employment of thousands of workers
and the injection of a high level of optimism into the broader economy.
The vision, planning and construction of the Empire State Building established a unique benchmark
in property development that is still acknowledged today. The achievements of this project are
admitted even today, especially when considering the many advancements available in the later
twentieth century including CAD (computer assisted drafting) for architects, computer modelling, as
well as advanced construction and material transportation techniques.
From a property development perspective the most impressive aspect is the extremely short time
period between commencement of construction and completion of the building in the varying
construction phases (see Figure 5.8). This period equated to just over 13 months or precisely 410 days.

Figure 5.8 Construction phases (Source: Wikimedia Commons 2020a)

Construction commenced on 17 March 1930 and was followed by the building framework
increasing in height by an impressive 4.5 stories per week. On 1 May 1931 the building was officially
opened when the building’s lights were turned on by the US president (ESBNYC 2020). Notably the
completed building took only 11 months to construct. This was an impressive feat when considering
the 102-storey building is located in the centre of high-density New York (see Figure 5.9) with the
added complications of difficult site access combined with a high proportion of manual labour
involved in the construction process.
Figure 5.9 Empire State Building: aerial view (Source: Wikimedia Commons 2020b)

The Great Depression from 1929 to the late 1930s was partly recognised as the catalyst for
construction of the Empire State Building due to the ready availability of a substantial labour force. It
can be argued that the rapid construction speed of the project was also assisted by other factors
including a lower level of workplace health and associated safety legislation and standards (i.e. in
comparison to today in developed countries) for workers. The nearby Chrysler Building (note: 35
metres shorter) was constructed over two years and completed one year prior to the commencement of
the Empire State Building, itself being a benchmark for the construction of the Empire State Building.
Although the construction of the Empire State Building was commenced in 1930, the corporation
behind the property development was only established one year prior in 1929 when the land was
purchased for US$16 million. The members of Empire State Inc. were known due to their high profile
in society and included John Raskob (former General Motors executive), Coleman du Pont, Pierre du
Pont, Louis Kaufman and Ellis Earl with Alfred Smith (former Governor of New York) to chair the
corporation (ESBNYC 2020).
The architect, William Lamb, completed the original drawings for the building in only two weeks.
The design approach was innovative for the time and based on compacting the space in the centre of
the building as much as possible so it could include toilets, mail chutes, shafts, corridors and vertical
circulation. This design then allowed the height of the building to be increased, however both the area
of the floors and the number of elevators decreased (6 Square Feet 2020).
Following final completion the Empire State Building was still not 100% fully leased. A high
vacancy rate was partly due to the effect of the Great Depression. It was noted the building was nearly
80% vacant upon completion and was given the nickname of ‘Empty State Building’. Additional
aspects relevant to the property development process include:

The building’s lightning arrester is struck more than 100 times every year.
Nearly all existing television and radio transmissions are sent from the tower of the building.
Approximately 9,500 visitors each day visit the observation decks after paying a fee.
The design is ‘Art Deco’ as was normal practice for the era. Note this original design has been
maintained and restored throughout all upgrades since construction and remains today.
On 28 July 1945 a US Army bomber crashed into the building’s 79th floor. Despite a fire and
associated damage, the design and construction of the building was of such high quality that the
building was reopened two days later.

References and useful websites

6 Square Feet (2020) The Wild and Dark History of the Empire State Building, www.6sqft.com/the-wild-and-
dark-history-of-the-empire-state-building/ (last accessed 20 May 2020).
Aastveit, K.A., Albuquerque, B. and Anundsen, A. (2019) Changing Supply Elasticities and Regional Housing
Booms, Working Paper, No. 8/2019, ISBN 978–82–8379–094–8, Norges Bank, Oslo,
http://hdl.handle.net/11250/2599237.
Alqaralleh, H. and Canepa, A. (2020) ‘Housing market cycles in large urban areas’ in Economic Modelling,
Elsevier. https://doi.org/10.1016/j.econmod.2020.01.005.
Asian Development Bank (2019) Financial Cycles in Asset Markets and Regions,
www.adb.org/publications/financial-cycles-asset-markets-and-regions (last accessed 31 January 2020).
Aye, G.C. (2019) ‘The effect of economic uncertainty on the housing market cycle’, Journal of Real Estate
Portfolio, 25:1, pp. 67–75.
Barras, R. (1994) ‘Property and the economic cycle: building styles revisited’, Journal of Property Research, 11,
pp. 183–7.
Beirne, J. (2020) ‘Financial cycles in asset markets and regions’, Economic Modelling,29 January,
https://doi.org/10.1016/j.econmod.2020.01.015.
Burns, A. and Mitchell, W. (1946), Measuring Business Cycles, National Bureau of Economic Research, New
York.
D’Amato, M., Siniak, N. and Mastrodonato, G. (2019) ‘Cyclical assets and cyclical capitalization’, Journal of
European Real Estate Research, 12:2, pp. 267–88.
Empire State Building New York City (ESBNYC) (2020) Historical Timeline,
www.esbnyc.com/explore/historical-timeline (last accessed 30 April 2020).
Ghent, A.C., Torous, W.N. and Valkanov, R.L. (2019) ‘Commercial real estate as an asset class’, Annual Review
of Financial Economics, 11, pp. 153–71.
He, Q., Liu, F., Qian, Z. and Chong, T.T.L. (2017) ‘Housing prices and business cycle in China: a DSGE
analysis’, International Review of Economics and Finance, 52, pp. 246–56.
Keynes, J.M. (1936) The General Theory of Unemployment, Macmillan Cambridge University Press.
Li, J., Wei, Y. and Chiang, Y.H. (2019) ‘Bubbles or cycles? Housing price dynamics in China’s major cities’,
International Journal of Strategic Property Management, 24:2, pp. 90–101.
Modelski, G. (1987) ‘The study of long term cycles’, in Exploring Long Term Cycles, edited by G. Modelski,
Frances Pinter, pp. 1–16.
Niehans, J. (1992) ‘Juglar’s credit cycles’, History of Political Economy, 24:3, pp. 545–69.
Ryan, P. and Branigan, C. (2019) ‘Emotions, uncertainty, gender and residential real estate prices: evidence from
a bubble market’, Proceedings of the 26th Annual Conference of the European Real Estate Society, 3–
6/07/2019, Paris.
Solomou, S. (1987) Phases of Economic Growth 1850–1973, Cambridge University Press.
Tvede, L. (1997) Business Cycles, Harwood Academic Publishers.
Tylecote, A. (1994) ‘Long waves, long cycles and long swings’, Journal of Economic Issues, 28:2, pp. 477–9.
Wadley, D., Han, J.H. and Elliott, P. (2019) ‘Regarding high voltage transmission lines (HVOTLs): perceptual
differences among homeowners, valuers and real estate agents in Australia’, Property Management, 37:2, pp.
178–96.
Wikimedia Commons (2020a) Empire State Building History,
https://commons.wikimedia.org/wiki/File:Empire_state_building_history.jpg (last accessed 20 February 2020).
Wikimedia Commons (2020b) Empire State Building – Aerial View,
https://commons.wikimedia.org/w/index.php?
title=File:Empire_State_Building_(aerial_view).jpg&oldid=411579912 (last accessed 27 August 2020).
Chapter 6

Planning

6.1 Introduction

In relation to property and real estate markets the role of planning is designed to co-ordinate and
facilitate the efficient use of resources, specifically relating to the limited supply of land being
either vacant or improved. Another critical objective is to restrict conflicting land uses from being
located directly next to each other, such as locating a new oil refinery next to an existing
residential area. The process of planning involves many stakeholders who are both directly and
indirectly associated with the proposed development. Whilst some regions are criticised for
planning legislation being too prescriptive and generally considered too inflexible, others have a
complete absence of planning where the market determines land use and development takes place
on a supply-demand basis. There is a balance to be sought where planning is a ‘value add’ to the
property development process. For example it has been shown at times that planning can
contribute to improved levels of housing affordability (Fernandez and Martin 2020).
A successful property developer will comprehensively understand the concept of planning.
Whilst planning legislation is commonly enacted at the local government level a developer
should understand aspects of planning law at all government levels since it has the potential to
affect land use and consequently the development potential of a particular site. Planning policy is
constantly evolving in response to both environmental and political factors such as the increasing
importance of sustainability in the built environment and the broader society. Climate change
continues to gain an increasingly higher profile and continues to have a direct and indirect effect
on property and real estate markets. In many countries it is necessary for developers to obtain an
individual planning consent for virtually every property development project in order to ensure
the optimal environmental protection. It is beyond the scope of this book to cover in detail all
aspects of the planning system for individual regions and readers are referred to other texts for
further readings.
The aim of this chapter is to provide an insight into the principles involved in the planning
process considered as vital components of development practice. The planning process and the
associated legislation will ultimately determine the type of development permitted on any site and
therefore largely determine the value of the completed development. Criticisms are often targeted
at the planning system based on the argument that this process adds uncertainty to development
in the form of time delays, potential cost increases and, at times, unpredictable decisions that
could possibly be overturned on appeal. These are issues that concern developers who have in the
past misunderstood the time and resources required to progress through the planning process
before any development can actually begin.
6.2 Planning and the environment
The higher profile of environmental concerns has led to sustainable development goals being
increasingly demanded and hence incorporated in development proposals, the wider involvement of
third party consultees but also frequent delays in the consideration of planning applications. As a
consequence of debates held at the 1992 Earth Summit in Rio de Janeiro and the United Nations
Bruntland Commission, many international governments committed to the concept of ‘sustainable
development’, i.e. ‘meeting the needs of the present without compromising the ability of future
generations to meet their own needs’ (WCED 1987). Over time the linkages have increased between
town planning and environmental law and regulations where these close ties have continued in many
aspects of land use planning and property development.
A common question relating to a previously constructed improvement on a site is whether to
‘reconstruct’ or ‘re-use’ although the actual decision process can be very complex. The outcome will
also have a direct and indirect effect on sustainability considerations although often a property
developer will prioritise economic considerations above sustainability, especially if the expenses
associated with a redevelopment are excessive. In addition it has been shown that local government
and private investors also depend on different urban redevelopment or repurposing strategies, however
the final decision will depend on the economic expectations of owners and property investors
(Mangialardo and Micelli 2020).
The details of the planning legislation and its interpretation can vary substantially between regions,
and even between adjoining towns, as well as being heavily influenced by the political party in
governance. For example a political party based on a ‘green’ platform would typically support a
mandate for an above-average sustainability agenda; in turn this may affect the requirements imposed
on a new property development in particular areas. The advent of social media has repeatedly
demonstrated the potential groundswell when an application for a property development is perceived
to affect environmentally sensitive land; some members of the public may feel the planning laws have
not adequately considered the full consequences of their decision on the environment. The developer
must be fully aware of the needs of the community and corporate social responsibility (CSR) is often
undertaken by the developer as well.
This chapter comprises a broad summary of how the planning system operates and implications for
stakeholders in the property development process.
A large number of government agencies and departments are involved in the planning system. This
includes dedicated planning departments depending on the size of the town, region,
state/county/borough and country. Their aim is to control activities classified as development.

6.3 What is development?

The concept of ‘development’ has varying perceptions for different stakeholders in the real estate
market and throughout wider society. Some sectors of society are fervently anti-development at one
extreme, largely based on the ‘sustainability’ and ‘climate change’ argument, regardless of the
unavoidable need to redevelop and reinvent to increase the level of efficiency in the urban market, e.g.
less traffic congestion, fewer vacant properties. People need sleep and safe shelter in the form of
housing to provide accommodation so there is also an argument to increase urbanisation at the other
extreme.
There are many varied planning arguments; for example the desire to retain and preserve every
older building in its original state, regardless of advances in design and construction approaches. It has
been discussed that cycles exist in the property market (see Chapter 5) and also all improvements will
eventually become physically obsolete, regardless of other factors. Therefore undertaking
development is an essential part of our society in order to replace old structures and meet growth
demand. Loosely explained, development can also be described as ‘renewal’, ‘renovation’, ‘reusing’ or
‘updating’, however there are as many different types of development as there are shades of grey. It is
practically impossible to encapsulate ‘development’ with a single generic definition.
In relation to planning legislation the following activities are often generally classified as
development:

carrying out of building, engineering, mining or other operations in, on, over or under land; or
undertaking any material change of use in any buildings or other land.

The concept of development can be divided in two general categories, one being the physical
operations such as building or engineering works and the second being the making of a ‘material
change of use’. The discussion here about property development tends to focus on the physical
activities although the question of use is very important. It is possible to argue that planning control is
basically one of land use, since once the use of land has been determined then the question of precisely
what can be built is arguably a matter of detail.
However not all activities require planning permission. For example in some countries the
designation of ‘minor building works’ falls under the heading of ‘permitted development’ and does not
require planning permission, such as building a boundary wall or certain changes of land/building use,
i.e. if the changes are within the same use class. However most types of development do need formal
permission.

6.4 The planning application

Making an application
If a property developer is carrying out a development for which planning consent is required then
usually they must apply directly to the local planning authority for consent. Since not all development
activities require consent, it is prudent to check local planning legislation to establish whether or not
permission for a proposed development is required. This information is readily accessible via the
website however a face-to-face discussion with the local planner may be more effective at times.
In some regions there have been efforts made to minimise planning constraints and barriers by
removing certain types of development from planning control and also the need for planning consent.
When it is not clear if planning consent is required the planning authority can be approached for
informal advice. It is also possible to formally establish whether a proposed development, use of land
or building is lawful by applying to the local planning authority for a formal ‘certificate of lawfulness’.
This will state whether the proposals would constitute development for which a planning consent is
required. The local planning authority must give a formal decision within a reasonable timeframe (e.g.
eight weeks) and there is normally the option for a right of appeal against this decision.
In most cases anyone may apply for planning consent in respect of any property. Furthermore it is
not necessary for a particular applicant to have any legal or financial interest. However if the applicant
is not the owner of the property then it is normally a requirement for a notice advising of the
application for planning consent to be served on:

a. the freehold landowner; or

b. any lessee with an unexpired term (e.g. at least seven years remaining); or
c. any occupier of agricultural property.

Most planning authorities stipulate a particular form to be used to serve this notice where the applicant
must advise the planning authority of the names and addresses of the people on whom they have been
served. In certain instances of property development (e.g. buildings for various types of public
entertainment or buildings exceeding certain heights), such applications are usually publicised by the
local planning authority who will place a notice in the local media and on the property’s boundary
stating where any member of the public might inspect the plans of the proposed development. Where
the development might have a significant effect on neighbouring property, the authority is usually
obliged to draw the attention of neighbours directly to the application. Any owner or lessee or
occupier of agricultural land upon whom notice is served, or any other member of the general public,
usually has the right to make representations to the local authority. There are usually different types of
application which can be submitted to a local planning authority depending upon the type of
development proposed and the location of the site concerned. Examples of the main types of property
development applications include:

1. Outline planning permission application. An outline application is generally used early on in the
development stage to establish whether or not the proposed development is likely to be approved
by the planning authority before any substantial costs are incurred. The application is made to
establish the principle of a particular form of development located outside conservation areas
without the need to deal with the matters of the siting of the buildings, their design, external
appearance, landscaping or the means of access into a site. These ‘reserved matters’ can either in
whole or in part be left for the future submission and determination of the planning authority in
the event of outline permission being granted. A typical example of such an application would be
for the residential development of a greenfield (i.e. largely undeveloped) site on the edge of an
urban area. The amount of detail the applicant is required to include in an outline planning
application may vary between planning authorities, therefore the applicant would be wise to first
check the requirement with the local authority.
2. Full detailed application. A detailed application will seek not only to establish a land use
principle but also approval for all the ‘reserved matters’ listed above. The application is
comprehensive and in the case of a residential development would include information about the
location of the site and layout of houses and roads, design of the dwellings/buildings, the
principle landscaping proposals and all of the relevant technical information. As the design of
new buildings and other reserved matters are particularly important considerations in
conservation areas (see below) it is mandatory to submit full applications in such localities.
3. Changes of use. Legally an application for the change of use of land or, more commonly,
buildings is considered to be a full application rather than an outline. This requires an applicant
to submit full details of their proposals to the planning authority. Changes of use applications are
normally, although not always, related to where such permission is required to change from one
category of land use to another. A typical example would be the change of use from an industrial
land use to residential land use such as a block of flats or units constructed on a closed factory
site.
4. Applications for heritage listed building consent or conservation area consent to demolish. All
proposals to demolish buildings in conservation areas require specific permission. Therefore
proposals for development in a conservation area must also, if demolition is envisaged, be
accompanied by a separate application for conservation area consent to demolish. Most
importantly any changes proposed to heritage listed buildings (i.e. those specifically identified by
the planning authority and relevant government bodies as being worthy of protection) must be
the subject of specific applications.

A developer seeking to conduct building or engineering works should consider applying for an
‘outline’ planning consent before the detailed application. However the decision on which application
should be submitted first will depend upon the following factors:

the location of the site;

 the issues involved in the proposed development; and
the nature of the developer’s legal interest in the site.

For example a developer may only have an option to acquire the freehold of the site or a conditional
contract being triggered by the granting of a satisfactory planning consent. Preparation of design
drawings for a large building project can be time-consuming and very costly in comparison to an
outline planning application. An outline planning application is a relatively quick and inexpensive
method of determining the likelihood of a proposed development being granted full planning
permission. However it must still contain sufficient information to describe adequately the type, size
and form of the proposed development. The local planning authority will reserve their subsequent
approval of the reserved matters and will attach conditions to an outline planning consent to cover
such issues. A typical condition, which will be one of many conditions on an outline permission,
would be as follows:

Prior to commencing any development, detailed plans, drawings and particulars of the layout,
siting, design and external appearance of the proposeddevelopment and means of access thereto
together with landscaping and screen walls and fences shall be submitted to and approved by the
local planning authority and the development shall be carried out in accordance therewith.

Costs
Fees are normally payable to the local planning authority when submitting applications and the
appropriate fee calculated in accordance with scales prescribed must be paid at the time the planning
application is submitted. Note: this scale of fees is usually reviewed annually. Most often the fees are
charged on a sliding scale depending on the size and nature of the development. As noted, the
planning authority is required to determine each planning application within a reasonable timeframe
(e.g. an eight-week statutory period) commencing from the date the application is registered by the
determining authority together with the correct fee. If no fee or an incorrect fee is deposited with the
planning application, then the reasonable timeframe period will not start to run until the correct fee is
received.

Processing the application

Planning applications must be made on forms provided by the local planning authority and are often
available electronically online. The forms are self-explanatory but many applications are delayed
because applicants either do not complete the forms correctly or fail to provide all the information
required. When the application form is submitted then the planning officer (i.e. a qualified person
employed by the local planning authority who will handle all matters arising from the application)
should be asked to confirm the form gives all the information required and no additional information is
needed from the applicant and also that no supporting documents are necessary.
The application will take its turn in a queue to be processed and checked. The proposed
development site will be inspected by planning authority staff and there is normally consultation with
other organisations such as the road/highway authority, the water authority about site restrictions or
with amenity societies in areas of special environmental interest. The planning authority usually
consults other appropriate authorities before giving planning permission. For example the authority in
charge of the main roads and freeways will be consulted regarding the design of any new roads
ultimately intended for adoption as public highways. Alternatively the local Environmental Health
Officer or equivalent may be consulted on potential noise or pollution problems or the Health and
Safety Executive might be consulted about ‘hazardous’ or potentially explosive processes proposed in
the development.
 The process of making a planning application will vary depending on the planning legislation
within a country or region. For example the process in the UK is summarised in Figure 6.1.
Figure 6.1 Example of the UK planning process (Source: UK Government 2020)

There are various matters where it is important for developers to satisfy themselves by means of
direct discussions with the appropriate authorities. The more important of these include (a) the
adoption of roads and footpaths by a highway or main roads authority where it is appropriate for them
to be adopted; (b) the acceptance by the local authority of public open space provided within any
development; and (c) the necessary approvals under the building regulations, fire regulations or any
other statutory provisions relating to the development in question, e.g. the respective Factories Acts,
the Shop Acts and Public Health Acts. Developers will consult with and reach agreement with the
relevant highway or main roads authority about the design and specification for all new roads and
footpaths and also enter into the necessary adoption agreement. They will reach a similar agreement
with the appropriate water company in respect of sewers. Note that a planning permission does not
constitute an agreement for adoption.
During this process the staff of the planning authority may identify and discuss with the applicant
any individual points or problems needing clarification. During this consultation stage it is often
possible to make modest corrections or alterations in the application to avoid such problems, however
more radical and complex alterations may require another round of consultations or even a new
application. Upon submitting the application it is useful to ascertain the date of the council’s planning
committee when the matter will be considered and to check at the appropriate time that it has been
placed on the committee’s agenda.
The local planning authority pays particular attention to the provisions of any approved
development plan and also any other material considerations when reaching its final decision.
However, if it is proposed to grant a planning permission requiring a substantial departure from the
development plan, then the local planning authority must advertise the planning application and give
an opportunity for objections to be submitted. The relevant government body overseeing the operation
of the planning system will be advised of the proposals and may decide to determine the application,
i.e. to arrange a public inquiry to hear arguments both for and against a specific proposal. In the
absence of any intervention by a government body, the local planning authority may grant permission.

Discussion points
What is the concept of development and when does it occur?
Who are the main stakeholders involved in the submission and evaluation of a planning
application?

6.5 Environmental impact assessment

In many regions the relevant legislation has incorporated a compulsory requirement for an
environmental impact assessment (EIA) or an environmental impact study (EIS), where a developer is
often required to produce an environmental statement (ES) as part of a planning application. This
statement examines the impact of a development proposal on the environment in its widest sense.
There is a comprehensive list of factors to be assessed dependent upon the type of development
proposed. Typically this will include the following considerations:

1. impact on the landscape

2. visual impact
3. ecology
4. geology
5. archaeology
6. air and water pollution
7. contamination of land
8. noise pollution
9. wildlife conservation
10. agriculture.

Some projects such as oil refineries, motorways/freeways and major power stations require the
inclusion of an assessment with all submissions. There are many types of developments that are
typically subject to assessment since they are likely to give rise to substantial environmental effects;
for example this includes mineral extraction and major infrastructure projects such as roads and
harbours. A developer may potentially also apply to the local planning authority for their opinion on
the requirement for an environmental impact assessment prior to making a formal planning
application.
A developer may have a right of appeal if they disagree with a local authority’s request for an
environmental statement. The relevant government body may make a direction that an environmental
impact assessment is essential or in certain cases the developer may voluntarily prepare an assessment
to allay any anticipated fears on environmental matters. The main difference to the normal planning
process where an environmental impact assessment is required is linked to additional publicity
requirements and an extended period for the relevant planning authority to give a final determination
on the application.
A prudent developer can save time and a great deal of energy by consulting the relevant planning
officer of the district council or appropriate authority at the outset, prior to any formal planning
application being submitted for a reasonably sized or large development. Through early consultations
it might be possible to agree the development proposals in principle with the planning officer.
Planning authorities generally have the power to delegate various powers of decision to their planning
officer although they might not always do so; therefore applicants should always determine whether
the planning officer is authorised to grant the necessary planning consent or if they are only able to
make a recommendation to the planning committee.
Planning authorities usually aim to give a formal decision within a reasonable period (e.g. eight
weeks) of receipt of the application. However in practice any substantial application is likely to take
longer than the recommended ‘reasonable’ period to reach a decision. If consent is then refused or
granted subject to conditions to which the applicant has objected, then an appeal can usually be made
to the overseeing government body. If no decision is given within a prescribed reasonable time period,
the applicant can assume that planning consent has been refused and may appeal to the higher
government body. The right of appeal is not universally applied by developers if they consider that
further negotiations beyond the reasonable period (e.g. eight weeks) are likely to result in planning
permission being obtained. Even though consultation with the planning officer does not guarantee that
a proposal is acceptable, applicants should at least thoroughly understand the views of the planning
authority by ensuring they have a working knowledge of all the relevant development plans and other
policies. This will ensure each developer is in a better position to consider how their application may
be approached.
Some planning authorities appoint advisory committees to comment and provide specialist
feedback about certain types of development. Most commonly, architectural advisory panels are set up
to give advice about the architectural merits of proposed developments envisaged to take place in
perceived sensitive areas. Planning authorities must also consult local residents’ organisations or
amenity committees of various kinds. Amenity societies are normally consulted when development is
proposed in conservation areas and the local planning authority has a duty to advertise the receipt of
planning applications for developments in those areas. A local conservation area committee might
exist and its comments will carry substantial weight with the high profile of climate change. The
planning officer should be able to indicate whether it is possible or advisable to consult such
committees or voluntary organisations at the informal pre-application stage. With environmental
issues now very high on the political agenda and commonly picked up by social media, it is becoming
increasingly important for developers to consult with these relevant pressure groups at an early stage
and prior to submission. Although planning authorities are usually advised by the government not to
exercise detailed control over design except in conservation areas, such issues are commonly disputed.
This is primarily because matters of design are somewhat subjective and capable of being interpreted
in several differing ways.
The particular sensitivity associated with applications for development within defined conservation
areas or affecting listed buildings arises because of the special protection afforded to such areas and
buildings by the planning legislation. Planning authorities have the powers to define conservation
areas, i.e. being areas of special architectural or historic interest considered desirable to preserve or
enhance. This process can take place in conjunction with the preparation of a local plan or in isolation.
Once defined, all planning applications for development within the area must be detailed and separate
applications must be made for any demolition. For example it may be the prevailing government
policy that all proposals for development within the conservation area must preserve or enhance its
character where possible. Retaining the facade of an industrial or retail building, prior to conversion to
housing, is a common scenario. Accordingly there is often much debate between planning authorities,
conservationists and developers over the design merits of schemes in conservation areas in the context
of government policy.
If the development proposals entail the demolition or alteration of the character of buildings
currently on a list of buildings of special architectural or historic interest prepared by central
government (e.g. listed buildings), then special procedures are required. A specific consent for the
demolition or alteration of the listed building must be obtained before any work can be carried out.
Applications for the necessary consent must be made to the local planning authority and advertised so
that any member of the public may make a representation. There are a number of reputable groups
with an interest in the protection of listed buildings, which in turn are consulted by planning
authorities with proposals for alterations or demolitions of listed buildings. Developers may have to
spend considerable time and resources discussing their proposals with interest groups in order to
reconcile their commercial requirements and the sensitive refurbishment of a listed building.
If existing buildings appear under threat from development proposals, a local government authority
may be able to issue a temporary listing commonly referred to as a ‘building preservation notice’
which has immediate effect and lasts for an extended time period, e.g. six months. This will enable the
relevant government body to decide whether to formally list the building concerned. If the building is
not subsequently listed there may be compensation payable to the developer for consequential loss.
Local planning authorities also consult archaeological experts when and if required. If the site is of
archaeological interest then the developer must allow an archaeological dig or a watching brief by
archaeologists to take place prior to the development commencing. The period of the dig and any
compensation or contribution from the developer is often the result of direct negotiation between the
developer and the interest group. For example under certain legislation specific areas of archaeological
importance can be entered upon and excavated for an extended time period (e.g. up to six months)
although often developers contribute in-kind and/or with financial resources contributions to quicken
this process. Nevertheless the development process may be delayed and at times it is prudent for a
developer to consult with archaeological groups. The general policy guidelines on archaeological
matters should be considered prior to purchasing a site. Many archaeologists now act as private
consultants to developers.
There are other considerations depending on the characteristics of each site. For example trees on
the development site may be protected by a Tree Preservation Order or TPO, therefore it would be
necessary to obtain consent with the relevant authority before felling or cutting them down. Normally
the necessary application is made to the local planning authority but in certain cases the consent of a
higher level of government (e.g. a Forestry Commission) is necessary.

Advertising the development

In most regions there are strict regulations enabling planning authorities to exercise a very tight
control over all external advertising, including site boards, which are located on the property itself and
promote the development. This is usually a matter where the planning authority will have a policy
document and strict guidelines. Normally the largest weighting is allocated to considerations of visual
amenity and public safety in development locations where advertisements may possibly distract the
attention of road users.

6.6 Planning application approval

In certain regions some types of planning applications, although often relatively minor in nature,
might be decided by the planning officers of a planning authority using powers delegated to them by
the planning committee. Lesser generic items, such as house extensions or advertisements, might be
quickly dealt with in this manner. More important or substantial applications will be decided by a
group of elected representatives of the local government authority (e.g. a Planning Committee) who
will meet regularly and normally have comprehensive powers to make a judgement on the application
on behalf of the council. The committee will be advised by planning officers whose advice is based
upon their knowledge of the area and associated problems and policies, as well as following the
consultations they have undertaken with such bodies as the highway and water authorities. Their
professional advice will take the form of a report and also be influenced by their knowledge of
planning case law and how the council’s policies operate.
Normally a planning committee will seek out and listen to the advice of their professional officers
and also take careful note of any representations made by members of the public. However it is
important to note the committee is not obliged to accept the officers’ recommendation and may make a
decision against the recommendation. Development is often highly contentious and public comment
might come to the committee from individuals or groups or in the form of petitions. The committee
must consider the variety of advice and representation it receives and make a decision to approve or
refuse the application or perhaps, in some cases, to refer it back to the applicant to seek a modification
prior to approval or resubmission.
Public interest and media interest in planning is often very strong when the existing status quo
might be disturbed. This statement is particularly true for a high-profile site not protected by historical
legislation but which has broader perceived value to local residents. A small vocal minority can raise
concerns although the mainstream media (and social media) may inflame them out of proportion when
seeking an angle, however this is not always the scenario. The planning committee is traditionally a
committee of elected councillors who, as part of the democratic political machinery, recognise the
impact the decisions may have on their political standing. It is important for developers to appreciate,
particularly when large controversial schemes are being prepared, that the political make-up of a
specific planning authority can in practice have a major influence on the eventual decision to approve
or reject each development application.

6.7 Planning consent

Planning permission may be qualified in various ways so we briefly consider the more important of
these. Permission may be granted subject to a variety of conditions, for a limited duration of time or
for the personal benefit of certain people or organisations. With regard to time limits there are two
aspects to consider. Every detailed planning permission will lapse unless the development is
commenced within a set time period (e.g. five years) from the date the original permission is granted
or such other time period as the planning authority stipulates. The relevant legislation (e.g. a planning
act) includes provisions to alter the duration of the planning permissions and consents. With outline
permission, the necessary application for approval to the various reserved matters must be made
within a time period (e.g. three years) of the outline consent being granted. The development must
commence within say five years of the date of outline approval or within say two years of the date of
detailed planning approval, whichever is the later, subject to the imposition of any other specific time
limit by the planning authority. Only a very limited amount of work on site, often referred to as
‘material operations’, is necessary to prove that development has commenced to meet the time-limit
requirements.
Previous decisions in the court systems have decided in order to show that a planning permission
has been implemented, there must be a genuine intention to carry out the development concerned
when a commencement is made on the site. This ‘test’ has caused developers some challenges at
times, particularly if planning permissions are obtained at the height of a property boom and are not
implemented then due to lapse in an economic slump. Developers must choose either to renew
permissions, which require renegotiations with the planning authorities, or to let existing consents
lapse. To deal with the evasion of the time-lapse provisions attached to planning permissions, local
authorities usually have powers to serve a completion notice, the effect of which is that planning
permission will lapse unless the development is completed within a reasonable time. In addition there
are usually rights of objection for the people who are affected by them and considered by the relevant
government body depending on the location of each property development.
The second aspect of time limits is when the planning permission remains in force for a limited
period; at the end of that period any buildings or works that have been erected must be removed and
any use authorised by the permission must cease. At the end of the limited period of planning
permission the property will revert back to the state in which it existed before the permission was
granted. On expiration of the limited period planning permission it is the responsibility of the
applicant to make a new application for the retention of the buildings or the continuance of the
planning use. Note that planning permissions for limited periods are of restricted value.
Conditions may be imposed limiting occupation to a particular type of occupier. These fall into two
broad classes as follows. There is the condition limiting occupation of a building to engagement in a
particular trade or vocation. Perhaps the best-known condition of this type is limiting the occupation
of agricultural cottages to those engaged in agriculture. The other and more restrictive type of
condition, although uncommon, is limiting occupation to a particular occupier personally. The ability
to impose such limitations on the type of occupiers sometimes enables a planning authority to grant a
permission it otherwise would not be prepared to consider.
The powers of planning authorities to impose conditions on a planning permission is an accepted
part of property development and planning authorities will provide guidance on the use of conditions
in respect of transport, retail development, contaminated land, noise and affordable housing for
example. Other matters covered include use of conditions for design and landscape, truck access,
‘granny’ annexes, staff accommodation, access for disabled people, holiday occupancy and nature
conservation. Planning conditions are normally only imposed when they are necessary, relevant to
planning, relevant to the development to be permitted, enforceable, precise and reasonable in all other
respects. A typical example might be a condition requiring landscaping, proposed as part of a scheme,
to be carried out in the next planting season available and maintained thereafter to the satisfaction of
the local planning authority. There is a similar right of appeal against the imposition of a condition on
a planning permission as there is against the refusal of planning consent.

Discussion point
What is the difference between planning permission, planning consent and planning approval?

6.8 Planning agreements or obligations

Whilst the planning authorities prepare the policies and plans required to establish the planning
framework for a particular area, in isolation this does not bring about the implementation of the
development plan. Implementation depends upon landowners and developers who initiate
development proposals within the planning area. Having prepared the planning framework, the local
planning authority normally waits for developers/landowners to produce specific planning proposals
and make planning applications. In addition to the power, where appropriate, to attach conditions to
the grant of permission it is possible for planning authorities to enter into legally binding agreements
with developers; this enables development proposals to come forward in circumstances where
authorities could not rely solely on their statutory powers of control, e.g. planning conditions.
Planning agreements, often referred to as planning obligations, are between a developer and a
planning authority and may be made under the provisions of the current legislation in the region. The
concept of planning obligations refers to both planning agreements and unilateral undertakings.
At times some agreements are made to phase the development of land to align with dates when
various public services will become available or improved road access will be provided. Similarly,
agreements might be made with regard to the provision of land within a comprehensive development
area for public open space or amenity purposes. Where there is inadequate infrastructure, for example
a lack of main sewers or adequate road access, it might be possible for an agreement to be entered into
requiring the developer to make financial contributions towards the cost of making available the
infrastructure to assist such development to proceed. With regard to the provision of infrastructure, it
should be noted that agreements can often be entered into with other infrastructure authorities (e.g.
relating to the adoption of roads and sewers, etc.) as well as with the local planning authority.
If developers feel a local planning authority is attempting to exert undue pressure to enter into an
agreement potentially imposing unduly onerous burdens, their remedy is to make a formal planning
application and take the matter to appeal if planning consent is not granted. However in many cases it
will be to the advantage of developers to offer a planning obligation themselves if they consider an
appropriate contribution of a facility or infrastructure will enable the development to take place at a
very much earlier date than would otherwise be the case; they may offer a ‘unilateral undertaking’ to
be bound by such an obligation. This can be considered as material by the planning authority in
determining a planning application and at an appeal to a higher government body following a refusal
of consent due to failure to agree terms on an agreement with the planning authority. Take note that
agreements bind landowners and successors in title and are registered on the legal title of the land
affected.
 There is an accepted use of planning agreements, particularly involving local authorities with
infrastructure burdens. Contributions towards infrastructure, whether they are given in cash or by way
of sites for various public authority purposes, will obviously be reflected in the amount a developer
will be prepared to pay for the land for the development. At times the developer has to assess the
likelihood of an agreement and its relevant cost prior to site purchase and this also adds uncertainty.
When considering a planning application the extent to which a planning authority should negotiate
with a developer in order to obtain some material benefit for the community (often referred to as
‘planning obligation’) has been a matter of controversy, especially where the burden can be so onerous
as to prevent or restrict development due to unacceptable profit margins. At times communities can
have an input into the circumstances when planning agreements are considered to be reasonable. As a
general rule, planning agreements should only be sought where they are necessary to the granting of
permission, relevant to planning and relevant to the development to be permitted. Often there are five
basic tests of reasonableness as follows:

1. relevant to planning;
2. necessary to make the proposed development acceptable in planning terms;
3. directly related to the proposed development;
4. fairly and reasonably related in scale and kind to the proposed development; and
5. reasonable in all other aspects.

Some stakeholders consider it is inappropriate for a planning authority to bargain in order to obtain a
material benefit in return for a planning permission; they perceive such a practice brings the planning
system into disrepute. Many feel that developers should not be subjected to ad hoc demands from
planning authorities seen as potentially dangerous precedents in the nature of local taxes on
development. However, others argue that in moderation and with common sense, planning gains can
facilitate development in circumstances where the authority is not able to provide needed facilities and
the planning gain makes a contribution to the welfare of the community in which the development
takes place. Note that an applicant has a right of appeal if planning consent is refused for any reason.
Where a developer has submitted a unilateral obligation to enter into an agreement on specific terms,
then the nature of those terms and their appropriateness is examined in detail.

6.9 Breaches of planning control

Local planning authorities often have wide powers to ensure no development requiring planning
permission takes place without prior permission being granted. It can also ensure no unauthorised uses
can continue unless the planning position is regulated and all development permitted is carried out in
accordance with the conditions the authority has attached to the permission. These powers are
included in the relevant legislation for the region in which the property development is located.
Where development has allegedly occurred without permission then authorities are empowered to
initially require information concerning the development, the identity of the owner of the land
involved and other pertinent matters are divulged to them. They can serve an enforcement notice on
the landowner/developer outlining the breach of planning control, the action required to remedy the
breach and also a time limit to conduct the necessary action. There is a right of appeal against the
notice normally on one of seven or so grounds. The most commonly used ground is arguing that
planning permission should be granted for the development concerned; the lodging of an appeal on
that ground is often regarded by the higher government body, which considers the appeal, as being a
deemed planning application. Other grounds include stating the alleged breach has not taken place and
that the means required by the planning authority to rectify the situation are unreasonable.
 Additional powers are available in the form of breach of condition notices where authorities can
require the conditions on a planning permission are all complied with. There is no right of appeal
against such a notice since the notice is then pursued to the court system via a criminal prosecution
and can be defended. More immediate powers of action are contained in a ‘stop notice’ literally
requiring a specific activity to cease, normally as a forerunner prior to enforcement action being taken.
If an appeal is successful against enforcement action where a stop notice has been served, there is
potentially a compensation procedure to be followed.

6.10 Planning appeals

In the event of a local authority refusing planning permission for a proposed development, or in the
event (subject to the discretion of the applicant) of the authority either taking a longer period (e.g.
more than about eight weeks) to determine the planning application or granting permission subject to a
condition that aggrieves the applicant, there is usually a right of appeal. In order to be valid, an appeal
against a refusal of planning permission must be lodged within a designated time period (e.g. six
months) from the date of refusal. In deciding whether to lodge an appeal against a refusal of
permission, an appellant must be satisfied there is sufficient evidence to show the local planning
authority’s reasons for refusal is inappropriate.
Planning authorities are required by central government to ensure all reasons for refusal are sound
and straightforward. The onus at the appeal is placed on local authorities to demonstrate any refused
proposals would cause demonstrable harm to interests of acknowledged importance. In assessing
whether reasons for refusal are capable of being set aside on appeal, the appellant and their advisers
will closely examine the relevant planning policies and any other material considerations. Once a
planning appeal has been lodged, jurisdiction of the case passes to the relevant higher government
body. Often there are three alternative methods of appeal potentially to be pursued by appellants as
discussed here.

6.10.1 Written representations

This is an exchange of written statements with the appellant’s statements putting forward the case in
support of the appeal being allowed and the local authority’s statement in reply seeking to justify the
reasons for refusal. Both statements are considered by an inspector who visits the site and determines
the outcome of the appeal on the basis of the written evidence and the site visit.

6.10.2 Informal inquiry

This usually takes the form of a meeting between the appellants and the local planning authority with
the inspector acting as chair. Written statements of case must be submitted in advance of the hearing.
Having read the statements, the central issues are identified that require discussion at the start of the
hearing and these issues are aired between the parties. Following the hearing, a site visit is held and
the appeal is determined on the basis of the written statements, the hearing discussion and also the site
visit.

6.10.3 Formal public inquiry

This is a quasi-judicial inquiry where the appellant is represented by a barrister, solicitor or qualified
person who presents the case for the appellant, as well as calling expert witnesses to give evidence in
support of the appeal. The planning authority is similarly represented, usually by the council’s
solicitor, who calls expert evidence supporting the refusal often from the government’s planning
officer. The witnesses are cross-examined by the opposing party and the inspector, having examined
the evidence presented at the inquiry and following the site visit, then makes their decision or
recommendations.
These three methods of appeal vary according to the prevailing legislation in the region. Often there
is provision for costs to be awarded against either party at an inquiry if there has been unreasonable
behaviour. This definition normally applies to those local planning authorities unreasonably
withholding planning permission for proposals that were clearly acceptable or where grounds for
refusal have been withdrawn at a late stage. In certain cases where such proposals have been brought
forward by developers to appeal, such as clearly being contrary to an adopted development plan and
where there are no material considerations suggesting the plan should not be followed, costs can be
awarded against the appellants.
Following each increase in economic and property development activity linked to a property boom,
there is an observed higher number of planning applications subsequently refused and followed by a
rise in the number of appeals. Conversely, with a downturn or recession the level of activity also
declines and there are fewer appeals. As an increased emphasis has been placed on developers to
forward a detailed development plan, developers have been advised to pursue schemes in the context
of their involvement in the development plan process (outlined earlier) to facilitate a favourable policy
framework for submitting an application. The time taken for appeals by written representations and
informal inquiries is usually substantially shorter, however the delays which occur in the decision-
making process are clearly an important factor to consider when making a planning application which
may progress to appeal. If the planning system is unable to respond quickly enough some development
opportunities will be lost and also any associated economic growth potential.

6.11 Future directions

From a perspective that the planning system is answerable to the political and legislative system, the
future is difficult to predict. The increasingly high profile of climate change adds another unknown
factor to the equation. The development industry is generally dissatisfied with the delays and
uncertainty it experiences and sometimes the ad hoc nature of the decisions made, particularly where
local politics is viewed as superior over professional logic. Various proposals have been put forward to
improve the planning system and developers must ensure they understand the process thoroughly.
With a strong political involvement there has been wide acceptance that planning plays a key role
in delivering both sustainability and economic growth. Satisfying both of these forces simultaneously
can be seemingly impossible at times. The current trend is for increased population growth, increased
globalisation, economic migration and increased need to adapt to and to mitigate the impacts of
climate change.
The planning system is required to have increased flexibility and responsiveness, increased
efficiency in the planning process and a more efficient use of land. As far as developers are concerned
it appears that some of the historic problems remain in the system, those of delay for example, whilst
newer and complex issues, like sustainability and climate change, have arisen and need to be
addressed in property development.

6.12 Reflective summary

The planning discipline is an extensive area of knowledge and this chapter provided an oversight
of planning and the planning system. A typical planner has a university level education in
planning due to the importance and complexities associated with this role. The planning system
itself is based upon decision making in various levels of government with particular emphasis
 placed on the government authority at the local level. For most forms of development involving
homeowner applications and minor changes of use, the system generally works in a
straightforward manner. However for more major forms of development, the political nature of
the system commonly means the straightforward exercise of completing an application form
correctly is insufficient to obtain planning permission. Consultation between developers and
council officers, local interest groups, highway authorities and others on anything but the smallest
project is now regarded as essential. At times it appears there is always an ongoing debate that
some developers have too much influence on government planning decisions (Brill 2019) and it is
essential for a successful developer to maintain an ‘arm’s length’ relationship with government
authorities. Combined with the increasing role of the development plan and its adoption process,
the increased accountability and ‘paperwork’ requirements have changed the way in which
developers regard the planning system. However the use of computer technology and internet
access to planning schemes and online forms has assisted the developer’s access to information.
This chapter introduced the broad planning principles and provided a sound basis to approach
the planning system. It should be noted, however, that like valuation, tax or building surveying,
planning matters are a specialism in which developers often employ expert advice. The
heightened concern of government and others in relation to environmental matters is greatly
influencing the planning system as well. This concern has placed town planning in its widest
sense in a high place on the political agenda. The planning system should be perceived as a
stakeholder in the property development rather than a hurdle or barrier that must be overcome. It
is recommended that further detailed information on planning be sourced on a regular basis due
to constantly changing planning legislation.

6.13 Case study: retail development – Castle Towers

Castle Towers shopping centre is located in the suburb of Castle Hill in the outer north-western
suburbs of Sydney, Australia and fully owned by Queensland Investment Corporation (QIC) Global
Real Estate (GRE). Completed and opened in late 2019, the Castle Towers ‘Stage 3A’ development
was the first chapter in QICGRE’s planned multi-stage transformation of the centre and draws more
than 18 million visits each year.
The development saw the introduction of an all-new fresh food marketplace, ‘grab & go’ dining
precinct and convenience shopping mall incorporating a range of new communal spaces. It also
delivered a new integrated pedestrian underpass designed to seamlessly connect the centre directly to
the concourse of the Castle Hill Metro Station and the adjoining public transport hub.

Location
Located approximately 30 kilometres north-west of central Sydney, Castle Hill is the largest suburb in
the Hills District region with a total trade area population of more than 400,000. Populated by a high
proportion of workers in professional and management occupations, the region’s main trade area
boasts incomes that are significantly higher than the Sydney average. Located at the strategic centre of
the NSW (New South Wales) state government’s plan for the expansion of Sydney, the region has
recently welcomed major investment in transport, infrastructure and urban development. All of these
factors underpin QICGRE’s plan to evolve Castle Towers into a key hub for the region’s thriving and
growing community.

Background
After almost three decades of ownership of this high-performing asset, QICGRE’s long-term vision
for Castle Towers is based on creating a thriving, multidimensional microcity that could serve the
whole-life needs of the local community; providing residents with an important community gathering
place and true town centre.

Site issues
Challenges faced by QICGRE during the journey of the development included those associated with
the fact that the project aimed to transform what was an underground carpark. Connecting utilities and
essential services for food tenancies in the former carpark space proved to be some of the biggest
challenges to overcome. Successfully converting an underground carpark (with low ceilings and no
natural light) into an inviting marketplace precinct was a dramatic move, but the team succeeded in
creating an inviting space by first establishing how they wanted people to feel in the space rather than
following outdated retail traditions dictating what a food court should be.
Extensive consultation was undertaken with Sydney Metro and Transport for NSW to build the
integrated underground pedestrian link between Castle Towers and the new Castle Hill Metro Station.
Located 25 metres below ground, the station allows commuters direct access into the centre.

Design of the scheme

Activating space previously given over to carparking, the new mall saw QICGRE enlist the talents of
specialist hospitality design firm ‘Luchetti Krelle’ to lead the interior design (see Figure 6.2). Led by
human-centric design principles and aimed at inviting longer dwell time, the interior design treatment
combined artisanal aesthetics with modern, human-centric comfort to create a welcoming, cocoon-like
space.
Figure 6.2 Castle Towers Food Court (Source: QIC)

The cohesive visual identity introduced homely design elements such as textured timbers, terracotta
sconce lighting and soothing forest-inspired art by Sydney painter ‘Oliver Watts’, successfully
realising QICGRE’s ambition to blend style and function in previously unseen ways for a suburban
mall, and a subterranean one at that.
Moving beyond the traditional notion of the shopfront to view stores as a 360-degree immersive
experience, the design team crafted moments of intrigue throughout each retail space to stimulate
emotional responses. Elsewhere the design team mapped the space to manage high foot traffic
resulting in the new transport hub connection, and also sought to provide elevated communal spaces
and increased amenity to cater to nearby apartment-dwellers, mobile commuters and the area’s
extensive youth demographic.

Sustainability measures
The process of repurposing an existing space represented several opportunities for improved energy
efficiency and cost savings. Retrofitting the former underground carpark space meant a reduced
requirement for heating and cooling thanks to the absence of typical winter heat loss and summer heat
gain from windows. Energy efficient lighting systems were installed throughout the space and more
efficient building management systems have helped to reduce energy consumption.
Results
Completed in late 2019, the Castle Towers 3A development was delivered three months ahead of
schedule thanks to a combination of clear vision and astute project management. QICGRE stated that
key to the development’s timely and successful execution was the shared vision and united approach
practised by the design, tenancy delivery and leasing teams. Within two months of its opening, more
than 260,000 customers had used the new station walkway to access the centre. The centre has also
increased advertising revenue, thanks to a strategically placed screen installed at the pedestrian tunnel
entrance.

Next phase
In early 2020 Castle Towers welcomed a further mix of new and revitalised retailers and the centre’s
transformation has continued throughout the year with design upgrades to communal spaces adjoining
the new mall. An enhancement to the Centre’s alfresco dining and entertainment precinct, The Piazza,
incorporating year-round weather protection, is also due for completion in late 2020.

Figure 6.3 Castle Towers retail development (Source: QIC)

References and useful websites

Brill, F. (2019) ‘Complexity and coordination in London’s Silvertown Quays: how real estate developers
(re)centred themselves in the planning process’, Environment and Planning A, 52:2, pp. 362–82,
https://doi.org/10.1177%2F0308518X19860159.
Fernandez, M.A. and Martin, S.L. (2020) ‘Staged implementation of inclusionary zoning as a mechanism to
improve housing affordability in Auckland, New Zealand’, International Journal of Housing Markets and
Analysis,13:4, pp. 617–33.
Mangialardo, A. and Micelli, E. (2020) ‘Reconstruction or reuse? How real estate values and planning choices
impact urban redevelopment’, Sustainability, 12:10. https://doi.org/10.3390/su12104060.
Planning Advisory Service (PAS), www.pas.gov.uk.
Planning Aid, www.planningaid.rtpi.org.uk.
Planning Inspectorate, www.gov.uk/government/organisations/planning-inspectorate.
The Planning Inspectorate (2007) Table 1.2 Planning Appeals, www.planning-inspectorate.gov.uk.
Planning Officer’s Society, www.planningofficers.org.uk.
QIC Global Real Estate (GRE), www.qicgre.com.
Queensland Investment Corporation (QIC), www.qic.com.au/.
Royal Institution of Chartered Surveyors (RICS), www.rics.org.
Royal Town Planning Institute (RTPI), www.rtpi.org.uk.
Town & Country Planning Association (TCPA) www.tcpa.org.uk
UK Government (2020) Planning Portal, www.planningportal.gov.uk (last accessed 2 May 2020).
WCED (1987) Our Common Future, World Commission on Environment and Development, Oxford University
Press.
Chapter 7

Construction

7.1 Introduction

The second major decision and financial commitment for a property developer in the
development process is to place a contract to construct the development and undertake
improvements to the land. This may include demolishing any existing structures, altering the
form of the physical land and constructing new improvements. From this point forward some of
the earlier flexibility will lessen, although to some extent this does depend on the procurement
route selected. Construction is a critical stage in the development process. The objective is to
construct a high-quality building that performs on time and on budget where ‘time, performance
and cost’ is the mantra.
The selection of the procurement route needs to be decided early since it has a direct effect on
the composition and the size of the professional team. After the initial brief is decided, a schedule
of accommodation prepared and the broad design constraints are selected, then the choice of
building contract can be made. Whilst there are traditional approaches and construction
methodologies that have been long adopted and proven, their relevance and appropriateness need
to be constantly evaluated and confirmed. The property development process continues to rapidly
change and adapt to the different external needs, such as the increasing use of off-site
construction (Hou et al. 2020) as well as the acceptance of 3D printing (Aghimiem et al. 2020;
Wang and Rimmer 2020) in wider society for example. The increased demand for adaptive re-use
(Chan et al. 2020) is another example of where the selection of the initial construction approaches
needs to consider the potential for changes to the future use of the structure.
The first part of this chapter provides an overview of the different types of building contracts
and procurement routes, followed by the second part explaining the management process from
pre-contract to the post-contract defects liability period. The roles of key personnel, such as
project manager, are discussed in the chapter. In addition the risks associated with building
contracts are identified along with strategies to either reduce risk or to transfer it to the contractor
or other parties. The procurement options of public-private partnerships and partnering are also
covered.

7.2 Procurement
The decision about the type of contract to select will depend on the developer’s requirements and the
size and complexity of the development. The key influencing factors are time, cost and performance.
The developer must determine whether cost management, time or building performance is the highest
priority since each will favour different procurement options. Different types of developer and
stakeholder attach their own varying degrees of importance to time, cost and performance or quality
and these factors will influence the optimal procurement strategy to be selected.
The selection of an appropriate procurement strategy has two main elements: analysis and choice.
The developer, usually with their consultants, must assess and set the project’s priorities and, perhaps
more significantly, determine their attitude to risk. Second, the developer must consider all possible
procurement options, evaluate each and choose the most suitable. The factors to be taken into account
at this stage include:

factors outside the control of the professional/project team such as interest rates, inflation and
legislation;
client resources;
project characteristics;
ability to be flexible and make changes;
risk management;
cost of construction;
time allocation; and
performance and quality.

Undoubtedly there may be conflicts between these factors and priorities must be set to ensure the
procurement strategy selected gives the client/developer the most control over the factors identified as
of greatest importance. There are a range of checklists that developers can use to determine the most
suitable procurement route and reference should be made to guidance notes distributed by the relevant
professional construction body, e.g. Royal Institute of Chartered Surveyors (RICS), American Institute
of Constructors (AIC), Australian Institute of Building (AIB).
Developers must decide whether the building design is to be produced by (a) an architect and the
professional team or (b) the contractor. For example it may be necessary to shorten the pre-contract
time by overlapping the design and construction elements of the scheme. Alternatively, early
completion may be achieved by using fast-track methods of construction. Of crucial importance when
selecting the best form of contract is the likelihood of any changes to design during the contract and
the need for flexibility. An additional important factor is the extent to which the developer seeks to
pass any risk onto the contractor. A public sector developer will be also concerned to achieve value for
money to meet the requirement for public accountability.
There are no steadfast rules about selecting any particular form of building contract. A developer
may use any of the available types of contract and adapt it to suit their own particular requirements,
provided it is generally acceptable to building contractors. However there are advantages in using the
forms of contract typically used in the building industry where there is tested and practical experience
ensuring the strengths and weaknesses of that particular type of contract are known. From the
developer’s perspective, building contract arrangements (often referred to as ‘procurement methods’,
i.e. methods used to both design and construct a scheme) may be broadly divided into three main
categories although with many variations in each.
The first category is based on the use of the traditional standard form of contract (in the UK this
type of contract was developed by the Joint Contractors Tribunal (JCT)) and this provides for a main
contractor to carry out the construction in accordance with the designs and specifications prepared by
the developer’s own professional team. They must ensure the quality of design, adequate supervision
of construction and suitability of the building for the purpose for which it was originally designed.
This procurement option is also commonly referred to as a ‘design-bid-build’ contract.
 The second category is the ‘design and build’ contract being different and frequently used in
preference to the traditional contract. In this agreement the contractor is responsible for the
construction and also for the design and specification. Note the contractor takes full responsibility for
ensuring that the building meets the requirements of the developer and is fit for the purpose for which
it is designed.
Third, there is management contracting, arguably based on some methods of construction in the
United States, which was used by some of the larger development companies on complex
developments. Like the JCT contract the professional team is responsible for the design and
specification. However the building work is split into specialised trade contract packages where the
management contractor (in return for a management fee) co-ordinates and supervises various sub-
contractors on behalf of the developer.

7.3 The traditional contract: design-bid-build

This type of contract tends to be used on relatively uncomplicated small to medium sized schemes.
The developer is able to use a number of variations and amendments to tailor the contract to the needs
of the project. For example in the UK this procurement route is traditionally based on the contract as
drafted by the JCT, which comprises a number of professional bodies: the Royal Institution of
Chartered Surveyors, the Royal Institution of British Architects and the British Property Federation
(which represents developers and property owners). Many countries will have produced their own
standard form contract for use in property development projects.
It is worthwhile to consider the process when using a typical design-bid-build contract. Developers
appoint their own professional team who are responsible for designing the building to meet the
specified requirements, for supervising the construction phase and for administering the contract. The
architect, together with the project manager (if appointed), lead the professional team and enlist the
services of other expert team members they need. An example here would be to overcome unforeseen
matters such as structural design problems and the provision of mechanical and electrical services.
Quantity surveyors or construction economists should be appointed at the outset, not only to
provide a cost estimate but to provide cost-planning services. Frequently project managers have a
quantity surveying background enabling them to maintain a close analysis on the financial
management of the development. The role of the professional team in designing and administering the
scheme under this type of contract can now be further discussed.

7.3.1 The role of the professional team

Unless a planning consultant is appointed then the architect is responsible for obtaining planning
permission and all other statutory approvals, such as building regulation approvals and fire certificates.
The architect is clearly responsible for the design of the buildings in terms of aesthetics and functions,
all in accordance with the developer’s brief and budget. The architect is also principally responsible
for the management of the contract, although being supervised by the project manager if appointed.
However the architect does not supervise the building contract on site on a full-time basis. In addition
a developer may also appoint a clerk of works or resident engineer at an extra cost to carry out the
full-time ‘on-site’ supervisory role.
The quantity surveyor is responsible for preparing estimates of building cost, preparing the Bill of
Quantities (i.e. a measured specification of materials and work to enable the contractor to submit a
price) and, during construction, for preparing valuations of work (usually monthly) upon which the
architect issues the ‘interim’ and ‘final’ certificates. The quantity surveyor should be appointed as early
as possible within the development process to advise on cost management and the merits of alternative
forms of construction (e.g. steel frame or concrete frame). They should also provide estimated cash-
flows of the building contract expenditure. The quantity surveyor reports on the cost of construction
and measures actual payments against the estimated cash-flow. Their role is to explain why the actual
cash-flow differs from the original estimate and prepare revised estimates for the remainder of the
project. The quantity surveyor is also responsible for estimating the cost of any possible variations in
design so the development team can decide whether or not they should be undertaken.
Other members of the professional team will vary and may include structural engineer/s and
mechanical and electrical engineer/s. The structural engineer works closely with the architect and
quantity surveyor to assist with the design of the structural elements of the building, calculating loads
and stresses. In addition they advise on how the design of the building should be modified to
accommodate them. A mechanical and electrical engineer advises on all services required such as
electricity, gas, water and the design of the heating, lighting and plant installations as well as when/if
air conditioning is to be provided. They will also be responsible for designing the system and liaising
with the architect so it can be incorporated into the design. Increasingly due to the higher profile of
climate change they have a key role in reducing the environmental impact of the in-use phase of a
building’s lifecycle through the integration of sustainable building services.
Provided the contractor executes the building work in a good and workman-like manner in
accordance with the architect’s drawings and specification in the Bills of Quantities and with any
instructions subsequently given to the contractor by the architect, the contractor will not normally be
responsible if the building is not suitable for the purpose for which it was specifically designed. This is
irrespective of whether the unsuitability is attributable to faulty design or to some physical inadequacy
in the structure. In other words a developer must rely on their architect and other professional
consultants for a remedy.
At times the respective responsibilities of the professional consultants for an inadequacy or defect
in the building are not clearly defined. In such circumstances some developers find themselves in a
complex situation and dependent upon the outcome of the arguments between professional
consultants. Such situations may be avoided by the exercise of care in the selection of the team of
professional consultants and, where a highly complicated or specialised or sophisticated building is
involved, it is helpful if the professional consultants have previous experience of dealing with that
particular building type. The quality of the team has a substantial influence upon the success of the
development project.
Most often all of the professional team, including a project manager, are appointed on a percentage
fee basis either by negotiation or in accordance with their professional body’s suggested scale fee. The
percentage fee typically relates to the final building contract sum and, from the developer’s
perspective, this does not provide a financial incentive for the professional team to ensure the building
is constructed on time and within budget. Note the professional’s reputation is at stake along with their
chances of future work with the same developer. A developer may negotiate a fixed fee basis for
appointment. Note the developer must be aware that the professional concerned will invariably include
an element in their fee proposal to cover the risk for extra work and therefore the developer may not
necessarily gain an advantage.
Developers will require the design team (i.e. architect, structural engineer, mechanical and
electrical engineer, sometimes a quantity surveyor) to enter into deeds of collateral warranty for the
benefit of investors/purchasers, financiers and tenants. Collateral warranties extend the benefit of the
developer’s contract with the professionals involved. Typically they require the professional practice
or company to warrant that all reasonable skill, care and attention have been exercised in their
professional responsibilities and also they owe a duty of care. In addition the professionals are
required to warrant that they have not specified deleterious materials. They will also need to provide
evidence of sufficient professional indemnity insurance (PI) cover from their insurance company. It
can often be difficult and time-consuming to procure these warranties in a form acceptable to all
parties since financial institutions and banks require almost total responsibility allocated to the
professional design team.
The professionals, in turn, are increasingly resisting deeds of collateral warranty in the form
required by financial institutions and banks due to the restrictions placed on them by their insurers in
relation to their professional indemnity policy. At times it can become very complex for the developer
acting as agent in the middle. For example some professionals may refuse to sign these agreements
under seal because they wish their responsibilities to last for only six years but not for 12 years. In
addition they may wish to limit the assignability of their deeds of collateral warranty to the first
purchaser and the first tenant of the completed development. They also usually insist their liability is
restricted to remedial costs of any defects, not consequential or economic loss. At the very least it is
important for the developer to ensure every member of the design team signs a warranty before they
are appointed.
Some developers have turned to insurance in the form of latent defects insurance known as
decennial insurance, especially on larger schemes. Latent defects insurance is relatively expensive,
typically about 1–2% of the building contract sum, but it has an advantage where the insurer is
responsible for pursuing remedies with the professional team. The insurer assumes responsibility for
repairing the property if an inherent structural defect is discovered that renders the building unstable or
threatens imminent collapse. The insurer typically covers a project for an extended period after
completion (e.g. say ten years), provided an audit has been conducted before construction begins and
an independent engineer reports on the design and construction of the building. The developer has to
pay for the fees of the independent engineer. The insurance policy is totally assignable to tenants and
purchasers who seem to be increasingly demanding that such an insurance policy is in effect.
Residential property developments in many developed countries are automatically covered by a
mandatory scheme enforced by the government. This protects individual residential purchasers after
they take possession of an individual property, as well as exposure to all associated future risk and
responsibilities as part of a larger property development when eventually transferred from a developer
to an individual purchaser. In a normal scenario the seller, following the transfer of ownership, has no
additional obligations associated with the property.
The majority of the design work for this type of contract is carried out prior to the appointment of a
contractor and has a considerable impact on the final cost. After the contractor has commenced work
then any variations requiring revised instructions to the contractor will frequently result in increased
costs or delays to the contract programme. Revised instructions are often caused by the developer
making a variation or the architect issuing late instructions as the design is inadequate or incomplete.
Thus the relationship between the developer and the architect is crucial in the design stage.
Each developer should establish positive and realistic cost limits to be relayed to the architect and
the professional team. They should ensure the architect thoroughly understands, with the aid of a
written brief, all of their requirements in relation to all the aspects of the building and its usage
including the standard and type of finishes required, the services needed and date for completion.
Above all they should avoid, if possible, any additional changes unless absolutely necessary to secure
a particular tenant or improve the value of the scheme. It is essential the architect is chosen with great
care as much depends on the architect producing the working drawings for the contractor on time and
the developer must determine whether an architect has both the capability and resources to deliver the
design element effectively.

Discussion point
Identify the individual roles of the professional team in a traditional design-bid-build
approach.
7.3.2 Selecting the contractor
Once the detailed design is completed then the quantity surveyor prepares the Bill of Quantities as this
document specifies and quantifies the materials and the work to be carried out in substantial detail. For
example this will include the number of door locks, hinges and other architectural hardware. All Bills
of Quantities must be carefully checked since any errors can involve additional cost due to later
variations to the contract. In addition, provisional sums and contingency sums must be included.
After this task then contractors are invited to submit tenders for carrying out the work based on the
drawings and the Bill of Quantities. However this is not necessary in all scenarios although it is logical
to ask a contractor to price the Bill of Quantities. This may happen when the developer has employed
a particular contractor (e.g. an in-house contractor) over time and is always pleased with the quality of
their work and therefore prefers to re-employ them. It may be that the contract contains a great deal of
specialised work for which one contractor has an outstanding reputation and they may be selected on
this basis to carry out the work, subject to an acceptable pricing of the Bill of Quantities. If this route
is taken then it may be advantageous to appoint the contractor earlier in the development process to
advise the design team on the practical aspects of the design.
If selecting contractors to be invited to submit competitive tenders for carrying out the work, then
there are certain issues to be considered. As a starting point it is necessary to limit the total number of
contractors invited to submit competitive tenders. Often approximately six or so contractors are often
adequate for even the largest contract. This restriction is because the pricing of Bills of Quantities for
a large construction project is time-consuming and expensive for contractors who are not keen to
submit competitive tenders when there is, in their opinion, an unreasonably large number of tenderers
and their likelihood of success is relatively small.
If the work is specialised then contractors skilled in that type of work are selected. Sometimes it
will be preferable to use a large national contractor, while at other times local or regional contractors
are favoured. Some contractors have a reputation for producing high-quality work, others for
producing work quickly and on time where this can be a vital consideration for the developer’s cash-
flow. Some other contractors have a reputation for submitting keen tender prices and there are those
contractors who have a reputation for expertise in formulating claims for extra payments on any and
every occasion during the contract.
The architect or developer may feel some contractors are entirely dependable while other
contractors may have let them down during their work on a previous development. Quite often it is
stated that high-quality work, speed and low cost are a very rare combination. Developers are often
guided by their architect, project manager and/or quantity surveyor regarding the selection of the
contractors for the tender. Before a contractor is approached and included on the team they should be
asked whether they are willing to tender for the job. There are times when contractors are fully
extended and are unwilling to tender for work. Some contractors for a variety of reasons may not be
interested in tendering for work; for example where they prefer not to work in a particular locality.
The prices submitted by each of the contractors are examined by the quantity surveyor and project
manager to ascertain what is offered. The quantity surveyor prices the Bill of Quantities independently
and this is used for comparison purposes with the contractor’s tenders. Each contractor prices each
element and aspect of the work, therefore setting out the applicable rates for each element of work or
unit of material. The contractor’s priced Bill of Quantities forms part of the contract documentation
and is used by the quantity surveyor to value the work conducted by the contractor.
The reliability and financial stability of each contractor become vital considerations. When each
contractor is chosen it might be advisable to rely on a ‘performance bond’. In this scenario the
contractor takes out a performance bond with an insurance company guaranteeing to reimburse the
employer for any loss incurred up to an agreed amount as a result of the contractor failing to complete
the contract. In addition, financiers may also insist on a performance bond for their benefit.
The failure of a contractor is a major disaster from a developer’s perspective since long delays can
occur while the legal position is resolved and another contractor is identified to complete the work.
The new contractor may request a considerably higher price for completing the job than was agreed
upon in the original contract. Furthermore, if defects later appear in the completed building then it can
be very difficult to apportion responsibility between the original contractor and the contractor who
takes over the contract work. Thus it is easy to understand why employers ask for a performance bond,
even though the extent to which their losses are reimbursed is limited and the cost of the performance
bond is usually added on top of the contract cost.

7.3.3 Paying the contractor

The method of payment for the works has a substantial impact on the developer’s cash-flow position.
It also has a significant impact on the contractor’s cash-flow and they have to consider the method of
payment when preparing the price for the work. As a result it is important that the method of payment
is made clear when the contractor is invited to tender.
In many instances the architect authorises monthly payments based on the value of work certified
by the quantity surveyor. Usually a certain percentage (3–5%) of the total value of the work
undertaken is retained until the end of the contract which is commonly referred to as the ‘retention’.
This arrangement ideally suits a contractor who obtains payments for the completed work, irrespective
of when the building is ready for occupation. The developer has to pay out very substantial sums of
money over a considerable period of time before they can obtain the final benefit of a completed
building at the end of the contract.
The ideal arrangement for developers is for the whole of the contract price to be paid when the
building is handed over, therefore they do not part with their money until the time when they should
be receiving an income from the building or have the benefit of final occupation. It must be
remembered, however, that if it were possible to make such an arrangement (note: this arrangement is
also extremely rare), contractors would increase their tender prices by one means or another to account
for accumulated interest and the extra associated risk. In the scenario where there is a large contract
spread over an extended period of time, some contractors might not be able to finance the work easily
without payments from the developer. Accordingly some compromises may be devised for payment to
be made in certain set stages; for example where the last payment made on completion and handover
of the building is weighted to give the contractor an incentive for a timely completion of the building.
The method of paying for the work has to be aligned with the circumstances of each contract. The
contractor is more likely to be flexible if they are a partner in the scheme and therefore will benefit in
terms of a profit share.

7.3.4 Calculating the cost

A commonly accepted approach is for the contractor to submit a bid on either a ‘firm price’ or a
‘fluctuations’ basis. The ‘firm price’ means that although the cost of labour and materials used in
carrying out the work may fluctuate with the market, the contract sum will not be varied to take
account of these fluctuations. In contrast the use of a ‘fluctuations’ bid means that once the contract is
awarded to the contractor then any increase or decrease in labour and materials is added to or
subtracted from the contract sum. Both types of contract usually include a clause allowing adjustments
to be made and take account of alterations in cost due to government legislation. However a developer
may delete such clauses, particularly when the tender market is very competitive. It is essential to note
that ‘firm price’ does not mean the contract sum, once fixed, will not be altered. Quantity surveyors’
re-measurements, architects’ variation orders and instructions and extensions of time may individually
or collectively affect the cost.
Developers and their professional advisers must decide on what basis they require contractors to
prepare their competitive bids in order that the contractors submit prices on the same basis.
Developers do not always find it easy to decide the optimal approach that is likely to be to their
advantage. The risk of fluctuations in the cost of labour and materials during the contract cannot be
completely avoided. This raises the question about whether the risk is to be borne entirely by the
contractor as per a firm price contract or alternatively whether the risk is to be borne by the developer
as in a fluctuations contract. If contractors have to prepare their bids on a fixed price basis, they will
add something additional to their prices to cover themselves against the potential risk of increased
costs. To tackle this problem each contractor is usually asked to quote prices on both a fixed and
fluctuations basis, so then the developer must examine the different prices and select the one likely to
prove most advantageous during the entire contract period. Most importantly each contract must be
judged on its own merits against the background of tender market conditions.
There are two main alternative methods of calculating the cost. First, a cost-plus contract, where the
contractor is paid on the basis of the actual cost of the building work (i.e. ‘prime cost’) plus a fee to
cover associated overheads and profit. The fee may be fixed or a percentage fee calculated with
reference to the final building contract sum or the initial estimate. Second, a target cost contract might
be negotiated or established by tender. A target cost is agreed with the contractor plus the contractor’s
fee. In most instances the savings or additions to the target cost are shared by the parties.

7.3.5 Duration of the contract

The date agreed in the contract for the completion of the building may at times be altered since the
contractor may apply for extensions of time for a number of reasons. Some of the reasons justifying an
extension of time entitle contractors to recover additional loss or expense they may have suffered as a
result of that extension. Extensions of time usually result in an increase in the cost and include the
contractor’s ‘preliminaries’, e.g. overheads such as insurance, cost of plant hire. Note the impact of an
extension is felt twice by the developer since it initially affects cash-flow and is then followed by
increased costs.
The main reasons for an extension and entitling the contractor to recover additional loss and
expense include the following:

a. Inadequacy and/or errors in the contract documents, the drawings and/or the Bill of Quantities.
This may be due to professional incompetence in the preparation of the documents or new
legislation may be introduced during the contract requiring an amendment/s to the drawings. In
addition the relevant building control officer for the local authority (responsible for providing
building regulation approval) or the local fire officer (responsible for issuing a fire certificate)
might impose conditions on their approval then necessitating design changes. Unforeseen ground
conditions in the case of a cleared site, hidden structural problems in the case of a refurbishment
or contamination issues can cause additional expense and delay. This emphasises the necessity
for a thorough site investigation and/or structural survey before the tender documents are
prepared.
b. Delay by the architect in issuing the drawings or instructions.
c. Delays caused by tradesmen directly employed by the developer.

Additional reasons potentially to be included in the contract terms depend on the outcomes of
negotiation with the contractor about the standard clauses that entitle the contractor to an extension of
time, although not to recover any additional loss or expense. These include:
 a. Failure by the nominated sub-contractors since on almost every building contract there are some
tasks sub-contracted to specialised professionals. When contractors identify and appoint their
own sub-contractors they are responsible for delays caused by them; therefore the developer is
not disadvantaged from this loss. Architects can nominate sub-contractors to undertake certain
elements of work. The reasons for doing this could be associated with their track record
including the high quality of previous work with the architect, or alternatively an expertise in
designing and constructing specialised elements in the development, e.g. the structural steel
work.
b. Poor weather: architects should ensure an accurate record is taken of weather conditions on site.
c. Strikes and lockouts.
d. Shortage of labour/tradespersons or materials.
e. Damage by fire where it is the contractor’s responsibility for insurance under the contract
conditions.
f. Inclement weather, e.g. earthquakes, floods, storms.

Developers may be compensated for a delay in circumstances where the architect has not granted an
extension of time under the terms of the contract. The compensation is in the form of liquidated and
ascertained damages at the rate as agreed in the contract in order to cover the developer’s loss.
However this agreed rate can fall short of a developer’s true loss in terms of the overall development
cash-flow.
Each developer should not assume the work would definitely be carried out within the time set out
in the contract and for the exact contract sum. A key advantage of many contracts is a level of
flexibility concerning how the price for the job is to be fixed and its elasticity. In turn this enables the
type and quantity of work within the contract to be varied, however this allows the quantity surveyor
to negotiate the final price for the work. Note that there is a disadvantage with regard to the flexibility
of this type of contract since it does not discipline the developer into making early clear-cut decisions
since there is always the possibility to make late variations. Furthermore the competence and
efficiency of the professional team is vital to the successful outcome of the contract. Inadequacies
relating to the plans and specifications are not realised until the building contract is underway. Also the
professional team is not motivated sufficiently to control costs and delays since their fees increase in
proportion to the final contract sum. This type of contract may lead to a very confrontational situation
with the contractor if the tender documents are inadequate or many variations are made.
Many contractors have the tendency to use the claims procedure as a negotiating ploy to claim
additional money to cover any losses they have made on the contract. It is for this reason alone that
many developers use ‘design and build’ contracts. Each developer must ensure they are in control and
are kept closely advised as to the likely financial outcome of the contract at all times. The best
arrangements for dealing with this are examined in the section concerning project management (see
pp. 223–236). The main advantages and disadvantages of the traditional approach are shown in Table
7.1.

Table 7.1 Advantages and disadvantages of design-bid-build procurement

Advantages Disadvantages
Competitive equity and fairness Strategy is potentially open to abuse resulting in less certainty
Design-led facilitates high-quality design
Reasonable price certainty based on market forces Overall construction timeframe may be longer than other options
with reduced unknowns because there is no parallel working
Acceptable strategy in terms of public No ‘buildability’ input from contractor
accountability and transparency
Well known procedure and proven approach The strategy can lead to adversarial relationships between the parties
Flexibility – changes are easy to arrange and with Approach is not fully promoted by all stakeholders
limited effect on value

Discussion point
What is the approach when selecting a contractor in the traditional design-bid-build
procurement?

7.4 Design and build

Most often this type of approach is unique for each individual development. Usually the contractor
assumes the risk and responsibility for the design and construction of the scheme in return for a fixed-
price lump sum. Simply explained, design and build is a fast-track strategy. Its use has become more
widespread due to dissatisfaction with other types of contracts and the problems encountered with
splitting design and construction responsibilities. Initially the use of design and build was limited to
simple and straightforward schemes but now is used on most types of building projects. For example it
is widely used by public sector clients for hospitals and schools.
The contract is based upon a performance specification by the developer or on their behalf. In this
context the reference to ‘performance’ equates to the various requirements which the completed
building must meet. It is important that the developer’s requirements must clearly, and in as much
detail as possible, be set out in the performance specification if this type of contract will be
successfully implemented from a developer’s viewpoint. The developers assume responsibility for the
design or what precautions should be undertaken to ensure the completed building meets with all of
the various statutory requirements. In addition the responsibility for the original purpose for which it
was designed rests wholly with the contractor.
Performance specifications vary from being relatively simple up to very detailed where this
depends on the nature of the scheme. For example if a developer seeks to develop a site with very
simple standard-design warehouse units then the specification may include a schedule of floor spaces
for units of different sizes. This would be accompanied by an indication of how much office
accommodation is to be provided, the total amount of toilet accommodation, services to be
incorporated into the building, the floor loadings and the clear floor heights, as well as an indication of
the total yard area. Based on this simplistic performance specification each contractor would be asked
for submissions to erect their own standard-design units to meet the requirements, together with the
cost price for carrying out the contract. The complete responsibility for obtaining all the necessary
statutory approvals, as well as for designing and erecting the buildings and ensuring they will be
suitable for the purpose for which they are required, rests with the contractor.
It should be noted that the performance specification tends to be extremely detailed and specifies
the materials to be used by the contractor. It is the contractor’s responsibility to comment on any
materials specified by the developer if they consider them to be unsuitable for their designated
purpose, prior to the contract documentation being completed.
It is possible to arrange for complicated buildings to be erected under a design and build contract.
In such cases the performance specification is critical and has to be carefully prepared by a team of
professional advisers. In the case of a complicated building, which does not conform to a standard
design, developers are completely dependent upon the adequacy of their own performance
specification to ensure they receive a building meeting all of their requirements.
 A developer using this type of contract may appoint a specific contractor with whom they have
successfully worked before or who has expertise in constructing buildings similar to the one proposed.
An alternative approach is for a developer to use a tender process to appoint the most suitable
contractor for the job based on their design, specification and price. Most often the tender list will be
short (e.g. only two or three contractors) due to the considerable amount of work involved by the
contractor. As with many contracts the track record and financial stability of the contractor is a critical
factor. Some contractors specialise in design and build, acquiring valuable experience in constructing
and designing where some larger contractors have ‘design and build’ divisions. The contractor may
employ all of the necessary skills in-house or simply employ external architects and engineers under
the supervision of their own in-house project managers.
A developer may appoint a quantity surveyor to conduct the standard pre-contract activities, such as
advising on the most suitable form of contract and preparing initial cost estimates. The quantity
surveyor will perform similar duties during the contract as those duties on a traditional contract, such
as valuations for interim payments and the final account. In some cases the quantity surveyor may take
on the role as the developer’s representative, often referred to as the ‘employer’s agent’ in the contract,
therefore effectively project managing and administering the contract. The quantity surveyor may
reach agreement regarding the letters of appointment and deeds of collateral warranty with the
professional team; they may also chair and minute all project meetings although often in a contract
this is the role of the architect.
Under a design and build contract the contractor submits drawings and specifications to the
developer for approval, who therefore can check to confirm what type of building will be built, what
services will be provided and so forth. The contractor is responsible for designing and constructing the
scheme in accordance with the approved drawings and specification. In a simple package deal where a
standard type of building has already been erected by the contractor in different locations as well as
where examples can be inspected and the occupiers asked for their comments on the adequacy of the
building, developers will know the proven product and any feedback on its suitability. In such
circumstances the design and build contract is advantageous where the buildings are of a simple and
straightforward nature, often with repetitive design elements, and also can be built to a standard design
previously used by the contractor elsewhere. The advantages include where the design time and cost
can be greatly reduced, the contractor is working to their own designs with which they are familiar, as
well as they may use various standard types of components they can buy advantageously and have
previously used on site. The contractor’s own designs will undoubtedly reflect the contractor’s
practical experience of erecting buildings. The result should be where the contractor works more
efficiently and speedily, and thus more economically, so the cost price of the building with regards to
the developer should be lower.
For the developer the advantages of this type of contract include scenarios where there are
fluctuations in the contract price and various alternative ways of paying for the buildings as the
contract proceeds, so then usually a lump sum fixed price is agreed. Therefore the contractor is
committed to provide the buildings for a known cost and covers the risk. Clearly a contractor allows
for these risks when preparing their price but the developer is reassured to know the price is fixed. It
may be changed only by variations issued by the developer or changes in legislation. When the tender
market is competitive then clauses in the contract dealing with changes in legislation may be deleted.
In other words the developer does not run the risk of becoming involved in endless professional
arguments if the design or construction of the building is defective. In this scenario it will be entirely
the responsibility of the contractor to see that matters are remedied.
There are disadvantages to be noted. For example the developer does not have the same detailed
control over the design and if the developer requests alterations during construction then the cost
might be increased out of all proportion. Hence the developer does not have the protection of
flexibility available in many contracts, such as in the example of the traditional JCT contract. It can be
argued the final cost of the buildings under a fixed-price, lump-sum package deal may be higher due to
the risk carried by the contractor, however in practice this is often offset by the advantages to the
contractor of using their own design and standard components. Another advantage is the potential for
overall time savings due to the overlapping of the design and construction processes. Furthermore the
developer should save money on professional fees since involvement by professionals will be less.
There may be development scenarios where the design and build type of contract is not suitable and
some developers have suggested the aesthetics and quality of the finished building may be lower
compared to a more traditional contract. To overcome this problem a developer can appoint an
architect to prepare the initial drawings and sketch designs under what is known as a ‘develop and
construct’ contract. The contractor is then responsible for developing the design as part of their tender
submission. However under this arrangement the developer must ensure the design responsibility is
adequately defined.
Alternatively the developer may appoint both an architect and engineer and novate their
appointment contracts to the contractor. By novating the contract the contractor steps into the shoes of
the developer and becomes the client of the professional concerned under the terms contained in the
original contract. Thereafter the contractor takes control of the design process and the professional is
liable to the contractor. A potential conflict of interest may arise as the architect/engineer may continue
to treat the developer as their ‘employer’ on the basis of their long-standing relationship. It is
important to ensure the professional and the contractor develop a good working relationship. The
developer will still insist on deeds of collateral warranty with each professional in case the contractor
enters receivership. The advantage to the developer under this variation is where they can appoint their
choice of architect and engineer, notably with whom they have a good working relationship, whilst
retaining the advantages of the standard design and build contract. A key drawback of the design and
build contract for developers, whichever variation is adopted, is the lack of flexibility. Developers
must decide before the contract is signed on what are their exact requirements since major variations
can usually only be made at a considerable cost. In summary the key advantages and disadvantages of
the design and build approach are briefly shown in Table 7.2.

Table 7.2 Advantages and disadvantages of design and build procurement

Advantages Disadvantages
Developer deals with only one construction company and therefore Only a limited number of firms offer design
inherent buildability is achieved and build so there is limited competition
Developer has to commit before detailed
design is completed
A higher level of price certainty is achieved before construction In-house design and build forms are an
commences (provided the developer’s requirements are adequately entity, so compensation for weak parts of
specified and changes are not made) the firm is not possible
There is no design overview unless separate
consultants are appointed for the purpose
by the developer
Reduced total time of project due to overlapping activities Preparing an adequate brief can be difficult
Difficulties comparing bids as each design,
programme and cost varies
Fewer overall uncertainties in the overall process Design liability is limited by the standard
contract
Changes to project scope can be expensive
7.5 Management contracting
In this procurement strategy a management contractor is engaged by the developer to manage the
building process and is paid a fee. Management contracting, initially developed in the United States,
became more widespread in an international context because developers were impressed with the fast-
track methods of construction. The management contract is generally used on larger complex
development projects where the developer requires speedy construction at competitive prices with the
flexibility to change the design during the contract. In summary, the building contract is split into
specialised contract packages, either by trade or building element, and let separately under the
supervision of the management contractor.
The developer appoints the professional team to prepare the drawings and specifications for the
project. The quantity surveyor prepares a cost plan based on the drawings and specifications. The
actual cost incurred by the management contractor (i.e. ‘prime cost’) is paid by the developer after
being certified by the architect and monitored by the quantity surveyor. The developer pays a fee to the
management contractors for their services in managing the various separate contracts. Note the
developer may not always appoint the contractor with the lowest fee proposal, however it is crucial the
contractor has management contracting experience and sufficient staff with the right skills. The fee
may be a lump sum or a percentage of the contract cost plan. The ‘prime cost’ includes the amounts
due to the various contractors of the various parts of the project, plus the management contractor’s
own on-site costs. The construction work is conducted by the various contractors who enter into a
standard contract with the management contractor based on detailed drawings, specifications and Bills
of Quantities. The selection of contractors should be conducted by the developer and the professional
team in consultation with the management contractor. The architect has the power to issue variations
known as ‘project changes’.
The management contractor should be involved at an early stage with the professional team to
advise on the practical implications of proposed drawings and specifications, plus on the breakdown of
the project into the various separate packages. The management contractor is paid in relation to
interim certificates issued by the architect, including instalments of the management fee. The
disadvantages include where the developer has to pay the management contractor’s fee, as well as for
the professional team, and the management contractor is not responsible for the actual building works.
The developer has no direct contractual relationship with the various contractors carrying out the
work. Accordingly the developer must enter into design warranties with each contractor where these
are capable of being passed to purchasers, financiers and tenants. However the management contractor
may have to pursue the remedies of the developer in respect of any breaches by the various
contractors. The developer has to reimburse the management contractor when settling or defending
any claims from the contractors, unless the management contractor is in breach of the contract or of
their duty of care. The liabilities and hence risk of the management contractor is limited. They are not
responsible for the payment of any liquidated damages for any cost overruns if caused by reasons
outside their control or by delays due to the various contractors. It is essential the management
contractor, developer and the professional team co-operate since the developer has to pay extra for the
management contractor’s expertise and experience.
It should be noted the management contract itself is not a ‘lump-sum’ contract. The management
contract is based on the contract cost plan prepared by the quantity surveyor, which is only an
indication of the price. However the contracts that the management contractor enters into with the
various contractors are usually based on a standard ‘lump-sum’ contract. Therefore the final cost is
based on the contracts with each specialised trade and may not bear any relation to the cost plan in the
developer’s contract with the management contractor. Cost control is essential under this contract and
must be very tightly managed by the project manager and quantity surveyor since there is no direct
incentive for the management contractor to keep within the cost plan as their fee is directly related to
the final building cost. In terms of cost control the success of this type of contract depends on the
ability of the management contractor to appoint the various trades within the budget of the cost plan.
However the final cost is whatever the cost is to the management contractor, including the fee, and
there is no penalty for exceeding the cost plan.
The developer must accept a very high degree of risk with this type of contract. Some developers
who have used this type of contract have found cost control to be the biggest problem as there is no
tender sum. Furthermore there is no control over the delays caused by the individual contractors and
there are extra costs involved in duplicating site facilities for the management contractor and the
various contractors. However the main advantage of management contracting is speed since projects
are usually completed more quickly than traditional contracts where full detailed drawings are
prepared before the contract commences. This speed is achieved by the flexibility of dividing up the
contract into separate elements, overlapping the design and also construction of each element. The
‘packaging’ of the contract allows the developer, to some level, to control costs and delays as contracts
are agreed upon later on in the process and can be varied to suit. Pre-construction and construction
times can be reduced when compared to other contracts. At times a developer may be concerned this
type of contract does not effectively control the development’s design and consequently the quality
standards suffer as a result.
Due to some negative experiences with management contracting associated with the disadvantages
noted above, a variation known as ‘construction management’ is often employed. With construction
management the trade contractors are placed directly by the developer and a construction manager is
appointed for a fee as part of the professional team appointed at the same time, not necessarily
afterwards as per the management contractor. The construction manager acts as the developer’s agent
and the appointment of a project manager is required to co-ordinate the professional team. Their fee is
usually percentage-based with an additional lump sum for the provision of site facilities. Their primary
role is to manage and co-ordinate all the various contractors, review design proposals, control costs
(i.e. a fixed budget), control the contract programme and be responsible for quality control. The
administration of claims for payment by the contractors and variations are their responsibility,
although the final account with all the contractors is administered by the architect and quantity
surveyor.
The advantage of employing a contractor on the professional team is to bring their experience and
expertise into the design stage at the beginning. A contractor may employ ‘value engineering’
techniques (i.e. detailed studies of the cost-effectiveness of alternative materials and methods of
construction) to review the design process. It is essential the developer ensures the contractor has the
relevant design experience otherwise the advantage of strict design control will be negligible. The
developer has a substantial involvement in this type of contract arrangement and it is the role of the
construction manager to ensure the developer makes firm decisions at the appropriate time. Overall it
is a very management-intensive contract resulting in higher staff and fee expenditure on behalf of the
developer compared to other types of contract.
A key advantage with construction management is the saving of time and this is achieved by
overlapping the design and construction of each package and involving the construction manager at
the commencement of the design process. It is appropriate where an early completion of the
development is crucial. Despite the developer having direct control over the various contractors, the
issue of cost control still remains problematic. There is still no guarantee of what the final cost of the
scheme will be, although incentives may be used to increase the contractors’ share of the risk but at a
cost to the developer. This method may be used by developers if they wish to maintain flexibility, take
advantage of fast-track methods of construction and retain control while accepting greater risk. They
could reduce this risk if they were confident of their exact requirements at an early stage and the pre-
contract period was sufficiently long enough to allow for detailed design.
The key advantages and disadvantages of the management contracting approach are summarised
briefly in Table 7.3.
Table 7.3 Advantages and disadvantages of management contracting procurement
Advantages Disadvantages
Time-saving potential for overall project time Imperative that brief is
detailed and clear
Increased buildability potential
Breaks down traditional adversarial barriers Higher level of price
uncertainty
Parallel working is inherent
Work packages are let competitively Relies on a good quality
team
Flexibility – changes can be made provided the packages affected have not been let and
there is little impact on those already let

A similar strategy to management contracting is the ‘design and manage’ contract. In this scenario a
contractor is paid a fee to manage and assume responsibility for the works and also the design team.
Observed advantages include early completion because of overlapping activities, a developer deals
with only one firm, the process can be applied to complex buildings and the contractor assumes the
risk and responsibility for integration of the design and construction. On the other hand the
disadvantages of this approach include price uncertainty (i.e. not achieved until the final work package
is let), the developer loses control over design quality and also the developer has no direct contractual
relationships with the works contractors or the design team; in turn this makes it difficult for the
developer to recover costs if they fail to meet their obligations.

7.6 Project management

The appointment of a project manager is not essential for every development. A project manager is
usually engaged for large and complicated rather than small, simple projects. Often developers will act
as their own project manager with ‘in-house’ staff or employ one of the professional consultants to
exercise the management function. Typically a project manager will receive a fee representing about
2–3% of the final building cost, depending on the extent of the role and the complexity of the scheme.
However the developer may appoint a project manager on an incentive basis linked to whether the
final cost is completed within budget. A development company may be asked to take on the role of
project management on the basis of a fee, either fixed or related to the profit of the development, by an
owner-occupier or property investment company for instance. Project management in this context has
a much wider definition to include the management of the entire development process.
Project management is a stand-alone occupation and project managers may be trained as architects,
quantity surveyors, real estate managers, valuers or agents and/or have a building/contracting
background. The project manager should be appointed at an early stage to be able to advise the
developer about detail relating to the type of building contract applicable to the development and to be
involved in the development brief and the design discussions. Also the project manager should be able
to advise the developer on the selection of the professional team, particularly those who have
previously worked with the project manager. The professional team should complement each other
and work well together. The project manager’s role is to act as the client’s representative when co-
ordinating the professional team and liaising with the contractor. Note the project manager is
concerned with the overall management of the project and not involved in carrying out any part of the
project. The project manager needs plenty of common sense, timing and co-ordination ability,
administrative skills and a sound knowledge of construction.
 The management objectives must be clearly defined in consultation with the project manager and
also made known to everyone in the project team. The objectives are to ensure the finished project is
suitable for its intended purpose and built to satisfactory standards, that completion occurs on time and
the project is completed within the budget. The project manager is often responsible for appointing the
professional team on behalf of the developer and will confirm the fees, letters of appointment and
deeds of collateral warranty under the guidance of the developer. The developer should ensure the
project manager is supplied with copies of all the funding documentation entered into with the
financier of the development. The documentation will include the plans and specifications agreed with
the financier and the project manager should ensure these are complied with at all times. If alterations
are necessary then formal approval from the financier will be required. The project manager is
responsible for ensuring all arrangements for the disposal of the building, either the letting or the sale,
are completed both efficiently and satisfactorily.
It is essential to examine the role of the project manager through the pre-contract and contract
stages. The following example is based on a traditional JCT contract as typically used in the UK
(JCTL 2020).

Discussion point
What is management consulting and how does this approach differ from other procurement
approaches?

7.6.1 Pre-contract preparations

The project manager should confirm the developer possesses the necessary legal title for the site,
whether it is freehold or leasehold, and that vacant possession of the whole site is available
immediately. All restrictions on the site should be carefully checked (e.g. underground services,
easements and rights of light or support) and compared with the proposed scheme to ensure the
building work will not interfere with them. The project manager will arrange, if not previously carried
out by the developer, all of the necessary ground investigations, structural surveys and site surveys and
then communicate these results to the rest of the professional team. It is important for all the site
boundaries to be clearly defined and that a schedule of condition of the boundary fences, adjoining
roads and footpaths, etc. is prepared. At times it may be necessary to negotiate ‘rights of light’ or
‘party wall’ agreements with adjoining landowners/occupiers.
The architect is responsible for ensuring all of the necessary statutory approvals have been obtained
such as planning permission and building regulations. The fire officer should be consulted early in the
design process and the architect should ensure the design is in accordance with all relevant legislation.
The architect is responsible for assuring the project manager that all necessary statutory consents have
been obtained. It is most important for the project manager to obtain unqualified assurances on these
matters because, in practice, many expensive delays are caused as a result of one or other of the
statutory consents not being obtained before the contract starts. Sometimes there are circumstances
that might persuade the project manager to allow a contract to start before all the statutory consents
have been obtained; however in this scenario the project manager and the developer must quantify and
fully accept the additional risk that is being taken.

7.6.2 Preparing the contract documents

The project manager’s most important task is to ensure the contract is not allowed to commence
without adequate documentation. Incomplete drawings are probably the most common cause of delays
and cost increases. If a contract commences before all construction drawings are completed and the
architect is unable to provide all the drawings to meet the contractor’s required time schedules, the
negative consequences can be very serious. The project manager needs to be absolutely satisfied with
the availability of the drawings by the architect and confirm that sufficient staff resources within the
architect’s firm are in place. If a contract is started before the drawings are fully complete, which is
often the case, a detailed schedule must be obtained from the architect showing exactly when the
outstanding drawings will be delivered to the contractor. Before the building contract is placed, the
architect must obtain from the contractor a written statement (provided the drawings are supplied in
accordance with the architect’s schedule) confirming there will be no subsequent claims for delays due
to lack of drawings. Ensuring this matter is agreed upon between all stakeholders at the
commencement cannot be overemphasised.
Project managers must also be satisfied the Bill of Quantities is as complete and accurate as
possible. The quantity surveyor will measure the quantities of the architect’s drawings and again this
highlights the need for their accuracy. Some items in the Bill of Quantities may be described under the
headings of ‘prime cost’ (i.e. actual cost) or ‘provisional sums’. ‘Prime cost’ items usually cover
materials or goods that generally cannot be precisely defined. ‘Provisional sums’ items cover elements
of the work where it is not possible to detail properly and evaluate when the contract is entered into.
The contractor is required to allocate a sum of money against these items.
The project manager must understand why the prime cost and provisional sums items have been
included in the Bill of Quantities and be satisfied it is not possible to make a detailed provision at the
outset. Quantity surveyors should be questioned to ensure they have received adequate information
from the architect to enable the preparation of their Bills with a high level of confidence in their
accuracy.
If a pre-letting has been achieved then it is essential to include any specific requirements from the
tenant/s in the contract document. Furthermore such requirements should be clearly referred to as the
‘tenant’s specification’ so there is no uncertainty. There may be a situation where the tenant
subsequently alters their specification and therefore delays the main contract on the ‘developer’s
specification’. Then if a claim is made by the contractor it can be apportioned to the tenant for
payment.

7.6.3 Appointing the contractor

If the plan is to invite competitive bids from selected contractors, the project manager should agree
with the architect and the developer concerning the names of the contractors who will be invited to
tender. When the competitive tenders have been received and evaluated, the contract is normally
awarded to the lowest tenderer. However there has been a move away from automatically only
accepting the lowest tender with the advent of ‘best value’ approaches whereby other factors are
considered and the lowest tender may not offer the best value for money over the long term. Some
clients appreciate that paying more in the short term has much greater long-term benefits.
The quantity surveyor compares each tender against their priced Bill of Quantities. The project
manager then decides whether a performance guarantee bond has to be obtained by the contractor.
Once satisfied on all matters, the project manager can authorise the allocation of the building contract.
All contract documents should be ready so the contract may be signed before work actually starts on
site, although in practice work often starts before the documents are signed on the basis of a letter of
intent. However this should be avoided where possible. The project manager will discuss with the
architect the underlying reasons for seeking to appoint any nominated sub-contractors and, if
appropriate, then authorise their appointment.
7.6.4 Site supervision
The project manager should be continually satisfied about the arrangements made by the architect for
site supervision during the construction phase. The size and complexity of a development may merit
the appointment of a full-time site supervisor, such as a clerk of works or a resident engineer or even a
resident architect at times. The architect should also arrange for progress photographs to be taken
periodically on site to ensure a clear visual record of the state of the contract at any time is always
available to supplement the architect’s own reports about the progress.

7.6.5 Construction period

When the contractor has taken possession of the site, the project manager ensures the works are
completed on schedule and the overall cost is maintained within budget. To undertake these duties
effectively there are regular meetings with the project team. The frequency and composition of the
meetings depend upon the size of the particular scheme and may vary at different stages. The project
management meetings are often arranged on a monthly or fortnightly basis. The project manager, the
architect and the quantity surveyor form the nucleus of the project management team. If the project
manager is also controlling the letting or sale of the project then the surveyor/valuer/agent is normally
a member of the team, particularly in those cases where the purchasers or tenants may seek to have
special works carried out. If the scheme is being financed externally, then the fund or bank’s
representative or appointed advisers will also attend the project meeting to fulfil their monitoring role.
The contractor may be invited to attend the part of the project management meeting at which the
progress on site is discussed. Often the project manager attends separate site meetings with the
architect to keep up-to-date about the construction progress. All project management meetings must be
professionally conducted and also are accurately recorded.
Typically at the commencement of a project meeting then the minutes of the previous meeting are
considered and any ongoing matters are dealt with. The architect presents a report on the progress of
the work by identifying those sections of the construction either ahead of or behind schedule and also
provides comments on the overall progress of the construction phase. The architect should identify any
difficulties that have arisen at every meeting and whether the contractor is delayed as a result of lack
of information. The architect should also report as to whether any variation orders or instructions have
been given to the contractor and, if so, their likely effect on the progress of the work. The project
manager will learn independently from the contractor or through attendance at site meetings whether
the contractor is being delayed by lack of information and/or materials/labour.
The quantity surveyor then presents a report on the financial situation, indicating whether or not the
work of measurement on site is well up to building progress and if any variation order or architect’s
instructions have been given therefore affecting the cost of the job. The quantity surveyor should
indicate the status with regard to prime cost and provisional sums, then present an overall summary
about how the cost of the job to-date directly compares with the original contract sum. The quantity
surveyor should also identify and examine any factors that might increase or decrease the cost of a job
in the future.
Where appropriate, the surveyor reports on the progress with regard to the disposal of the property
and also on any requests for special or extra work received from prospective purchasers or tenants.
Then the practicability and advisability of conducting those special works are discussed. Ideally the
purchasers or tenants should take possession of the completed building in accordance with the original
design and specification, conducting required special works at their own expense after the building has
been handed over to them. However it is not always possible to insist on such an arrangement since it
may be necessary to carry out such works in order to secure the letting or sale.
The project manager then summarises the overall financial situation, particularly with regard to
payments to the contractor, compares them with the budget, ensures the date of handover is viable and
then compares the estimated date for the receipt of income or capital payments with the budgetary
expectation. These are matters of vital importance to the developer’s cash-flow. If it appears that the
project is running behind schedule, then methods of speeding up the work to recover the position are
considered, together with the cost implications. Usually there is a liquidated damages provision in the
building contract and the question of its enforcement has to be considered. In practice the liquidated
damages are often inadequate to compensate the developer for losses incurred as a result of the delays.
This is because if the true cost is written into the contract documents at the time of the invitation of
tenders, then contractors would increase their tender prices out of all proportion in order to safeguard
themselves against the risk of a heavy liquidated damages claim although they may never be made.
This scenario outlining project management arrangements was based on a scenario where a JCT
contract is used to illustrate the basic principles involved; then it can be generally applied to other
procurement methods. In reality the project team may be much larger and a management contractor or
a construction manager can form part of the team on construction projects of a complicated nature.
Accordingly the project management task is much more intricate. On the other hand when design and
build contract methods are used, then the role of project management is less complex and may be
undertaken by the quantity surveyor. In the case of a lump-sum, fixed-price design and build contract,
project managers are essentially concerned with quality control and progress. They may inspect the
buildings during the construction phase or arrange for a professional consultant to undertake this task.
Periodic meetings with the contractor to discuss building progress and the achievement of the
handover dates should enable them to fulfil their role.

7.6.6 Handover of the completed development

During the relatively short time between the date of final completion and the handover of the building
from the contractor to the developer, the architect prepares a ‘snagging’ list identifying all of the minor
defects to be remedied before handover occurs. It is useful for the developer’s surveyor and the
intending occupier’s representative, if known, to accompany the architect here to ensure all
stakeholders are satisfied with the snagging list. At the outset of the contract, the project manager will
have confirmed all building works are adequately protected by the contractor’s own insurance
arrangements. Note the contractor’s insurance no longer protects the building once it has been handed
over, therefore it is vital for the project manager to ensure the developer has adequate insurance cover
after handover until the insurance cover provided by the occupier takes effect.
If the development has been pre-let or pre-sold to an owner-occupier, then the occupier/s and/or
their contractor/s may seek to gain access before formal handover from the main contractor working
for the developer. From a developer’s perspective this scenario should be avoided unless it is
necessary to secure the deal. If an occupier wishes to gain early access to attend to fitting-out works,
then arrangements should be documented clearly in the contract. Ideally an occupier’s special
requirements should be incorporated at an early stage into the design process or if the occupier is
secured after the building contract has started, then the occupier should be allowed access only after
practical completion of the building. It is important to include the developer’s base specification for
the scheme into any documentation so any changes potentially leading to an increase in cost or delays
can be assigned to one party or the other party. If there is an overlap between main contractor and
fitting-out contractor, the project manager should ensure the occupier organises adequate insurance.
Problems can occur when the fit-out contractor’s work affects the work of the main contractor. The
project manager, in combination with the architect, needs to identify and resolve problems quickly.
The quantity surveyor should then ask when any outstanding re-measurement work will be
completed and also be in a position to agree the final account with the contractor, therefore permitting
the architect to issue a final certificate. The JCT contract will have provided for a certain percentage of
the total cost to be retained by the building owner until the end of the defects liability period, often six
months from the date of practical completion (note: or 12 months in the case of any electrical and
mechanical element of the contract). Special maintenance periods may be agreed for particular
components of the work, e.g. landscaping. The contractor is responsible for remedying any defects,
other than design, which have occurred during the defect liability period although provided each has
not been caused by the occupier. It is essential for the buildings to be carefully inspected at the end of
the liability period because if there are any obvious defects the architect does not identify then it may
be assumed the architect was prepared to accept the building subject to those defects.
The importance of carefully inspecting the site and its immediate environs on the handover date
should not be underestimated. If any damage has been caused to adjoining property during the
building contract, for example damage to boundary walls and fences, then the contractor must remedy
this. Inspection of the roads, footpaths, kerbs, grass verges and associated areas immediately adjoining
the site is conducted to confirm the contractor remedies any damage; otherwise the highways authority
or relevant body may subsequently ask the developer to pay the cost of any remedial works.
The architect should produce as ‘built drawings’ a building manual and maintenance schedule to
assist the occupier by giving a comprehensive schedule and description of all components (e.g. taps,
locks, fastenings, sanitary ware, etc.) that will need replacing in the future, together with
recommendations for regular maintenance work to maintain and preserve the building fabric.
Furthermore the manuals and operating instructions for services are provided by the services
engineers.
Where an occupier is not taking possession immediately then the developer is responsible for a
vacant building and a programme of regular cleaning and maintenance should be instigated. Such
physical arrangements are reasonable and necessary, as well as the necessary steps to protect the
property against illegal entry and vandalism. An example for a residential development is the
provision of neat hoarding or a solid boundary fence erected across the frontage immediately before
the handover date. Consideration is often given to the issue of employing security guards or patrols.
Adequate insurance cover should be in place to provide protection against fire and loss due to damage
to the property. Public liability insurance should also be arranged to protect against claims from
potentially injured third parties.

7.6.7 Monitoring construction progress and costs

The project manager’s objective is to produce the building on time and within budget for the
developer in their role as the client. Therefore it is important to examine how the project manager
reports to the developer on construction progress and cost. As any delays in completion or increase in
costs will affect the profitability of the development, it is therefore essential for a developer to be
regularly informed about progress and cost. The developer will need to regularly update the cash-flow
appraisal prepared in the initial evaluation stage (see Chapter 3) to assess profit.
Each project manager will use their own method of reporting, however it is important to agree with
the developer at the outset about the type of information required. The optimal method of reporting
typically uses charts and graphs to compare actual progress and cost against the original estimates.
Note this is typically undertaken using one of the specialist software packages designed for project
management. The starting point should be the appraisal used at the site acquisition stage so actual
costs and progress can be compared against estimates undertaken at the original date of acquisition.
This means the developer can clearly identify changes in costs and progress, rather than reading
through large amounts of data and written information. The charts usually include written comments
stating reasons why costs have increased/decreased or why the site progress is behind schedule. Note
that industry software packages generate an interactive yet simplistic Gantt chart for the adjustment of
process time and/or costs in response to changes.
 After the developer has assimilated the information in the charts and graphs, then further questions
can be asked of the project manager about the reasons for identified increases in cost or delays in
process. In particular it should be clearly understood who is able to authorise the expenditure of
money and their spending limit. Every member of the project team must know whether they are able
to spend money and, if so, what authorities they must obtain.
Typical reporting methods include the following as listed below.

(i) Bar (or Gantt) chart

The bar chart is a calendar showing the development programme displayed in weeks or months. The
programme is divided into tasks and the detailed time period when each of these is to be carried out is
shown on the chart. An example of such a chart is shown in Figure 7.1. The chart includes both pre-
contract activities as well as the contract programme, since each are equally important and facilitate
monitoring as any delay will impact on the start of construction. This also highlights how crucial it is
for the project manager to be involved in the development process from the commencement. The chart
indicates when each individual task is timed to start and finish. It shows how the tasks overlap and the
work that should be undertaken at any time. From time to time the programme and the bar chart may
need to be amended but a comparison of what has been achieved against what the chart shows gives
the developer and project manager a simple yet instant test of progress.
Figure 7.1 Hypothetical development project via bar or Gantt chart

The bar chart can be used to indicate the timing of when specific information or decisions are
required by the project manager, the developer and also the contractor. This is absolutely essential as
lack of information or instructions is one of the main causes of delay. The bar chart also confirms any
delay in one particular activity can affect the entire programme. After a potential delay is identified
then it is important for the project manager to advise the developer about what potential effect it will
have on the overall programme and how then time gains can be achieved via other activities. It is vital
for the project manager to distribute the bar chart to the entire professional team allowing each
member of the team to identify the target dates they must work to.
Once the contractor is on site then the bar chart can be substituted with the contractor’s actual own
bar chart outlining the timescale for each activity to be undertaken on site. It is important the project
manager receives the contractor’s bar chart regularly so the overall bar chart can be updated and
amended as necessary. The developer may not need to know the exact progress of each individual
trade on site and it is often sufficient to break down the contractor’s programme into substructure,
superstructure, finishes and external works. However the project manager must be able to produce the
contractor’s bar chart at any time, as in some cases the developer will need to know the detailed
programme. For example the developer may need to know at the earliest opportunity when the area in
the building identified as a show/display suite is ready to assist marketing of the development. Another
method of monitoring progress and highlighting the importance of providing information and
decisions is to prepare a chronological timetable of events. Overall a bar chart is the most instant way
of comparing progress against original estimates.

(ii) Cash-flow table and graph

A cash-flow table prepared by the project manager is shown in Figure 7.2. The purpose of this cash-
flow table is to estimate the developer’s flow of cash payments throughout the development period.
The developer can use this to prepare a cash-flow appraisal, which can then be regularly updated
throughout the development. The importance of the cash-flow has been discussed in Chapter 3.
Estimates of cash-flow often have to be revised and at times there is a risk they may not highlight
problems with delays until the final months of the contract.
Figure 7.2 Cash-flow: fees/construction

(iii) Financial report

The project manager’s financial report may appear similar to the example in Figure 7.3. This is based
on the quantity surveyor’s cost reports and payments already made to the contractor as certified by the
architect. It enables the developer to identify variations in costs throughout the contract.
Figure 7.3 Financial report: building costs

The project manager should advise the developer about the supporting reasons for all cost
variations. Any variation in cost from the original contract value may be due to a claim from the
contractor, an architect’s instructions to the contractor or variations required by the developer. We
have already examined the circumstances under which a contractor can make a claim for additional
costs. Claims may be based on the inadequacy of the drawings and/or the Bill of Quantities.
Alternatively they may be based on delays in the architect issuing drawings or instructions. The
project manager must ensure any claims and variations are kept to a minimum if costs are to be kept in
budget; they should monitor the activities of the architect and ensure they adhere to their drawing
schedule. The project manager in consultation with the quantity surveyor must advise the developer
about the cost of any variation proposed to ensure the developer is fully aware of the implications. No
revision should be made without a sound justification and the developer must know why cost estimates
have to be revised. The project manager must maintain a close scrutiny on costs and question any
decisions accompanied with cost implications.

(iv) Checklist
Most project managers prepare a checklist of the main activities throughout the development. An
example of such a checklist is shown in Figure 7.4. The checklist defines the main activities applicable
to the particular development, some of which will require approval by the developer. It should
highlight information required by the project manager to be supplied by the developer where it is
essential for the project manager to identify the decisions required by the developer and also by which
date. Developers should know when and if the progress of a development is being delayed because a
decision is required, as well as detailing the implications of any delay in this decision. The
developer/project manager relationship is two-way where one and both stakeholders should ensure the
other stakeholder is kept fully informed at all times.
Figure 7.4 Checklist to monitor primary activities

The above methods of reporting are typical, however different project managers will have their
own preferred approach. Whilst regular reporting on progress and costs is an effective method of
keeping a developer fully informed, it also provides the project manager with an essential tool. This
approach is even more important if the developer insists on regular reporting in the manner noted
above. The project manager will know whether the objectives are being achieved and also will bring
those targets that need to be achieved into sharp focus and identify the problems to be addressed.
Throughout the construction process the project management role in a development, regardless of
whether carried out by the developer or through the appointment of a project manager or another
professional, is primarily about teamwork and motivating the team to work together. Problems must be
identified and solved before team members potentially resort to a blame culture and become
entrenched. The project manager must anticipate delays by ensuring constant communications with the
professional team and the contractors. Contracts and email/digital/paper communications should not
be the only medium relied on since there is no viable substitute for personal contact. Most importantly,
project managers should fulfil their role efficiently when constantly considering cost and time
restraints. Furthermore they must have the ability to lead and motivate the professional team and the
contractor. This, again, confirms a successful property development process is largely about the
interaction between people.

Discussion point
How are flexibility and potential variations addressed in the developer’s planning
spreadsheets?

7.7 Public-private partnerships

Collaboration between public bodies, such as local authorities or central government and private
companies, is commonly referred to as a public-private partnership or PPP. In today’s real estate
markets the public developments are able to use PPP as an effective method of procuring buildings
and infrastructure. In the public sector there are three primary procurement approaches being (a) PPP,
(b) Design and Build and (c) Prime Contracting. The underlying rationale for PPP is linked to private
companies being more efficient and better managed than public bodies. In bringing both the public and
private sector together it is envisaged the business community’s management and financial skills will
lead to a better value equation for money for taxpayers. The Private Finance Initiative (PFI) was
created in the early 1990s. Governments and local authorities traditionally paid private contractors to
build roads, schools, prisons and hospitals out of the funds received from taxation. Under the PFI
approach the contractors pay for the construction costs and then rent the completed project back to the
public sector. In turn this enables the government to obtain new hospitals, schools and prisons without
raising taxes. The contractor is normally permitted to retain any additional cash left over from the
design and construction process, in addition to the ‘rent’ money. Critics argue that governments are
mortgaging the future and also the long-term cost of paying the private sector to run these schemes
exceeds the cost if the public sector was to build them itself.
PFI is not fully developed in some government sectors, however it is a well-established means of
providing funding for new roads and prisons. The complex nature of PFI contracts and the political
obstacles can result in controversial schemes, which in turn slows progress in some areas. In addition
it could be argued that trade in public services could ultimately provide a substantial benefit to the
private sector.
PFI has broadened the concept of public-private co-operation. If privatisation is a take-over of a
publicly owned entity, then PPP is more like a merger where both sides share the risks and
acknowledge the benefits. With the health and education sectors accounting for a large proportion of
the GDP in many countries, the rewards for industry from opening up the public sector to private
finance are substantial. However governments are not always perfectly clear regarding how far they
want to go in these areas when in the face of opposition, where critics argue that taxpayers will end up
paying for PPP developments.
Previously there have been arguments some PFI projects have been sub-standard where private
companies take short-cuts in order to maximise profits. Another PFI criticism is based on firms
making their profits by reducing employees’ wages and benefits. From a positive perspective the PPP
supporters believe that some hospitals and schools would not be built if it were not for private finance;
it is also asserted that PFI will lead to increased quality in public services. Performance-related
penalties, now part of most PFI contracts, will ensure improvement in standards. Overall PFI is a fast,
effective and economic way of getting new projects built over the short term.
7.8 Partnering
Clients, designers and contractors have evolved their relationships with developers and developed
different types of business relationships. One successful approach is partnering. Under this type of
arrangement each party to a contract works towards agreed goals to benefit all concerned. Partnering
thrives in an atmosphere of trust and openness although fails when co-operation is absent. In summary,
partnering is a business relationship for the benefit of all parties and built on trust, openness and
respect. Whilst the contract establishes the legal relationship between parties, partnering establishes
the working relationship. At times it is referred to as the traditional way of doing business based on the
premise where a person’s word was their bond. Partnering can be used on small, large or complex
projects and is promoted as a win-win way of doing business for all parties involved. Partnering is
based on an ethos of ‘teamwork’. In the case of construction projects, objectives are achieved through
a teamwork approach to:

design control and efficiency;

minimising pre-construction budgeting and approvals periods;
maximising efficiency of the construction period and completion dates;
problem-solving co-operation;
cost control reporting and reconciliation; and
agreed conflict or dispute resolution procedures.

For the partnering approach to succeed then a number of key principles need to be adopted by the
parties. For example a commitment to, and value placed on, a long-term business relationship
therefore ensures a willingness to work towards longer-term goals such as a reduction in project times
and improvement in building performance or quality. In partnering organisations there is a requirement
to develop an environment for long-term profitability and to encourage innovation. In addition,
partners commit to improved project buildability and a lowering of project costs through the process
of value management. The establishment of project organisational structures and clear lines of
communication are essential to reduce conflict and disputes and also ensure successful outcomes.
Advocates claim the successful outcome is a project constructed in less time, costing less and of
higher quality than otherwise would be realised through traditional procurement routes. With a
partnering approach then it can be argued that developers and contractors are able to better define the
project and identify risks prior to commencement in order to avoid time delays, cost overruns and
potentially any poor relationships between parties. In summary the key elements of partnering in
construction include the following as listed below.

Commitment from top management where a jointly developed Partnership charter is not a
contract but a commitment.
Equity with all stakeholders’ interests considered in establishing mutual goals combined with a
commitment to win-win thinking.
Trust, since teamwork without trust is not possible and personal relationships are developed to
build trust and understanding about each stakeholder’s risks and goals.
Development of mutual goals/objectives where at partnering workshops, mutual goals and
objectives are established and the means by which to meet them are identified.
Continuous evaluation to ensure implementation, stakeholders agree to a plan for periodic joint
evaluation based on mutually agreed goals.
Timely responsiveness saves money and can address a problem expanding into a dispute.
Methods of discussing issues are discussed prior to project commencement to reduce conflict
risks.
Partnering workshops are organised at the commencement of the project and involve all team
members. The workshop, being a planning session to establish the partnering tools and to problem-
solve critical design/construction issues, typically takes about two days to complete. The project
charter is accepted as a visible tool setting out the team performance goals and project mission. This is
periodically reviewed to ensure it has continued appropriateness and relevance. In addition it is
essential to have agreement about criteria to measure to what extent the partnering is successful. The
second stage is, therefore, to agree upon a team report card approach and the various benchmarks for
measuring success. The third and most important tool developed at the initial workshop is the issue
resolution process where the approach should encourage communication and creative problem-
solving.
Roles and responsibilities are defined and communication points are agreed by all stakeholders.
Without a commitment to principle-centred leadership from management, it is evident the partnering
approach will not be as successful. Follow-up meetings are held every three or six months during the
project and it is in these follow-up meetings where partnering is actually delivered and the results are
produced. Similarly, at the end of the project an evaluation should always be undertaken so lessons
can be learned by all stakeholders to assist future projects.

7.9 Reflective summary

A core aim of the developer during the construction process is to produce a high-quality building
both on time and within budget. The selection of procurement is critical and largely dependent on
project size and complexity as well as the developers’ attitudes to risks. There are three main
types of building contract available: (a) traditional contract format; (b) design and build; and (c)
management contracting. At the same time there are many variations of each type depending on
the exact contractual arrangements and the role of the professional team. Each contract has its
main advantages including the traditional contract for its flexibility, the design and build for cost
control, as well as management contracting for speed. Disillusionment by developers with the
traditional contract has led to an increased use of the design and build contract where the
contractor is responsible for design and construction, therefore avoiding the problem of cost
increases due to the late production of drawings by the architect.
In order to address problems associated with quality control of the design and build contract
the appointed contractor has taken over the appointment of the developer’s chosen architect
through a novated contractual arrangement. Whichever method is selected then the success of the
building contract, in terms of achieving the aims above, relies on good control, leadership, and
firm early decision making by both the developer and the project manager. The professional team
and the contractor should be motivated towards the same objective, resolving any conflicts and
identifying problems before they arise. One factor with a considerable impact on the construction
phase potentially could be a shortage of labour, particularly in trades such as plumbing, electrical
and plastering. In the public sector both PPPs and PFI can affect procurement. The advent of
partnering can also influence some developments with distinct advantages for long-term working
relationships. Overall, construction is a critical phase in the property development process and
typically there are no short-cuts possible. The most recently completed development will also be
the showpiece for future projects so the aim should be for continuous improvement in the
construction phase.

7.10 Case study: diversifying development risk – Petronas Towers

This case study examines a unique property development and how risk was reduced via an innovative
construction process. The Petronas Towers in Kuala Lumpur, Malaysia, are a single project however
are two separate towers located together on one parcel of land (Figure 7.5). Although there is also a
skybridge positioned between both buildings on the 41st and 42nd levels this skybridge is not affixed
to either building. This design feature is to allow tower flexibility, i.e. as the towers will sway slightly
in high wind.

Figure 7.5 Petronas twin towers (Source: Wikimedia Commons 2020a)

This project included development exposure to risk with many aspects however it is worthwhile to
examine how risk was reduced during the development process. The organising committee originally
determined there was substantial risk if the period between (a) project commencement and (b)
completion was too long. Even though the original construction timeframe was stated as eight years,
this was subsequently reduced to six years due to potential risk associated with finance and budgetary
constraints over the longer period.
There are other areas where the stakeholders sought to reduce exposure to construction risk, such as
determining who would be the optimal constructor. It would normally be assumed only one primary
building company would be engaged in the construction of the building structure. However with this
project there were two tenders issued for the construction of the two towers, i.e. a separate tender for
each individual tower. The successful bidders for each tower were: (a) a Japanese firm “Hazama
Corporation” for Tower 1 and (b) a South Korean firm “Samsung Engineering” for Tower 2
(Skyscrapercenter 2020). This approach of using two different construction companies, although
relatively uncommon, was very advantageous for the property developer as follows:

In the future scenario that potentially one construction company becomes insolvent or is unable
to meet the agreed construction deadline then the other builder is already present on site and
extremely familiar with each tower since they are practically identical. Hence the other builder
can quickly take over the project for the other tower.
There would be a level of competition and pride between the construction companies.
Such an extensive project if combined into a single tender (i.e. construction of both towers by a
single builder) would be too large for most construction companies to complete within the
shortened six-year deadline. Dividing the task in half (i.e. two builders for two towers) addressed
this problem.

The risk associated with potential time delays associated with construction was enhanced via the use
of incentives. For example it was openly promoted by the client that the first construction company to
complete the top of their individual tower would be allocated the additional contract for building the
interconnecting skybridge. This incentive had the desired effect of reducing construction risk by
creating a race between the Japanese and South Korean firms, where the latter construction firm was
the quickest (i.e. they constructed Tower 2 first). Therefore the South Korean firm was also awarded
the contract to construct the interconnecting bridge (Skyscrapercenter 2020).
Another risk factor was linked to the site location where the original surveyed site for the
foundations was found to include bedrock irregularities. Unfortunately this would have potentially
been a problem for supporting the immense weight of the building. To reduce this risk the developers
moved the entire site approximately 60 metres southeast of where it was initially meant to be located
(MM2H 2020).
The foundation was excavated down to the equivalent height of a five-storey building where 500
truckloads of earth fill were removed from the site every night. The foundation consisted of 104 deep
piles per tower, then supporting a 4.6 metre thick concrete raft. Additional risks were associated with
the concrete pour that needed to be continuous and uninterrupted. Therefore this task was conducted
for 54 hours without breaks which equated to a full concrete truck arriving every 2.5 minutes. In total
the completion of the foundation took a period of one year since the excavation commenced.
A reduction in exposure to obsolescence risk was also sought. For example in the original building
design the architect proposed a 427-metre high building, being only 15 metres shorter than the world’s
tallest building at that point in time. However due to pressure from external stakeholders including the
Malaysian president, an updated design ensured the building’s height was increased by more than 15
metres (MM2H 2020). Nevertheless the title of the world’s tallest building was held by the twin
towers for a relatively short period following completion in 1996. Note, by 2004 the tallest building
title was awarded to ‘Taipei 101’ and then transferred in 2010 to the ‘Burj Khalifa’ in Dubai. By 2020
the twin towers would not be in the top ten of the world’s tallest buildings, therefore highlighting the
rapid pace of obsolescence for major global building developments. However the status of the twin
towers and the extensive retail shopping precinct on the lower floors (Figure 7.6) has ensured the twin
towers will always remain a global landmark.
Figure 7.6 Twin towers retail shopping (Source: Wikimedia Commons 2020b)

This case study highlighted different techniques used to reduce exposure to different types of risk in
the project. The successful completion of the twin towers by two different constructors both on time
and within budget confirmed the risk reduction process was successful and effective. It is clear that
risk is associated with all property developments, although the more expensive the project then the
more there is for the stakeholders to lose.

References and useful websites

Aghimiem, D., Aigbavboa, C., Aghimien, L., Thwala, W.D. and Ndlovu, L. (2020) ‘Making a case for 3D
printing for housing delivery in South Africa’, International Journal of Housing Markets and Analysis,13:4,
pp. 565–81.
American Institute of Constructors (AIC), www.professionalconstructor.org.
Australian Institute of Building (AIB), https://aib.org.au.
Chan, J., Bachmann, C. and Haas, C. (2020) ‘Political economic and energy impacts of substituting adaptive
reuse for new building construction: a case study of Ontario’, Journal of Cleaner Production, 259.
https://doi.org/10.1016/j.jclepro.2020.120939
Construction Industry Council (CIC), www.cic.org.uk.
Expatgo (2020) www.expatgo.com/my/2013/01/09/the-history-and-construction-of-the-petronas-twin-
towers/petronas-5/ (last accessed 31 March 2020).
Hou, L., Tan, Y., Luo, W., Xu, S., Mao, C. and Moon, S. (2020) ‘Towards a more extensive application of off-site
construction: a technological review’, International Journal of Construction Management,20 May.
https://doi.org/10.1080/15623599.2020.1768463. The Joint Contracts Tribunal (JCT), www.jctltd.co.uk.
Joint Contracts Tribunal Limited (JCTL) (2020) https://corporate.jctltd.co.uk (last accessed 2 May 2020).
MM2H (2020) www.mm2h.com/the-history-and-construction-of-the-petronas-twin-towers/ (last accessed 27
March 2020).
Royal Institution of Chartered Surveyors (RICS), www.rics.org.
Skyscrapercenter (2020), www.skyscrapercenter.com/building/petronas-twin-tower-2/150 (last accessed 24
March 2020).
Wang, B.T. and Rimmer, M. (2020) ‘3D printing and housing: intellectual property and construction law’, in
Automated Cities, Springer. https://ssrn.com/abstract=3626487.
Wikimedia Commons (2020a) https://commons.wikimedia.org/w/index.php?
title=File:KLCC_twin_towers1.JPG&oldid=284853005 (last accessed 27 August 2020).
Wikimedia Commons (2020b) https://commons.wikimedia.org/w/index.php?
title=File:Suria_KLCC_(18952839826).jpg&oldid=431280365 (last accessed 27 August 2020).
Chapter 8

Market research

8.1 Introduction

In a similar manner to professionals in other disciplines, property developers may be an expert in

their specific area of expertise (i.e. the task of commencing and completing the physical property
development) but lack the same high level of commitment in other related areas. Undertaking
adequate market research is often acknowledged as one of these shortfalls where this conclusion
is often reached with the benefit of hindsight, especially if a property development has not been
as successful as planned. As a consequence many property developers expose themselves to
higher levels of risk noted as almost entirely avoidable if the importance of market research prior
to commencing the project, as well as during the entire construction phase (including disposal
through sale or lease), had been realised.
It is unclear exactly why the importance of sound market research is often underestimated in
the property development process. A possible reason could be a lack of formal training
undertaken by many property developers who may have evolved into their developer role based
on their industry experience. Another possible reason is that when a property developer has
previously operated in a rising market (i.e. demand exceeds supply), the impact of failing to
conduct adequate market research may be partially hidden by rising prices. A downturn in the
property cycle requires the developer to be more cautious due to the added risk that (a) demand
for new or refurbished may be reduced due to an over-supply of similar property or (b) that
values may decrease, which in turn will affect the profit margin. Market research is critical at all
times but more so in a market downturn with associated falling property values.
Undertaking thorough market research has the potential to make or break a successful property
development. Market research by itself is a specific expert discipline and its importance cannot be
underestimated as an integral component of the property development process. All successful
property developers acknowledge that the undertaking of well-planned and carefully executed
market research will substantially increase the likelihood of success; nevertheless there will
always remain some property market information considered either unknown or unknowable. The
rapidly growing area of property market research (Newell 2020) continues to embrace different
specialisms including information and database services, strategic and site-specific analysis,
forecasting, portfolio analysis and the emerging area of artificial intelligence (Abidoye et al.
2020).
There are varying approaches to conducting market research and this discipline is constantly
changing. For example both the site-specific analysis and large-scale strategic analysis are
approaches used by developers and investors when examining the viability of individual projects
and/or to assist in making decisions affecting a company’s long-term real estate strategy.
 Research analysts can provide invaluable insights about the fundamental demand and supply
factors at any given time throughout the development process, as well as insights into the status
of underlying market conditions. The increasing availability of ‘big data’ in the real estate market
has added another dimension to real estate market research (DeLisle et al. 2020). Market research
can identify previously invisible risks, opportunities and trends that may not be readily evident
from simply viewing a list of current transactions in the market.
This chapter highlights the importance of market research, emphasises why it must always be
incorporated in every project and explains how it can enhance the success rate of the property
developer. In addition there is a discussion about the differences between varying land types that
further complicate direct market comparisons. Prior to commencing any form of market research
it is essential for each specific land type (e.g. retail, industrial, residential) to be identified early in
the analysis stage. A simple categorisation approach such as this will assist the overall market
research process, however on the other hand if omitting this step then the likelihood of failure due
to higher exposure to risk will be substantially increased.

8.2 Conducting market research

The concept of market research can vary substantially according to the perception of different
stakeholders. For example the term ‘market research’ or ‘market analysis’ is used broadly in
economics but has a more specific meaning when related to the context of property development. A
good starting point is to consider market research or analysis as the identification and study of the
market for a particular economic good or service. This can be considered at two different levels as
follows:

a. based on a relatively broad market viewpoint without a specific individual property as the
primary focus of the study. For example this type of market research could be applicable for
multiple properties located in the same marketplace; and/or
b. based on the perspective of the actual real estate market in which a given property competes. In
this scenario the relevance of the market research is limited to an individual property.

With regards to most forms of research (see Figure 8.1) the focus can range from specific research (a)
to broad research (b) where the decision for the property developers will be based on what levels of
research are relevant to the project at hand. The amount of market research able to be undertaken is
practically infinite and in a constant state of change. Resource limitations, especially financial and
time, will usually dictate how much market research can be undertaken for a particular property. This
balance between broad and specific information must be closely monitored and evaluated for each
property development.
Figure 8.1 Market research approach from broad to specific

Figure 8.2 highlights the relationship between the overall aggregate real estate market and the sub-
sectors based on classifications of different land uses. This replicates the operation of the market
where each land use has a set of unique characteristics. For example a prospective purchaser or tenant
of an industrial property will have very different requirements and also buyer/occupier characteristics
in comparison to a prospective purchaser of a residential property.
Figure 8.2 Relationship between market research areas

Building further upon this discussion, the next stage is to examine the relationship between land
use and geographic location to determine the exact sector of the real estate market to be the subject of
market research. Using the simplified model in Figure 8.3 it is possible to enter four different locations
(Y axis) and four different land uses (X axis) resulting in 16 different sectors. A typical real estate
market could be segmented into many land uses (e.g. 10) and also additional geographical locations
(e.g. 15 localities for ease of discussion), therefore resulting in approximately 150 different unique
sectors with each needing individual market research. This example highlights the underlying
complexities when determining where boundaries start and finish. In reality a real estate developer
operating in the global market will be examining an extremely large number of locational sub-markets,
each with their unique characteristics, landscape and supply/demand interactions.
Figure 8.3 Cross-tabulation based on land use by geographical location

During the actual task of undertaking market research and gathering data it is essential to consult
numerous market stakeholders and participants. Direct sources of information are those involved or
likely to be involved in property transactions and who can be relied upon for accurate comparison
purposes. There are also secondary sources of information although some may provide only general or
broad information about the local economy being viewed as supporting information.
It is critical to understand how the interaction of supply and demand directly affects a property’s
value. After an investigation into recent property transactions, as well as properties for sale in a
competing market with the same land use (note: although not necessarily in the same locational sub-
sector) and the behaviour of market participants, then it is possible to examine supply and demand
relationships and investigate both the current and future status of values. This approach will assist in
the interpretation of market attitudes towards current trends and anticipated changes. If current market
conditions do not indicate substantial levels of demand for a proposed development, then market
research may identify when adequate demand for a project will likely emerge at a future point in time.
It can be noted in this example that market research assists to forecast the timing of a proposed
property development and also provide insights into the amount of future demand anticipated over a
specified time.
As the determination of the highest and best use of a parcel of land should be a core objective of a
successful property developer, market research provides a sound basis for providing an insight into
what this actually is. For example an existing or proposed improvement may be considered suitable
for a specific land use in today’s market. Therefore it should also be put to the test of maximum
productivity where the developer is confident that an appropriate level of market support will be
forthcoming when the completed property development is released onto the market. In other words,
market research can provide this higher level of confidence. When undertaken correctly then in-depth
market research goes much further in specifying the type and level of support. For example a
particular study may identify the key marketing strategies required for an existing or proposed
development; in addition it may provide estimates of the actual proportion of the overall market the
development is likely to capture and the most likely absorption rate. Market research will often
provide a ‘best case scenario’ and a ‘worst case scenario’ to assist a property developer to undertake a
sensitivity analysis and evaluate all possible options.
In order to estimate the level of market support for a proposed property development the
relationship between demand and competitive supply in the subject property market needs to be
closely examined, both for today’s market and in the future. Although based on standard economic
theory, this relatively simplistic approach is often underestimated and overlooked. The supply-demand
relationship for this sector (as per Figure 5.4) can be easily modelled for the market over the forecast
period including the final sale/leasing up period upon completion.
The overall market value of a proposed property development is largely determined by its
competitive position in its market and interaction of supply and demand drivers. Ensuring a high level
of familiarity with the characteristics and attributes of the subject property (note: divided into (a) land
component, (b) building component, (c) completed development) will enhance the ability to identify
competitive properties (i.e. supply) and to examine the comparative advantages and disadvantages a
subject can offer potential buyers or tenants (i.e. demand). Only with a comprehensive and in-depth
understanding of prevailing economic conditions can a developer understand their subsequent effect
upon relevant property markets. It will then be possible to quantify and better understand the
externalities affecting a proposed property development.

8.3 Sourcing real estate market information

The three most common reasons for undertaking market research are as follows:

1. Ensure informed decisions are made about individual developments or investments. This may
include validation of preliminary unsupported estimates of a developer or investor.
2. Assist in the formulation of long-term development and/or investment strategies.
3. Analyse and predict the performance of property investment portfolios.

Each of these uses will bring together a mix of different research skills and approaches. In addition to
these established uses, property market research is being increasingly used for decision support
systems in a wide range of real estate related disciplines including valuation, investing, lending,
purchasing and real estate development. Especially for publicly listed companies there is a greater
need for higher levels of transparency with dealings and decisions relating to real estate finance. Some
of the areas where market research can assist include information about the following:

1. How variables and decisions on the local economy affect value.

2. How the property development is affected by trends in the market, e.g. demographic trends
divided into varying cohorts.
3. The level of risk associated with a development at a future point in time.

There has always been a need to predict or forecast the future designed to reduce risk due to fewer
unknowns. However the creation of such models are never absolutely risk-free and extended
timeframes are directly linked to higher levels of risk and more unknown factors. For example it is
possible to forecast the future weather pattern for the next hour with a high degree of certainty,
however less certainty is associated with predicting tomorrow’s weather since it is covers a greater
time period into the future. For example, how much certainty is associated with the weather when
comparing one day ahead or one month ahead? Some decisions, for example which government will
be in power in five years, are practically impossible to estimate with a high degree of accuracy so there
will always be a certain level of exposure to risk.
Despite these challenges, real estate developers must keep up-to-date with constantly changing
forecasts about future trends via the use of property market research. Ignorance and the ‘benefit of
hindsight’ are not valid excuses if a development has failed to reach its full potential due to reliance on
poor or inadequate market research. At times the research may indicate a proposed development is not
a viable proposition to commence in the current climate and should be delayed until the market
recovers and demand levels are restored. This result is a positive outcome for the developer since it
will reduce exposure to risk, regardless of whether the project proceeds or doesn’t commence. All real
estate developers entering the market need to be fully conversant with the wide range of research
services available, if only to become sophisticated purchasers of them when required. The next section
provides a guide to the main types of property research.

8.4 Types of research

This section discusses information as well as site-specific and strategic market analysis, forecasting
and portfolio analysis.

8.4.1 Information
Generally speaking there are two different types of information being (a) specialised real estate market
information and (b) other supporting information.

(a) Real estate market information

Reliable accurate statistics about every transaction in the real estate market are not freely available in
all markets; for example with reference to publishing purchaser and seller’s names for example. This
is partly due to privacy laws and also to the lack of a centralised marketplace. Detailed information
about development activity at a local level is rarely available on a consistent basis over long time
periods, especially with reference to sensitive financial information. In the commercial market the
assembly of a comprehensive database about recent leases and development completions usually has
to be gradually and painstakingly pieced together by an analyst based on different sources. Some
property market reports contain information about rents and capital values in selected locations and
cities, however minimal information is provided in order to gain a reasonable view of market activity
either at the national level or for specific individual markets.
In the absence of detailed inexpensive comprehensive statistics the successful real estate developers
assemble their own confidential database of transactions and prices. For example larger developers
monitor information about many aspects of the market including building availability, transactions
(take-up and rents) and performance (yields and capital values). This information is often provided by
larger valuation and appraisal firms via regularly produced bulletins or in periodic reports on sectors or
via topics of special interest.
One of the core challenges when conducting property research, especially in national, international
or global markets, is the lack of benchmarks or commonly agreed standards for all buildings and land.
For example there are many challenges when comparing the level of sustainability of commercial
office buildings as the sustainability tools used in one country are often not directly compatible to
another sustainability tool used in a different country (Reed and Krajinovic-Bilos 2013). Indexes for
monitoring the real estate market are becoming available (e.g. the IPD Index produced by Investment
Property Databank) although remain expensive and also lack detail at the local level (Savills 2016).
Property market information is also available via many free online websites and also is aligned with
spatial Geographical Information Systems (GIS) and other mapping systems, therefore greatly
assisting with monitoring the market. It is sometimes argued that there is too much information
available at times, and therefore this can potentially confuse the market and potential
purchasers/tenants. Therefore caution must be exercised with this free and varied information with
regards to reliability and accuracy of data. In other words, just because it is listed on a website doesn’t
ensure it is reliable by any means.

(b) Supporting information

As real estate market analysis has evolved and gradually become more sophisticated, it has drawn
increasingly on the use of ‘supporting evidence’. For instance, if the prevailing demand is analysed
solely on the basis of transactions completed on individual properties then an important part of the
picture may be missing. The number and type of completed transactions, for example, is often
restricted by the availability of suitable property due to the infrequent transfers. Attention should be
placed on the underlying level and character of demand by analysing demographic characteristics
(especially for retail developments with reference to disposable income) or the structure and
performance of its local economy (e.g. employment rate), amongst other factors. Official statistics of
this type are available from most relevant government bodies that conduct a regular census and also
from consultancies to provide an additional analysis of census data.
As well as indicators about the status of the local economy, the analyst may also be required to
advise on the overall state of the economy or specific occupier types; for example an increasing trend
in the number of manufacturers. In addition there are many macro-economic indicators considered
integral in a real estate market analysis including, for example, statistics about Gross Domestic
Product (GDP), retail sales and also manufacturing output. Information about employment and
unemployment is relevant as well as national employment statistics and selected data for regions,
counties and local authorities, often accessible at no cost.
The list of data sources, both for direct real estate and supporting information, is not exhaustive and
the range of useful publications is increasing all the time and updated regularly via the relevant
website. Nonetheless, substantial gaps still persist. At times a researcher or analyst is spending their
(and client’s) resources identifying and collecting information although this might already be more
efficiently provided via official sources. Moreover, the fact that property information has developed in
a piecemeal fashion, led by competing private-sector interests, means that it is often inconsistent
between sources (though usually consistent within any given source) and has focused on areas that
have attracted the most investment. For example placing the focus on inner-city residential property.
This latter aspect is not altogether a negative aspect so long as the market remains focused in the same
direction. A market downturn in a particular area often shifts investor and developer interests
elsewhere towards locations and property types on which existing information is often poor quality. As
the next development cycle then gathers pace with associated enthusiasm, errors of judgement are
often made in these poorly researched and understood markets.

8.4.2 Strategic and site-specific analysis

In some circumstances it is often sufficient for a researcher to supply their client simply with
information, such as where the real estate developer may be the external client or the research is
conducted in-house. As information has now become more widely available the clients now expect a
detailed interpretation of the information and insights in the light of specific questions about their
company or individual development plans. There are two different types of analysis being commonly
required, namely (a) a strategic analysis and (b) site-specific research.

(a) Strategic analysis

A strategic analysis is conducted either by a company’s own research team or commissioned from
external consultants. It typically examines questions being long term in nature and rarely related to
individual development projects. This type of research is often employed where a development or
investment company is either reviewing its current strategy or evaluating an opportunity to evolve in a
new direction. For example a question might be whether the company should be moving towards a
different property type, land use or location or alternatively whether it should diversify its
development activities. Reports of this nature typically compare performance across different land use
sectors and/or locations based on a long-term perspective. The analysis will usually examine real
estate market performance within the context of underlying economic forces where analysts may also
draw on economic and property market forecasts to predict future performance. This type of strategic
research is rarely published therefore it is difficult to measure the impact on decisions made by major
real estate developers.
Strategic research is also used to keep companies informed of emerging and future trends in
occupier, development and investment markets. Research of this nature is sometimes funded by a
group of developers and/or investors joining together to commission an analysis on a particular topic.
While little of this research is published, we know that large property companies and investors are
constantly examining varying issues such as demographic change (e.g. the ‘greying’ of the population)
and how it may affect demand from a retail perspective. Some developers also use this type of
research to identify market niches and new opportunities in order to maintain a competitive advantage.

(b) Site-specific analysis

Site-specific analysis is employed where a developer or investor needs answers to questions about an
individual scheme. These questions might include, for example, whether the developer’s predictions
about an under-supply scenario are correct, whether to refurbish an existing property or if an investor
should fund a particular development. The purpose of the site-specific study is to look beyond the
immediate state of the market (note: on which agents can already advise) and to identify risks and
opportunities that otherwise might not be apparent. Among other things, the analyst should be able to
place perceived market shortages within the context of the property cycle and identify how the market
might move during the course of the development project. An important role for real estate market
research is to provide the developer with information to assist informed decision making and identify
sections of the market that should remain in demand well into the future.
Site-specific studies typically examine some or all of the following influencing factors:

i. Demand: both quantity and type.

ii. Supply: quantity and type.
iii. Supply–demand interaction.

(I) DEMAND
The first step in any site-specific study is to define the development’s most likely market area. This is
often referred to as ‘the catchment area’, especially in research relating to retail developments. The
size of the retail catchment area will normally depend on factors including the size of the development
scheme or the population of the immediate town/city on which it is dependent upon for economic
viability and the expected area of ‘draw’ in terms of demand. Generally, the larger the retail real estate
development then the more extensive is the catchment area. When a scheme is designed for occupiers
who are likely to be long distance relocations (e.g. a large business park) the analyst may research
demand levels on a much broader scale such as nationwide or global, as well as with reference to the
local market area. Demand is analysed both in terms of underlying economic drivers and recent
property market transactions within a specific catchment area.
An in-depth understanding of the local economy is critical when identifying potential long-term
threats or opportunities, as well as the potential size of the market. For example, since employment has
a direct influence on consumers’ spending potential and is directly related to how much floorspace is
needed in commercial, retail and industrial property then an evaluation of the current and future
employment situation is critical. An analysis of economic structure and recent market performance
may reveal the economy is presently healthy but over-dependent on a particular industry even though
the overall outlook is poor. Changes in the size and composition of the local population will also
directly affect the level of disposable income, spending patterns and the size of the available
workforce. The local economy research will draw on the various sources of ‘supporting information’
and will normally also include visits to the area and direct contact with local government bodies,
organisations and the major employers.
Different methodologies have been developed to translate actual and forecast volumes of spending
and employment into an estimate of the quantity of floorspace needed or the capacity of the market to
absorb this demand. This capacity can be compared against existing floorspace provisions, together
with any additional development proposals in order to assess whether there is likely to be a
quantitative shortfall in supply, now or in the future. Establishing the quantity of demand is, however,
rarely adequate to provide a case for or against a particular development. After the level of demand
has been estimated then an evaluation must be undertaken of its qualitative characteristics and how
these align with the developer’s proposed design. It should be noted all retailers will not experience
demand for the same identical goods in the same stores, in the same manner that all office tenants will
not want the exact same configuration and specification of their office space. The reasons for
examining the ‘shape’ of demand curve often are twofold. First, to estimate what proportion of the
total quantity of demand is likely to be for a proposed property development. Second, to critically
assess the design of a proposed or existing property development. Qualitative aspects of demand can
be assessed either via additional desk-based research or via direct research into tenants. Examples of
desk research include examining the socio-demographic composition of the population, the total
number of banking, legal or accountancy offices or the size distribution of manufacturing firms. The
available methods are many so ultimately it will depend on the research question/s being asked. Data
on property transactions can also be useful indicators of the ‘shape’ of demand; for example the size,
location and rents achieved in recently completed office developments or the profile of retailer
enquiries. While recent lettings can be a useful indicator of demand, a crucial distinction must be
made between effective demand (i.e. completed transactions) and latent demand (i.e. requirements yet
to be satisfied). In certain circumstances, such as in very active markets, the level of demand may be
adversely influenced by what developers are currently providing rather than what occupiers will
actually want over the long term.
The different types of qualitative surveys commonly conducted include direct individual interviews
being face-to-face, via telephone, email or postal depending on the complexity of the questions being
asked. Surveys are carried out either by property researchers or sub-contracted to specialist market
research firms, especially in the case of retail surveys for which the required sample size is usually
quite large.
These surveys can provide excellent first-hand information and insights into occupiers’ actual
requirements and the supporting reasons behind their property decisions. Surveys reduce the need to
infer occupier behaviour from notably weak secondary data sources, such as reported transactions. The
principal disadvantages of surveys include that they can be relatively expensive and also it is accepted
that poor survey design can produce misleading results.

(II) SUPPLY
An analysis of supply can similarly be divided into quantitative and qualitative components.
Quantitative analysis will establish the aggregate amount of existing floorspace in a market area, the
existence of any development proposals and when they are likely to be constructed to add additional
floorspace. This analysis should be placed within the context of the development cycle to indicate
whether increasing or decreasing building activity is likely to occur during the next time period.
Qualitative analysis may assess how much of the total floorspace is likely to be competing directly
with a proposed real estate development, given its characteristics and intended occupier profile. With
this approach it is often possible to identify a shortfall in seemingly oversupplied markets and vice
versa.
Often detailed information and related data about floorspace and development activity are not
readily available, especially at the local level. This requires the researcher to assemble piecemeal
evidence from various sources to provide a best estimate of supply. Common sources include local
government authorities, commercial databases, collection of information in the ‘field’, local real estate
agents, industry bodies and other developers via networking opportunities.

(III) SUPPLY–DEMAND INTERACTION

The balance between demand and supply should be reflected in current real estate market conditions,
especially when providing rental information. Property researchers frequently use the prevailing level
of vacancies as an indicator of balance in the existing market. Where available, the data about trends
in a locality’s take-up and availability are also used to indicate the direction in which market balance is
moving and why. A falling vacancy rate, for example, may not always indicate an improving level of
demand as it can also indicate the withdrawal of vacant stock from the market, perhaps to be
redeveloped later. Unfortunately a lack of reliable data could mean that detailed analysis of take-up
and availability is not always possible; in this scenario the analyst may need to devote considerable
effort to collecting and analysing data about rental agreements and vacancies to gain a reliable picture
of the market or future trends.
A real estate developer must refer to a range of indicators to present a view of future market
conditions and the likely outcome for an individual development. Where extensive data is available
then projections of take-up, availability and vacancies can be used alongside projections of underlying
demand and supply conditions to produce a formal forecast of rents. Otherwise the rental levels may
be simply projected on the basis of underlying economic demand conditions and the supply of new
developments, i.e. at one step behind market indicators detailing take-up and availability. Assumptions
about future rents contained in the formal development appraisal can then be tested against rental
projections, further assisting the developer to formulate a view about the viability of the development
project.
Research can also provide a more qualitative view of the viability of a scheme and identify intrinsic
‘strengths’ and ‘weaknesses’, potential unforeseen ‘opportunities’ and any future ‘threats’ being
commonly referred to as a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. Often this
type of analysis is especially useful in situations where formal forecasting is not possible and there is a
need to address questions about the optimum size and configuration of the proposed development.
Conclusions from a qualitative analysis of this type can also begin to identify the characteristics of the
target market. For example, occupier profiles as identified can be used to nominate companies for
inclusion in a marketing contacts database.
8.4.3 Forecasting
As they have gradually become more familiar with property research, real estate developers and
investors have become increasingly interested in the possibility of predicting future market conditions
with direct reference to the level of rents, yields, capital values and returns. This is also designed to
reduce direct and indirect exposure to risk. This research service is also provided by specialised
consultancies producing regular forecasts of the property market, usually on a confidential basis to
developers and investors at an agreed cost. Note that not all forecasts are published in a high level of
detail since they usually involve many assumptions. Forecasts are commonly available for the office,
retail and industrial sectors as well as the investment market at national, regional and, increasingly, at
a local level. In some areas there is very limited forecasting of residential markets over the medium to
long term. Most national and global real estate companies employ in-house research teams producing
property market forecasts for use by their own staff.
Forecasts are used for two primary purposes. First, they can provide an indication of the likely
future operating environment through forecasts of the real estate market as an aggregate. In this
respect the forecasts can indicate a required change in direction for a company’s strategy, e.g. by
highlighting future potential risks in an under-supplied market. Second, forecasts are sometimes
employed in site-specific studies to provide rental projections or alternatively provide yield forecasts
for the local market into which a real estate development will be undertaken. The aim of forecasts is to
predict and model future changes in rents and yields on the basis that the relationships between each of
these variables and the factors which drive them, namely the supply and demand interaction, will
remain relatively unchanged in the future as they have been in the past. Most forecasters employ
formal econometric modelling techniques based on commonly accepted regression analysis or hedonic
modeling.
It is widely accepted that the direct and accurate measurement of demand and supply interaction in
the real estate market is extremely difficult. Forecasting models, therefore, normally employ proxies
for demand and supply. On the demand side the economic factors driving property demand are often
used as the demand variable, e.g. retail sales or employment in service industries. On the supply side
the amount of space being released onto a specific market and also building completions are
sometimes known, however they often have to be inferred from other datasets, such as building
approvals and planning permission.
The models and associated formulas used for forecasting are usually closely guarded secrets but the
underlying aim is always to reduce the number of assumptions to as few as possible. Reliance on facts
and actual information is to be incorporated into the model as much as possible. For example, with
retail property the level of current rents is often strongly related to recent historical rents. In addition
to recent rental agreements a number of other factors assist to ‘explain’ retail market rents including
consumer expenditure on the demand side, together with floorspace, stock and construction
commencements on the supply side and also interest rates. A common feature of forecasting models is
that some explanatory variables are ‘lagged’ where events that occurred one or a number of years ago
may be reflected in the level of rents this year. These types of explanatory models form the basic
building blocks of property market forecasts. Once the fundamental relationships have been
established, forecasts of the independent variables (e.g. rents, yields) can be produced if projections
are available for the explanatory variables.
On the demand side the economic forecasts are typically obtained from specialist economic and
regional forecasters. On the supply side a real estate developer may provide their own estimate of
future building and stock from an analysis of the current development pipeline. In some circumstances
it is also possible to use data in forecasting models relating to take-up and availability. As the use of
property market forecasting has become more widespread so have the dangers of overly mechanistic
analysis grown and the heavy reliance on ‘black box’ models created by software developers although
the actual user may be unfamiliar with exactly how the calculations actually work. This lack of
knowledge and understanding by certain users is another risk to consider.
A number of simple rules can be applied to the process of forecasting to avoid some potential
pitfalls. Firstly the cliché ‘garbage in and garbage out’ can be applied rigorously to property market
forecasts. This remains an issue in spite of the vast improvements in the quality of property data over
recent years. Second, and reflecting the restricted availability of suitable data, all models should be
kept relatively simple and also robust. Third, ‘answers’ generated by forecasts should be assessed
critically in the light of the experience and knowledge of the real estate developer. Fourth, the users of
the forecasts must be made aware of the uncertainties surrounding forecasts and the limitations
imposed by the data. Forecasting is not a substitute for interpretation as it is only a decision-support
tool for the real estate developer to work with. It will only provide an insight, not the answer.

8.4.4 Portfolio analysis

A further application of property research techniques is in the area of portfolio analysis. Portfolio
analysis was originally developed for the other capital markets in the 1950s but has been successfully
applied to property. It is used to analyse the comparative return and risk performance of:

1. Property as a whole against other competing investment types, e.g. equities, cash at bank.
2. An individual property type against other land uses (office, retail, industrial).

In a portfolio analysis the expected relative returns for different property types or asset classes and
their respective volatility levels on an inter-relationship basis are examined using an extended time
series. The analysis identifies the optimal combination of property types or asset class providing the
maximum return for any given level of risk, therefore identifying the optimal mix within a portfolio.
Forecasts are increasingly being used alongside portfolio analysis to predict the optimum real estate
holdings in selected future market scenarios.

8.5 The impact of research

The focus in this discussion has been placed on what property research is, how it is undertaken and
what it refers to from a property development perspective. The reliance on property research has
increased very rapidly and subsequently it has now become an important part of the development and
investment process. However the usefulness and limitations need to be acknowledged. Real estate
developers and investors find research to be helpful for individual projects if the rapid expansion of
and demand for such research can be taken as a measure of its usefulness. At the level of the property
market as a whole, however, this is less clear. For example with reference to economic theory the
wider availability of information should arguably assist to make the market more efficient. This was
evidently not the case with previous market downturns (e.g. the global financial crisis in the early
twenty-first century) and the widespread availability of unprecedented amounts of information via the
internet.
It could be argued that the growth and availability of property information and research, especially
information freely available instantly over the internet, has increased speculative decisions and
interpretations. In other words the amount of information appears to have assisted to make responses
more acute. This may not be a problem in markets for other asset classes (e.g. equity market) in which
the supply side can respond quickly to changes in demand, either by increasing or decreasing output,
but in the real estate market the consequences can be disastrous because of the long lead times in the
development cycle. Against this background it must be acknowledged that there are limits to the
usefulness of research into the future operation of real estate markets. If used correctly then research
can potentially reduce uncertainty but not eliminate risk completely.
 As real estate developers seek to undertake successful developments in future cyclical upturns in a
market operating in a relatively uncertain economic climate, the reliance on accurate and reliable
research will undoubtedly continue to increase. Improved databases and a more consistent analysis,
however, will not provide all of the answers to the real estate market. The real estate developer should
never lose sight of the all-important final consumers of property, namely the occupiers, where final
decisions are made by humans rather than mathematical numbers or software models. Perhaps more
research in future should be directed to understanding exactly what are the requirements of the
development industry if we are to avoid a repeat of the mistakes observed in every financial downturn.

8.6 Reflective summary

The importance of conducting thorough market research, although at times disregarded as less
important, is often underestimated when undertaking a property development. This chapter
discussed why incorporating market research is an integral component in every successful real
estate development. A lack of reliable and appropriate market research can be directly linked to
higher risk and uncertainty, as well as reducing the potential profit margin and associated lost
opportunities in ensuring the highest and best use is achieved.
It is essential to undertake appropriate market segmentation to accurately identify the most
appropriate market for the proposed property development with careful attention paid to varying
levels and direct/indirect drivers behind demand. With reference to office development the core
drivers will predominantly be businesses seeking office space. Retail development will be largely
dependent upon the location and characteristics of nearby households. Industrial development
success will be associated to a range of variables including the strength of the local economy and
government decisions about international trade for example. An analysis of the competing supply
of similar land use will ascertain the total amount of stock available to the market, as well as the
relevance and potential to achieve equilibrium.
There are different types of market analysis possible including economic base analysis,
marketability studies, investment analysis and feasibility analysis. The rapidly growing area of
property market research embraces a number of different specialisms including information and
database services, strategic and site-specific analysis, forecasting and portfolio analysis. This is a
very specialised area and has substantially increased in importance due to its recognised potential
contribution towards reducing exposure to future risk for the real estate developer. While
significant advances have been made in the availability of property market information, a number
of major gaps still exist and the benefits from conducting detailed (and often expensive) research
are often underestimated. For example the application of GIS mapping in the real estate market
allows the analysis of increasingly sophisticated and widely available data, however relatively
few developers take the time to model the locational attributes and thematic mapping
implications associated with their potential real estate development (Reed and Pettit 2018).
Both a site-specific and a strategic analysis are often used by developers and investors to
enable assessment of the viability of individual projects and/or to better inform the company’s
long-term property strategy with regards to exposure to risk. Analysts provide critical insights
into the fundamental demand and supply factors underlying market conditions. Effective and
timely research can also identify potential indirect risks and opportunities that might not be
readily transparent from current transactions in the market. Forecasts and portfolio analysis are
increasingly being used in these types of analysis to provide predictions of future rents and yields
and the optimal portfolio mix of properties as a result. A successful real estate developer will
understand the importance of relying on high-quality relevant research to minimise their exposure
to risk. This may be informal risk evaluation (e.g. networking) but most often this will involve a
 substantial capital outlay for in-house researchers or an external consultancy to ensure today’s
decisions about the future are as fully informed as possible and based on minimal assumptions
and unknowns.

8.7 Case study: retail development – Watergardens: The Marketplace

Location
The ‘Marketplace’ in the Watergardens centre opened in March 2020 was built by QICGRE
(Queensland Investment Corporation Global Real Estate). The expansive single-level shopping centre
was developed from the ground up in 1997 and occupies the central portion of a 57-hectare (140-acre)
developable site, being equivalent in size to a third of the Melbourne central business district (see
Figure 8.4). Positioned in one of Victoria’s strongest growth corridors, Watergardens is the retail and
social hub of the Taylors Lakes community in outer west Melbourne, Australia. The centre is ideally
positioned to evolve into a major civic and commercial hub for the outer western suburbs with direct
and easy access via the Melton Highway and its namesake train station.

Figure 8.4 Site of Watergardens retail centre

 Watergardens is home to large retailers including Target, Big W, Bunnings, Harvey Norman, two
Woolworths supermarkets, JB Hi-Fi and over 200 specialty stores. Station Street is the centre’s
outdoor entertainment and dining precinct and features Hoyts Cinemas, Zone Bowling, Goodlife
Health Club, as well as a variety of dining options. Most recently, Watergardens introduced a new-to-
trade-area-offer, the ‘Marketplace’. This precinct saw a clever repurposing of an ex-Coles box, and
introduced a new Aldi supermarket and over 20 retailers, including fresh food and casual dining
retailers.

Background
The 30-year masterplan for the Watergardens site proposes a range of land usages with ‘Quest’
confirmed to develop serviced apartments and plans for office, childcare and higher education in
motion. As the first step in the site’s evolution, QICGRE committed $AU60 million to redevelop a
portion of the existing shopping centre into an experience-led precinct based around fresh food and
fast-casual dining. Branded the ‘Marketplace’, the circa 5,000m2 (53,800 ft2) redevelopment was
designed to bring a taste of central Melbourne’s famous food markets to the metropolitan fringe while
honouring the young and multicultural profile of the total trade area. Highly anticipated by the local
community, the food-oriented development was defined as essential by the investment management
and product strategy departments within QICGRE in line with the organisation’s growing role in town
planning, as well as a sector-wide shift away from apparel and towards dining. In the context of the
QICGRE portfolio, this was considered a small project.

Site challenges
Having previously hosted a major supermarket chain, the site for the Marketplace was a traditional
big-box shell – the risk being that any subsequent development could feel like an empty shed without
access to natural daylight or a connection to the outside. The centre needed to remain operational
throughout the redevelopment, with shopper access to car parking spaces limited during the
construction. Fortunately the site adjoins a service road and noise pollution could be contained to one
end of the shopping centre. Following the shutdown in construction that occurs over the Christmas
holiday period, shopfitting works were required to take place over a compressed timeframe during
which Victoria has a number of public holidays. Nearing completion in March 2020, the COVID-19
pandemic and associated shutdowns created an atmosphere of uncertainty and necessitated heightened
safety precautions.

Design scheme
With demographic research highlighting the importance of quality fresh produce and
multigenerational family dining, the design team set about finding ways to deliver the look and feel of
an open-air market and establishing an environment that promoted a mix of social interactions. One of
the first decisions made saw the main external wall replaced with giant transparent sliding doors to
allow for the free flow of air and people in the warmer months while facilitating pop-up night markets
and street party-style events. To bring further natural light into the previously inward-looking space,
the existing roof was re-engineered with translucent sheeting and timber slats before being dressed in
life-like artificial plants. The team dubbed this ‘anti-architecture’ and paid specific attention to the
landscape design and biophilic elements across the indoor-outdoor environment. A standalone
business case had to be submitted for the installation of extensive real planting on the ground plane
because of the maintenance costs associated with natural plants, however this was ultimately deemed
vital to the consumer appeal of the space. Perhaps the most critical addition to the floor space was a
40m2 (430 ft2) children’s play area being a first for the primary trade area and viewed as a magnet for
local families.
A key pillar of the design brief was to differentiate the Marketplace from the centre’s existing food
court and externalised dining precinct. Rather than installing open-plan food court-style seating, the
team opted to provide a diverse range of seating types to allow people to use the space as they want to.
There are opportunities for larger gatherings but also quieter more private areas using planting as
screening. Capacity for 300 diners was achieved with the ability to remove or add seating as needed
for in-centre activations such as cooking demonstrations. The customer journey through the space was
also mapped to be meandering rather than a straight pathway to encourage the community to use the
space rather than simply travelling through it.

Figure 8.5 Watergardens internal design

The basebuild design, tenancy design, tenancy delivery and leasing managers on the project worked
very closely to deliver a unified holistic outcome for the precinct. For example this collaborative
approach often saw the tenancy design and delivery managers called into leasing meetings before
contracts had been signed to ensure the buy-in of the prospective tenant. QICGRE enlisted Sydney-
based ‘Archer Office’ and Melbourne firm ‘Foolscap Studio’, along with creative direction from
‘Seventh Wave’, to give life to the architectural and interior design concepts, respectively, with a focus
on hospitality principles rather than preconceived notions of what retail spaces should look like. In a
departure from the ultra-modern and shiny developments commonly associated with fashion-led
shopping centres, this redevelopment is characterised by a limited and timeless palette of timber, steel,
terrazzo and cement sheet. These materials were carried across tenancy lines to blur the conventional
shopping centre boundary between communal and leased areas while still allowing retailers to express
their own brand identity.
Beyond the anchor tenant (Aldi), the Marketplace comprises independent and family-owned chain
retailers who required differing levels of guidance through the design approval and shopfitting
processes. While some existing tenants (such as Vietnamese diner Angie’s Kitchen) took the
relocation as an opportunity to rebrand, other new additions (such as IRO Seafood) required end-to-
end branding and design consultancy services from the QICGRE team and its trusted local suppliers.

Sustainability measures
QICGRE utilised the existing structure rather than taking a knock-down-rebuild approach. The
redevelopment also fell within the scope of the retail sector’s first Climate Bonds Initiative-certified
‘green bond’ as established by QICGRE in 2019 in partnership with the ‘Clean Energy Finance
Corporation’. In addition to natural ventilation, the design scheme prioritised daylight-sensing lights
as an energy conservation measure.
In addition, in the process of delivering the Marketplace the following sustainability initiatives
were introduced:

Highly efficient water-cooled chillers replaced the existing packaged units in the development.
The new water-cooled central plant will save in excess of 51,500kg (113,500 pounds) CO2 per
annum.
Adopting a ‘Spill-air’ mechanical solution in lieu of a fully air-conditioned mall. This system
takes advantage of the overflow of tenancy air conditioning to provide an element of
conditioning to the common mall areas. It achieves acceptable comfort levels while reducing the
overall capital expenditure and ongoing operational costs associated with running and
maintaining a traditional air-conditioning solution to the mall areas.
High-performance Polycarbonate roof sheeting has been used on most of the roof areas and
provides a substantial amount of natural light while reducing the thermal gain and loss, thereby
minimising energy consumption.
Water-efficient fittings, fixtures and appliances that will reduce potable water consumption by an
estimated 38%.
Existing rainwater tanks will be in use, which have a total capacity of 60,000 litres (15,850 US
gallons).
Extensive recycling facilities have been incorporated to maximise recycling rates and reduce
waste.

Results
The Marketplace opened on time and 100% leased in late March 2020 following a relatively short
window for fit-out works. Due to unprecedented challenges generated by the COVID-19 pandemic, a
small number of tenants were unable to open as planned, and a major launch marketing campaign was
postponed in accordance with government directives on social distancing. In response to these
unpredicted launch conditions, the project team developed a comprehensive strategy amidst a rapidly
increasing global crisis that focused entirely on the health and wellbeing of all staff and customers.
Crowd control and social distancing systems were successfully put in place where conversations with
incoming retailers, who had been promised promotional campaigns on opening, had to be managed
delicately. Putting the unusual operating conditions aside, the first two weeks of trade saw the
Marketplacewell patronised and its design praised by shoppers. Other Watergardens retailers
complimented the seamless integration of the new precinct into the centre.

About QIC Global Real Estate

QIC Global Real Estate (QICGRE) is a specialist division of QIC, which, since its creation in 1991 by
the Queensland Government, has grown into one of the world’s leading diversified alternate
investment firms. With a portfolio including retail assets Eastland, Watergardens, Castle Towers and
Robina Town Centre among more than 40 other mixed-use commercial and retail real estate assets in
Australia and the United States, QICGRE has a proven track record of comprehensive development
and asset management capabilities. Focused on transforming strategically located properties into
mixed-use community hubs that power local economies and support vibrant neighbourhoods,
QICGRE envisions, invests in and manages places where people feel proud to live, work and play. By
investing responsibly, holding and developing assets over generational horizons, QICGRE is able to
design, execute and deliver town centres that evolve alongside their growing communities and extend
far beyond traditional retail. QICGRE seeks to reflect the values and aspirations of the communities it
serves with a firm goal of weaving our assets into the fabric of their communities, seamlessly
integrating retail, entertainment and leisure opportunities for people to enjoy.
QICGRE crafts value-added strategies based on propriety, ethnographic and econometric research,
and always in alignment with its environmental, social and governance principles.
For more information visit www.qicgre.com

References and useful websites

Abidoye, R.B., Chan, A.P.C., Abidoye, F.A. and Oshodi, O.S. (2020) ‘Predicting property price index using
artificial intelligence techniques: Evidence from Hong Kong’, International Journal of Housing Markets and
Analysis, 12:6, pp. 1072–92. https://doi.org/10.1108/IJHMA-11-2018-0095.
CBRE (2020) Research and Reports,www.cbre.com.au/global/research-and-reports (last accessed 31 January
2020).
DeLisle, J.R., Never, B. and Grissom, T.V. (2020) ‘The big data regime shift in real estate’, Journal of Property
Investment and Finance, 38:4. https://doi.org/10.1108/JPIF-10-2019-0134.
Newell, G. (2020) ‘The need for more research on the Asian real estate markets’, Journal of Property Investment
and Finance,24 June. https://doi.org/10.1108/JPIF-05-2020-0059.
QIC Global Real Estate (GRE), www.qicgre.com.
Queensland Investment Corporation (QIC), www.qic.com.au/.
Reed, R.G. and Krajinovic-Bilos, A. (2013), ‘An examination of international sustainability rating tools: an
update’, Proceedings of the 19th Annual Pacific Rim Real Estate Society Conference, 13–16/01/13, Melbourne.
Reed, R.G. and Pettit, C.J. (2018) Real Estate and GIS: The Application of Mapping Technologies, Taylor &
Francis.
Savills (2016) World Office Yield Spectrum 2H/2016,Richard Reed & Tony Crabb. http://pdf.savills.asia/selected-
international-research/1608-world-office-yield-spectrum-2016h2-en.pdf.
Chapter 9

PropTech

9.1 Introduction

It is commonly accepted that real estate itself is a slow moving asset class with the broader real
estate industry being highly conservative in nature (Baum 2017). Consequently many
stakeholders in the property development industry have been relatively slow to capitalise on new
opportunities offered by PropTech/computer technology and the associated software. For
example Microsoft Excel still remains the most commonly used tool for data management 30
years after its introduction. This was supported by a survey of 400 real estate management
professionals who confirmed most were using relatively basic spreadsheets as opposed to high-
tech software where the primary use of their spreadsheets was for valuation/appraisal, cash-flow
analysis and reporting (Altus 2019). Furthermore, collaboration between many property industry
stakeholders within the value chain is often undertaken via fragmented, offline channels (Xu
2019).
Clearly the real estate industry is an integral sector within most economies and can no longer
ignore mainstream and fundamental technological innovations (Feth and Gruneberg 2018). An
example is the arrival and subsequent disruption of Airbnb in the global housing industry, being
facilitated by internet innovations and the widespread acceptance of technology in the
marketplace. The efficiencies and new marketplace established by Airbnb were unprecedented
but also unable to be ignored by property professionals.
The continued uptake of specialised software packages is specifically designed to meet the
needs for a broad spectrum of property developer requirements who are seeking to improve
operating efficiencies. In combination with the increased portability of this technology via the
widespread use of laptops, tablets and smart phones, this technology ensures the developer now
has many tools available both ‘in office’ and ‘in the field’ to assist with the complex task of
evaluating and managing each development. Clearly the use of PropTech in real estate
development is now an essential tool for successful developers. The objective of this chapter is to
examine the evolution of property technology or real estate technology, commonly referred to as
‘PropTech’ in the property development industry. Although most developments initially
commence as a relatively simple cost/benefit analysis to evaluate if the completed development
would potentially be profitable, they inevitably become more complex due to the interaction
between the individual elements and associated stakeholders in the development, e.g. build costs,
land/acquisition costs, rental values.
One of the largest benefits from using computer software is the straightforward ability to
conduct a sensitivity or scenario analysis to the ‘bottom line’ effect from possible changes to
variables in the development process. Fortunately the availability of specialised property
development software has provided developers with the ability to undertake a sensitivity analysis
using many different possible scenarios. Most importantly this assists the task of modelling the
potential consequences of foreseeable changes in these different variables to enable contingencies
to be built into the development plan. This reduces risk by ensuring that any potential ‘knock-on’
effect is taken into account. In addition it also allows a developer to adapt to changes during the
development process (e.g. due to unavailability of specific construction materials), to factor in
adjustments for price increases and also assess their effect on the level of profit/risk.
During each development period many of the variables in the scenarios are subject to change
and completely outside of the control of the developer, commonly referred to as ‘systematic’ or
‘market’ risk. This is especially applicable to constantly changing macro-economic variables such
as borrowing interest rates and inflation. For example in a proposed property development there
may be a change in one or more of the following variables:

– initial purchase price for the land, e.g. higher price;

– delayed construction time period, e.g. due to poor weather;
– market downturn and therefore lower final sale and/or leasing value; and/or
– increased competition from other developments resulting in extended sale or leasing period.

In addition to scenario or sensitivity analysis, the use of property development software has many
other benefits including ease of use, standardised output (i.e. producing detailed stakeholder
reports) and the potential for reduced errors in the aggregate analysis. It is accepted that
successful property developers keep up-to-date with industry standards including the optimal
development software that is best suited to their purposes. As the software industry continues to
evolve and experience a rapid rate of change with regular version updates and hot fixes for bugs,
it is important that reference is made to the most up-to-date version of the industry accepted real
estate development software. Note that ongoing support for end users is usually a major criterion
in the final purchase decision.
The task of undertaking a financial analysis in the property development process was
substantially advanced in the later twentieth century with the arrival and widespread availability
of computer hardware and software. Prior to these advancements, complex calculations and
forecasts over extended time periods including references to the time value of money were a
laborious task and undertaken using pen and paper. Undertaking any modifications without a
computer would be very time-consuming, as well as increasing the likelihood of a calculation
error. Decisions relating to the use of technology in property development are very subjective and
unique for every developer. It would be extremely rare for any property developer to not rely on
some form of technology commencing with a very basic spatial and locational analysis (Kumar et
al. 2019).
The task of identifying all relevant property development software cannot easily be
accomplished from a global text perspective although examples can be referred to. It is accepted
that each software has its own strengths and weaknesses so it is essential the needs of each
individual developer are aligned with the most suitable software for the task. For example project
management software incorporating detailed Gantt chart analysis can greatly assist the property
development process (Levy 2019). On the other hand, 3D virtual modelling (Zhou 2019) and
virtual reality (Patare and Pharande 2019) provide a significant value add to the property
development process and associated marketing activities.
This chapter focuses on PropTech and how technology can assist the property development
process. The types of software packages discussed here are: (a) generic real estate development
software based on a financial spreadsheet format ideally suited for financial analysis purposes
used by developers; and (b) specialised real estate development software. The reader is
encouraged to search for and become aware of all available real estate development software
 available in their local region and country, as well as keeping up-to-date with constant and
rapidly changing developments in this area.

9.2 The concept of PropTech

The reference to PropTech is a portmanteau from ‘property technology’and commonly used to
describe technology employed in property or real estate (Urban Developer 2020). Simply explained,
PropTech uses technology to assist a complex real estate industry that incorporates a large number of
inefficiencies. In addition, PropTech provides technological solutions such as digitalising real estate in
order to improve integration and also improve both productivity and efficiency. There are many facets
of the property development process relevant to the PropTech ecosystem including planning,
construction, renting, buying, management and sales (Urban Developer 2020). This term is used by
real estate professionals when discussing property-specific innovation; in addition, PropTech also
examines how computer technology users actually experience and attract value from real estate.
There were three distinct phases of PropTech according to Xu (2019).

First phase: early PropTech and real estate in the Microsoft era (1980–2000)
Following the arrival of personal computing and the subsequent use of programs such as Lotus and
Excel, many real estate companies then started to use technology more. At this time the computer
programs were only available in stand-alone closed-form therefore did not communicate nor were
integrated with each other.

Second phase: emergence of online platforms (2001–2007)

Following the mass uptake of the internet there was a high level of confidence in online transactions.
At this time it was unlikely to find real estate information online, especially with reference to buying
or renting property. There was the initial uptake in the residential real estate domain due to the
substantial size and availability of data.

Third phase: big data (2008–present)

Following amazing achievements in data processing and storage, the high level of demand for real
estate services has been matched by widespread acceptance by consumers. It was accompanied by the
uptake of vertical integration assisting to make massive gains in efficiency. This includes the entire
end-to-end process incorporating the construction phase and integration of buyers, seller and the real
estate agent. Technological advances including faster internet download speeds and superior reliability
levels enabled the transfer of big data.
It is challenging to accurately define what PropTech encompasses since it means different things to
different stakeholders. A reliable definition was provided by Baum (2017) who stated the horizontal
sectors relating to PropTech were about information, transactions and management as follows:

a. Information (InfoTech) initially related to the information available via the internet (e.g. online
newspapers), email, mobile telephony and social networking.
b. Transactions are linked to the next phase of technology development where the internet was used
as the medium for the exchange of money, goods and services, e.g. online banking.
c. Management and control involve the use of computers and mobile phones as dashboards for use
of the electronic functions, such as transactions. This can also be extended to real estate
 applications such as retail (e.g. monitoring customer behaviour) and logistics in property
development.

Whilst the multidisciplinary and broad nature of the property market are both a strength and a
weakness, it also provides both benefits and challenges for the introduction and uptake of property
development technology. In other words it is difficult to accurately define the boundaries with
reference to PropTech where Figure 9.1 attempts to visually display the relationship between PropTech
and other kindred technologies in the construction and finance sectors. The other sectors are referred
to as Smart Real Estate (i.e. Intelligent Cities and Buildings), Contech and FinTech.

Figure 9.1 PropTech conceptual diagram (Source: based on Baum 2017 and Immobolier 2.0 2020)

9.2.1 PropTech sectors

In Table 9.1 there are three vertical PropTech sectors cross-referenced with the three horizontal
PropTech sectors (information, transaction/marketplace, management/control) previously outlined in
Figure 9.1. The vertical sectors are (a) Real Estate FinTech, (b) Shared Economy and (c) Smart Real
Estate.

Table 9.1 Horizontal and vertical PropTech sectors (Baum 2017)

Real Estate FinTech Shared Economy Smart Real Estate

Information X X X
Transactions/marketplace X X
Management/control X

a. Real Estate FinTech refers to technology-based platforms assisting buyers/sellers with accessing
property information and other information relating to the transaction of property or property-
related assets, e.g. leases.
b. Shared Economy refers to technology-based platforms relating to the ‘actual use’ of real estate.
The focus here is placed on land, buildings and their associated land use types and purposes. The
 data is aimed at prospective buyers or sellers and generally associated with occupiers.
c. Smart Real Estate refers to technology-based platforms relating to the ‘operation and
management’ of real estate, ranging from individual units to large developed regions. This relates
directly to the real estate asset, property management and also facilities management.

Discussion point
What are the origins of PropTech? Describe the horizontal and vertical sectors of PropTech.

9.3 Spreadsheets
For many real estate developers the conventional spreadsheet (e.g. Microsoft Excel) has traditionally
been viewed as the most suitable software package when examining a real estate development. This is
linked to the widespread use of electronic spreadsheets in mainstream computer software that are
generally relatively simple programs to learn and use. The ease of use of any software is a critical
consideration, as is the suitability for the task and also the purchase price. The typical approach is for a
developer to customise and evolve their spreadsheet over time as they identify potential amendments
in the spreadsheet layout or function. Another benefit from the use of spreadsheets is the explicit
nature of the transparent approach where all input and calculations are visible, being in direct contrast
to the ‘black box’ implicit approach where many of the calculations are hidden and not visible.
Although the ‘black box’ approach is easier to learn and use in relation to inputs and outputs, a lack of
user understanding about the process can result in errors.
The origin of spreadsheets was designed for use in the accounting discipline and have replaced
paper-based systems throughout the business world. The spreadsheet program often used by
developers is Microsoft Excel being part of a suite of programs belonging to the Microsoft Office
suite. This program features calculation, graphing tools, pivot tables and a macro programming
language called ‘Visual Basic for Applications’ (Microsoft Excel 2020). This type of program allows a
user to organise and analyse data in tabular form in a worksheet. By adding formula to the
spreadsheet, each value can have a predefined relationship to other values so that a change in one
value will automatically recalculate and display a new value based on the contents of other cells.Over
time and in subsequent software versions there have been ongoing improvements, however the basic
concept and visual appearance of spreadsheets generally has remained unchanged. The increasing use
of online programs (i.e. where the spreadsheet is not stored on an individual computer but on a server
in a remote location) has improved flexibility for multiple users and also reduced any risk associated
with potential loss of data.
This ability to link any number of cells together makes the spreadsheet especially useful for ‘what-
if’ scenario analysis, since changes in any value can be observed without the need to manually
recalculate the figures. For a property development this is ideal for evaluating scenarios throughout a
property cycle and producing a potential range of both low risk and high risk scenarios. Also modern
software has most of the common financial and statistical functions built into the program, thus
calculations such as standard deviation or net present value are easy to compute. Note that a
spreadsheet program such as Microsoft Excel is designed primarily as a mathematical spreadsheet
program yet will also provide very limited capacity for incorporating text and diagrams. For this task a
separate word processing program (e.g. Microsoft Word) is required although there is limited
compatibility with Excel. In other words with reference to Microsoft the ‘off the shelf’ generic
software packages (e.g. Excel, Word, PowerPoint, Access, etc.) are specialised and each do not
perform multi-functional tasks across all areas, hence the need for separate programs.
 Today the property profession now has a choice of spreadsheet-based software specifically tailored
towards the property industry depending on whether the focus is on management or development. For
the developer some computer software offers a spreadsheet with a standardised format that can be
adapted for a range of different development projects. These programs are designed for ease of use
and require minimal user training. The flexibility of such programs ensures it is an ideal tool for
tracking changes or scoping out the viability of a development.

9.4 Property development appraisal software

There are specialised software packages available being specifically designed for development
appraisal. These programs can be used for valuing residential, commercial and mixed use building
plots in addition to managing the project costs once a development has commenced. Amongst other
features, such as phasing costs and incomes, this type of program allows the user to residualise the
land value or add a land value and calculate the potential profit. This type of software can be used to
obtain bank finance or manage development costs, income and profit. Examples of available programs
capable of performing these tasks include ARGUS EstateMaster DF and Caldes.
ARGUS EstateMaster DF (EstateMaster Development Feasibility) is a powerful real estate
valuation tool. This program calculates key investment performance indicators, such as Residual Land
Value, Profit, Margin, NPV and IRR. You can also conduct multi-option scenario analysis to achieve
the best financial outcome for your development site (Altus Group 2020). The developer advocates the
program assists to identify the optimal property development opportunities by forecasting the financial
viability and risk profile of future projects. In addition a developer can forecast the financial viability
of a project using a discounted cash-flow analysis to ensure the optimal financial outcome.
Caldes Developer Model is a spreadsheet-based property development appraisal software program
that can be used as an add-in to Microsoft Excel. The software is used globally by developers, banks,
funds, agents and surveyors when evaluating the property development process for a planned scheme.
More specifically the program is focused on the assessment of viability in order to assist the decision-
making process and understanding of the risks and funding of different development types or
brownfield types. The software uses a standardised model to assess Gross Development Value (GDV),
capitalised rental income, grants, funding, assessment of land value, building cost, abnormal costs,
infrastructure costs, levy charges, fees and returns (Caldes 2020). With reference to undertaking a
sensitivity analysis, it is advocated the program will allow users to examine the effect of changes in
rental or sale value, net or gross floor areas, land cost and build cost. This is assisted by a summated
appraisal located on each spreadsheet providing an instant summary of how any changes affect a
project (Caldes 2020).

9.5 Project management software

Many developers now use a specialised project management software package. Some software
packages (depending on how sophisticated they are) have the ability to support the management of the
entire development process by helping to plan, organise, manage resource pools and develop resource
estimates for any given development. In addition this type of software can improve decision making,
assist communication between suppliers, contractors and other stakeholders and also help with
documentation and administration.
Project management software packages require the developer to break down the individual stages
of the development process and specifically include detailed information about the actual build; this
information is then entered into a spreadsheet or interactive Gantt chart. In turn this allows the
developer and other stakeholders to view the entire process on a time line where financial outlays and
processes are visible at any given point throughout the entire development process. The critical stages
of the development or processes must be completed before the next stage can proceed, e.g. complete
the foundations before constructing the walls. This type of software is typically used throughout the
scheme because it can adapt the entire development schedule in response to change; for example if
there is an unforeseen delay in the delivery of materials for a particular process. It also enables a
developer to adapt to change to avoid unnecessary additional costs and control budgets and resource
allocation. There are many project management software packages available and their features
generally fall into two categories as discussed next, being either (a) ‘scheduling’ or (b) those providing
‘information’ to the user/s.

Scheduling tools
Such tools are designed to sequence project activities by assigning dates and resources to each task.
The level of detail and sophistication of a development schedule produced by a scheduling tool may
vary considerably depending on the software or methodology employed by the developer. Most often
the use of scheduling tools supports the following activities:

identifying and controlling multiple dependency relationships between scheduled activities;

managing resource assignment, resolving conflicts and levelling;
undertaking critical path analysis;
calculating duration estimation and probability-based simulation for a given activity; and
cost accounting.

Information tools
This software can also provide information to the developer or other stakeholders associated with the
project. It can be used, for example, to provide insights into workload planning, timing for delivery of
equipment and materials or alternatively to measure the level of effort required to complete a
development project. The type of information this software might be required to produce could
include:

accounting reports;
risks associated with the project;
projected timescales for the completion of specific tasks;
workforce planning and availability, e.g. planning for holiday periods;
detailed record of activities throughout the development process, e.g. historical evidence in
relation to past progress or performance;
utilisation and optimisation of available resources; and
collaboration with stakeholder/s or collaborators.

9.6 Project management software package options

Although potentially viewed as expensive, arguably the initial outlay when purchasing or using this
type of software will be recovered through improvements in efficiency therefore reducing the financial
outlay during the development process. Individual developers will have their own unique system
requirements and therefore different license options are available, including access to a cloud-based
program or single user installation.
Installation
Cloud-based application
Many project management packages are available on a subscription basis and the user will access
the program and centralised data via a web browser. The benefits are due to the ability for multiple
users in different locations to access the information. Considering that many project managers are
operating in the field, direct access to a smart phone or tablet is essential.

SINGLE USER OPTION

There are relatively few software developers who offer this option. However if the developer chooses
this option then they can purchase the program with installation onto a desktop/laptop. This type of
software is designed to be a single user application and suits a project manager operating as a sole
trader or individual.

Program users
Once the system requirements are chosen in relation to access, there are other options based on the
desired number of program users.

SINGLE USER STANDALONE SYSTEM

An individual or single user application is typically used by small companies and/or individuals. The
software is based on an assumption that only one person will be tasked with editing the project plan.
Desktop applications generally fall into this category.

THE MULTI-USER OR COLLABORATIVE SYSTEM

This type of system is designed to give multiple users access to the system in the cloud at the same
time and allow them to modify their separate sections of the plan. Therefore users can update sections
they are personally responsible for and these changes instantly update the master version plan which
all stakeholders have access to. This is a typical feature associated with cloud-based tools and relies on
each user having direct access to the internet. Some desktop software overcomes this limitation by
providing a fat client (also called heavy, rich or thick client; a computer network that typically
provides rich functionality independent of the central server) that runs on a user’s desktop computer
and both receives and sends updated information to the other project team members through a central
server when users connect periodically to the network. Any changes to scheduling can also be
synchronised with the other schedules as soon as the user logs onto the network.

COMBINED OR INTEGRATED SYSTEM

This software configuration will allow a developer to combine project planning or management with
many other aspects of company life; for example calendars, messaging, task lists and managing
customer relationships.
One example of property management software is produced by the company Altus Group (2020) as
an international software company providing products which include a range of software aimed at the
property industry including:

ARGUS Acquire™
ARGUS Developer™
ARGUS EstateMaster™
ARGUS Enterprise™
 ARGUS Taliance™
ARGUS Voyanta™

Discussion point
What are the key differences between (a) property development appraisal software and (b)
project management software?

9.7 Estate agents or letting agents software

If a developer intends to manage the sale of the completed development then they should be familiar
with current software systems for property management in the real estate market. A starting point for a
software search would be to use a property management search engine such as Software Advice
(2020). Practically all software programmes are available commonly via the cloud on a remote server,
usually paying a monthly license fee for access. Most packages offer similar features, however some
packages have the added benefit of being linked to social media sites such as Facebook, Twitter and
LinkedIn. Modern social trends are heavily weighted towards the use of the internet so it is essential
for every agent to raise their profile by sharing relevant property management news and posting
frequent updates. Indirectly this will greatly enhance the marketing of the property management
business, increase brand awareness and secure future clients based on the level of internet presence.

9.8 GIS and spatial analysis

Whilst a thorough understanding of location is understood to be fundamental to the property
discipline, real estate professionals and students have yet to harness the full potential of GIS
(geographical information science) mapping and spatial analysis in the real estate industry (Reed and
Pettit 2018). Although the property and real estate industry has a strong reliance on maps, often they
are produced at a very basic level where the user has relatively little knowledge about how to create,
manipulate and produce maps. There are many user-friendly GIS programs available including the
internationally popular ArcGIS software developed by ESRI (2020).
Many aspects of the property market are human orientated and cannot be automatically replaced
with computer technology. However there is significant potential for decision support systems to assist
real estate stakeholders; for example, digital tools such as GIS, dashboards and sensors to assist those
working in property development. Accordingly this is precisely how GIS should be viewed, being a
decision support system to provide the broad real estate discipline with an improved understanding of
the spatial and temporal dimensions of the property market and also assist property stakeholders to
make informed decisions about property. In other words, GIS has the potential to ensure there will be
fewer ‘unknown’ variables and more ‘known’ variables, which effectively reduces the level of risk in
decision making (Reed and Pettit 2018).
An important component of GIS is 3D modelling where a developer or project manager, with
limited or no prior knowledge of 3D drawing software, is able to create a model of a prospective
development. There are a number of very intuitive programs currently available that usually have an
option to interface with aerial imaging software via the internet (SketchUp 2020). This facilitates the
developer with uploading an ordnance survey map or aerial image of the site they potentially will
develop and then produce a 3D model of the proposed development. The core benefit to the developer
is the production of any number of development options to be considered prior to engaging the
services of an architect. The use of 4D modelling is accepted in the construction industry, such as
linking a project portfolio management program to a BIM model to facilitate construction scheduling,
therefore it is likely that the use of 4D will continue to increase.

9.9 Building Information Model (BIM)

The core advantage of using BIM is best described as a digital representation of physical and
functional characteristics of a development or building and can greatly assist with the analysis of a
property’s lifecycle (Boriskina 2019). From a property investor’s perspective the amount of
obsolescence in a building equates to a higher level of risk and a lower value; obsolescence (or
‘growing old’) is inevitable within the built environment although steps can be taken in the design and
construct phases to minimise the pace of obsolescence in the lifecycle of the building. Therefore BIM
is advantageous since there is a shared knowledge resource for information about a particular
development and this forms a reliable basis for decisions during its lifecycle, i.e. from ‘cradle to grave’
(Edwards et al. 2019).
BIMs are also useful when producing virtual 3D models from the original 2D architect’s drawings;
the core objective is to help stakeholders, including potential occupiers, to understand how a
development will actually function when complete. The most common users of BIM software are
typically the individuals, businesses and government authorities who plan, design, construct, operate
and maintain diverse physical infrastructures, e.g. infrastructure, residential units, offices, factories and
industrial property. The benefits from using BIM are now discussed in further detail.

Benefits to a developer during the construction phase

Purchasing tasks: BIM enables a digital and complete list of all construction materials to be
tabulated. This also allows the developer to quickly select products that comply with the
proprietary, prescriptive or performance specifications.
Clash detection: this feature can assist to reduce the risk of human error during model
inspections. Although the cost associated with correcting a clash can be substantial, in contrast
the cost of detecting and fixing a clash between structural elements and services in the initial
design stage is relatively insignificant.
Reduced information requests: the use of a digital model reduces the need to supply repetitive
information during the construction phase. For example there can be many requests for
information due to poor or incomplete documentation. In addition every alteration to
documentation or design has a cost associated with the change. However using BIM has the
benefit of allowing the building to be constructed twice; once digitally at the design stage and
then a second time as the actual physical building.

Benefits to the client

Energy use: the ability to substantially reduce the amount of energy consumed in-use by the
building each year since building design and thermal calculations can be analysed in detail. In
turn this presents options for enabling improvements to be made to the design of the building
fabric, services, use of renewable energy or even at the design stage changes made to the
building’s orientation in order to benefit from solar gain.
Building maintenance: the provision of digital information following completion of the project,
rather than comprehensive hard copy paper files, can assist with maintenance scheduling by
providing quick and direct access to information.
 Informed decision making: a virtual model allows the client to investigate exactly how the
building and fixtures/fittings will function when completed. This allows any adjustments to be
easily made in order to improve functionality and also reduce long-term costs associated with
replacement materials or alterations after a building is complete.

It should be noted the cost of adopting BIM may increase the design fees, however this extra cost will
be predominantly compensated by the additional value at the design and construction phases, as well
as with maintenance of the building once complete. BIM models allow repeated simulations to be run,
clashes and waste to be identified and designed out where possible. Furthermore, the client receives
usable asset data from the property developer after the project is completed. Emerging technology has
continued to focus on improving ways to link data from different sources together so that it can
become more useful. For example using BIM to undertake a sensitivity analysis to accurately examine
energy performance (Singh and Geyer 2020) and/or to be used in association with detailed CO2
assessment tools (Galiano-Garrigos et al. 2019).

9.10 Reflective summary

This chapter introduced and discussed the rapidly developing area of PropTech, what the concept
related to and also discussed the relevance to property developers when undertaking a potential
development project. In the past the property and real estate market has been relatively
conservative and generally lagged behind technological innovation in other related disciplines.
Therefore it has never been more important for all real estate stakeholders, especially property
developers, to keep a close eye on the technological direction the market is heading. Thus a
developer may find themselves in communication with other stakeholders who are operating at a
higher level and can transfer data/simulations to fix problems immediately. In addition it has been
shown that developers need to identify and develop early strategies to implement the latest
innovations in a structured manner (Feth and Gruneberg 2018).
The actual type of computer program each property developer decides to invest in will largely
depend on whether the development is (a) a one-off or a relatively straightforward simple project
(e.g. one single parcel of land or a single building over a relatively short period of time) or
alternatively (b) a complex multi-stage development over an extended timeframe. The
widespread availability of inexpensive computer technology including ‘in the field’ portability
has increased the reliance on real estate development software throughout all phases of the
development. Complete solution packages are typically used for managing and growing a
commercial real estate portfolio. These types of software tools can include many property-related
tasks including property development, asset management, asset valuation, portfolio management,
budgeting, forecasting, reporting, lease management, collaboration and knowledge management
and will appeal to professionals managing REITs, institutional investors and developers.
These specialised property development programs have many benefits including ease of use,
standardised output (i.e. reports) and reduced potential for human calculation errors. With the
increased use of BIM and ongoing developments in computer technology, programmes and
software, there will definitely continue to be exciting and extremely useful tools to aid property
professionals in the future. As expected this is the fastest changing area related to property
development and the onus rests with the developer to keep up-to-date with all facets of PropTech.
The use of property development software is now considered mandatory in a similar basis to the
use of email. In the first five editions of this book there was rarely a mention of computers or
software, and definitely not a standalone chapter until added to the previous edition. Keeping up
 with the changing trends in the property development industry will ensure each property
developer remains competitive.

References and useful websites

Altus Group (2020) www.altusgroup.com/argus/ (last accessed 20 March 2020).
Altus Group CRE Innovation Report (2019) Altus Group, www.altusgroup.com.
Argus EstateMaster DF (2020) www.estatemaster.com/products/development-feasibility (last accessed 20 March
2020).
Argus Software, www.altusgroup.com/argus/.
Banister, J. (2020) Dawn of the VR ERA: Proptech Adoption Exploding as CRE goes
Digital,www.bisnow.com/national/news/technology/dawn-of-the-vr-era-proptech-adoption-exploding-as-cre-
goes-digital-103878 (last accessed 16 April 2020).
Baum, A. (2017) PropTech 3.0: The Future of Real Estate, Said Business School, University of Oxford, April.
Boriskina, Y. (2019) ‘BIM technologies’ effect on transformation of a property life cycle’, E35 Web of
Conferences,91, pp. 1–6, https://doi.org/10.1051/e3sconf/20199108030.
Caldes (2020) www.caldes.com/developer (last accessed 21 March 2020).
Edwards, R.E., Lou, E., Bataw, A., Kamaruzzaman, S.N. and Johnson, C. (2019) ‘Sustainability-led design:
feasibility of incorporating whole-life cycle energy assessment into BIM for refurbishment projects’, Journal
of Building Engineering,24. http://doi.org/10.1016/j.jobe.2019.01.027.
ESRI (2020) ArcGIS, www.esri.com/en-us/arcgis/about-arcgis/overview (last accessed 20 March 2020).
Estatemaster Software, www.estatemaster.com.
Feastudy software, www.devfeas.com.au/.
Feth, M. and Gruneberg, H. (2018) Proptech: The Real Estate Industry in Transition, 10 January.
http://dx.doi.org/10.2139/ssrn.3134378.
Galiano-Garrigos, A., Garicia-Figueroa, A., Rizo-Maestre, C. and Gonzalez-Aviles, A. (2019) ‘Evaluation of
BIM energy performance and CO2 emmissions assessment tools: a case study in warm weather’, Building
Research and Information, 47:7, pp. 787–812.
Immobolier 2.0 (2020), https://immo2.pro (last accessed 12 April 2020).
KMPG, CB Insights (2016) The Pulse of Fintech Report, August
Kumar, E.S., Talasila, V., Rishe, N., Kumar, T.V.S. and Iyengar, S.S. (2019) ‘Location identification for real estate
investment using data analytics’, International Journal of Data Science and Analytics,8, pp. 299–323.
Levy, R.M. (2019) Introduction to Real Estate Development and Finance,Taylor & Francis.
Microsoft Excel (2020) http://microsoft.com (last accessed 18 April 2020).
Patare, T. and Pharande, N.S. (2019) ‘Virtual reality: a new dimension for real estate’, International Journal of
Engineering Science and Computing, 9:4, pp. 21371–4.
Reed, R.G. and Pettit, C.J. (2018) Real Estate and GIS: The Application of Mapping Technologies, Routledge.
Singh, M.M. and Geyer, P. (2020) ‘Information requirements for multi-level-out-of-development BIM using
sensitivity analysis for energy performance’, Advanced Engineering Informatics,43.
https://doi.org/10.1016/j.aei.2019.101026.
SketchUp (2020) www.sketchup.com (last accessed 22 April 2020).
Software Advice (2020) www.softwareadvice.com/au/property/accounting-software-comparison/ (last accessed
22 April 2020).
Urban Developer (2020) https://theurbandeveloper.com/articles/what-is-proptech (last accessed 12 April 2020).
Xu, L. (2019) ‘Modernizing real estate: the property tech opportunity’, Forbes, 22 February (last accessed 15
April 2020).
Zhou, X. (2019) ‘VRML-based real estate 3D virtual scene display and its impact on property prices’, in
Multimedia Tools and Applications.https://doi.org/10.1007/s11042-019-7303-3.
Chapter 10

Marketing and sales

10.1 Introduction

As with all businesses one of a developer’s primary objectives for their organisation is to‘increase
shareholders’ wealth’. This applies regardless of whether it is a single person property
development company or a large international organisation. At the same time the underlying
objective of undertaking a property development is to complete the development and then, upon
completion, move directly onto another development project. However after the final stage of the
development, and hence the reason for undertaking many of the stages in the development
process, the next step is the eventual sale or lease of the completed project to a third party. To
facilitate this process, marketing is a key yet frequently misunderstood component.
Due to competition, property developers use a range of promotional tools to increase
recognition and also their market share (Selvi et al. 2020). Often the incoming new occupant or
tenant only becomes aware of the development via a structured marketing programme and this
may include relatively simple marketing strategies. For example this may result from placing an
informative site board on the site boundary. In today’s competitive marketplace there are
relatively few prospective new owners or tenants who are not subject to strategic marketing
initiatives from competing developers. Maintaining a comprehensive email database assembled
from online enquiries is an example of accepted marketing practices. Therefore developing and
implementing an effective marketing plan is an integral part of a successful property
development. An additional consideration is the effect of evolutionary psychology where an
established bias can assist an individual investor to choose the optimal course of action and also
the less costly mistake (Pandey and Jessica 2019).
Where possible the dual objectives of a successful marketing plan will be to (a) sell or lease
the completed project and (b) achieve the predicted sale price or rental level as originally forecast
prior to commencing the development. A successful campaign would also theoretically result in a
lower exposure to future risk coupled with increased future certainty, however this can only be
achieved by adopting a sound marketing plan incorporating proven and reliable promotion and
selling strategies. Otherwise it can be asked: ‘who will know about a completed property
development unless they visually sight it from the road in the construction phase?’ This ‘free’
marketing option would result in very limited exposure to an extremely small sector of the
marketplace, primarily based on pure luck. Accordingly it is a high-risk approach. Although
marketing has a financial cost it has been consistently proven that you have to ‘spend money to
make money’.
Most importantly marketing is an important part of the development process and therefore
must not be a task occurring only at the end of the process and receive relatively little attention.
 Marketing must be viewed as a high priority that potentially will adversely affect the success, or
lack thereof, of every property development. By itself a marketing strategy has the potential to
‘make or break’ a property development. This aspect has also affected lending criteria where
banks and financiers require a high level of pre-commitment (i.e. usually at least 50% of the
development assigned to dedicated purchasers) prior to lending any funds for the development. In
these scenarios the developer actually commences marketing prior to undertaking the
development, continues marketing during the development and then up until final completion if
required. The strategic marketing programme ends when 100% commitment to the completed
development by prospective purchasers/tenants has been achieved.
The importance of the marketing phase has often been underestimated by property developers
who may focus too much on the preceding ‘hands-on’ steps of property development, including
land acquisition and construction, rather than maximising the eventual return on disposal. Some
developers appear to be more focused on identifying the next potential development, as their
current development is nearly completed, rather than on the marketing phase prior to completion.
In addition, certain developers may be unfamiliar with the optimal marketing strategies for their
project. For example in the twenty-first century an ‘online’ presence quickly replaced the
newspapers as the most up-to-date source of property space available for sale/lease. Furthermore
an ‘online’ presence has the widest instantaneous global reach and can be instantly updated
(Wisniewski and Brzezicka 2020).
The primary goal of the property developer should be to achieve ‘full market value’ for their
completed development based on the highest and best (legal) use of the site. The nature of the
real estate market with individual buyers and sellers ensures there is an absence of a centralised
marketplace, unlike other investment such as the stock market. This situation provides additional
challenges for the developer since all advertising must target individual purchasers and tenants
who are dispersed throughout the marketplace. Yet again this places additional importance on the
marketing phase.
The widespread use of computer technology has also radically altered the approaches used to
market completed developments. For example it is commonplace to use computer simulations
and 3D or 4D visualisations of a completed development to supplement or replace a typical
physical display unit. This allows a prospective tenant to view a development, either finished or
unfinished, remotely from anywhere with internet access. In addition, prospective buyers and
tenants may be contacted via a variety of mediums including mobile or cell phone text message,
email and/or video-conferencing. Although traditional communication mediums such as
telephone and direct mail-out are still in use, they now only represent a relatively small
proportion of a strategic marketing campaign. This chapter discusses the methods and options
available for marketing the completed property development with the emphasis placed on
efficiently enhancing the marketing and selling process.

10.2 Marketing approaches

Just as there are numerous different land uses, there are a large number of different marketing
approaches which are tailor-made for each individual development. The marketing discipline has been
evolving rapidly and will likely continue this trend in the future (Rust 2019). To maximise their
returns the developer must be fluent with all marketing options and also be fully conversant with the
inner workings of the property market. This includes using resources to identify and accurately define
the target market using specified parameters such as (a) geographical location, e.g. for a large
residential unit development or (b) by prospective investor size, e.g. for an industrial subdivision. This
is then followed by an organised campaign to actively promote a product, such as a completed
property development or part thereof, to the nominated sector. The underlying aim is to promote the
development to potential purchasers and tenants in the target market based on the highest level of
efficiency, i.e. not promoting to sectors outside the target market where possible. For example if the
property development is a completed retirement village and the developer is only targeting a market
aged 50 years and over, then a television marketing plan would be aligned with the television
programmes (e.g. mid-morning lifestyle) being watched by this cohort and not typically viewed by
younger generations.
It is accepted that each developer has limited resources, especially financial, in every stage of the
development including the marketing phase. Therefore the developer must establish a realistic budget
to actively market the completed development and be prepared to adjust this allocation if deemed
necessary based on a ‘cost-benefit’ analysis. In a perfect world every additional dollar spent on
marketing should result in a higher return on marketing investment, although in reality this
relationship is often hard to accurately measure. The size of the marketing budget will depend largely
on the nature of the development scheme and the state of the property market prevailing at a particular
point in time. The rationale behind decisions about the marketing budget will be affected by the
prevailing level of demand in the marketplace. For example the developer should consider the impact
of other completing developments recently (or that will be) released onto the market. For a developer
it can be frustrating that successful marketing is not an ‘exact science’ and therefore the actual
proportion of the development budget spent on marketing will vary between each project. Whilst some
property developments will practically ‘walk out the door’ there will be other developments needing a
concentrated and at times relatively expensive marketing campaign to ensure the completed project is
successful. The alternative option, being a poorly informed marketplace seemingly unaware of the
product available for sale, should always be avoided.
The amount of financial resources a developer commits to promotion is often based on their
judgement, partly influenced by their past experiences and expert advice as received e.g. from their
selling/leasing agent. Developers who specialise in a particular type of development or who
concentrate their development activities in a particular geographical area will tend to have established
personal contacts and a good established reputation with potential occupiers. They also have a sound
grasp of the supply and demand interplay. In such scenarios the amount of promotion and associated
financial resources required will be minimal. Often this type of developer will be able to promote the
project via personal contacts either directly or through appointed agents. Another example is the
potential to obtain free exposure in the media, especially for landmark or interesting developments
with an ‘angle’, which may create sufficient publicity to reduce reliance on marketing campaigns. In
these situations it is a good idea to forward a press release to the media rather than wait for their
interest via enquiries. In the case of large-scale development the promotional campaigns tend to be
very extensive and may have their individual phases extended over considerable periods of time to be
effective. Associated costs can also be expensive and long-running campaigns may be cost-prohibitive
although this depends on the size of the development.
Regardless of the size of the promotional budget and available resources it is essential for the
various components of the marketing campaign to be closely monitored. The level of success with the
marketing campaign should be observed and recorded where possible. For example it should be
possible to record the number and timing (i.e. exact day/time) of enquiries as this will help to gauge
the effectiveness of a marketing strategy to attract potential occupiers. This is a common feedback
mechanism and frequently used by major retailers who examine customer postcodes to analyse
consumer behaviour from different areas.
When monitoring buyer/tenant enquiry levels it is important to maximise value for money,
therefore a careful analysis of all enquiries in terms of both quantity and quality will help to identify
the most effective methods of promotion. Furthermore, detailed monitoring and analysis of results will
provide a useful database for the planning and direction of future promotional activities. Note there is
large difference between (a) attracting an enquiry from a potentially interested future occupier and (b)
converting this enquiry into an occupier, i.e. sale or tenant. The conversion rate is just as important
from a marketing perspective.
It is essential for the initial planning phase of the promotional campaign to be undertaken in
consultation with the sales/leasing team who will be involved in selling/letting the scheme, whether
they are appointed agents or an in-house team employed as part of the entire development project. For
large developments the sales/leasing team may include an advertising agency and a public relations
consultant who are experienced in the promotion of property and real estate, especially with reference
to a newly completed property development. This will include being skilfully able to identify a
genuine enquiry rather than spending substantial time with non-genuine customers.
Prior to commencing any promotional activity the developer, agent and any consultants must
identify the relevant strengths and weaknesses of a particular property development, in the context of
the competition, so the advantages may be highlighted. This may also include reference to the unique
selling points (USPs) of the development. During the evaluation and design process it is critical the
developer defines the target market for the property, either through their own knowledge and
experience or, where necessary, via market research. The property market is accepted as being very
fragmented partly due to the lack of a centralised marketplace. For example potential occupiers may
vary from small businesses to major companies with their own retained agents or internal property
departments; they have different needs and perceptions. In order to be cost-effective all aspects of the
promotion must be specifically designed to attract the attention of the target market.

Discussion points
What is the level of importance associated with marketing and selling in the property
development process?
List the various marketing approaches available to a property developer.

A relatively early decision in the property development process is to confirm the name of the
particular building or development, where applicable, to create an identity which the promotion can
attach itself to. It should be noted the individual identity/name of the building, together with an
associated design/logo, will last throughout the promotional campaign and can be a major marketing
aspect. Most importantly the ‘name’ of the development will distinguish it from the competition in the
same marketplace. The name identifies the building or development and this is particularly important
in relation to the perception of a large shopping centre development as the name will endure well
beyond the letting of the individual shops. Most importantly the name will be used in promoting the
centre to the shopping public and wider society. With an office building the building’s name will tend
to change from time to time when let to a large individual firm who may then name it after their own
organisation. For example sports stadiums are typically named after a sponsoring organisation or team.
From a marketing perspective these names are usually restricted to one or two words for maximum
effect and memory retention.
This naming approach is commonly used for all land uses upon which a major development has or
is being undertaken including major residential land subdivisions. Also the name of a completed
property development may reflect its former historical or locational significance, often for many years
after the development has been completed. It is important for the developer, prior to selecting and
promoting a suitable name, to confirm with the local authority and also relevant stakeholders that the
nominated name is acceptable to them, the government body and broader society. Due diligence
should also include an analysis of other developments with the same or similar name, even from a
global perspective, which will help to mitigate any confusion when an internet search is conducted for
the development’s name.
Next we discuss some typical approaches to marketing a property development in additional detail.

10.2.1 Site boards and site hoardings

Even today this approach remains one of the oldest and most cost-effective means of marketing a
property based on the locational attributes. Other than the cost of manufacturing and printing there are
no ongoing costs associated with advertising due the ‘free’ benefits attached to the site. Also this form
of advertising will ensure there is a direct connection between the broader marketplace and the site.
Furthermore it is human nature to read bright and targeted signs that are specifically designed to attract
the attention of a passer-by. Additional techniques such as 24-hour lighting and a video screen on-site
have only served to improve and prolong the use and effectiveness of on-site boards.
The erection of a site board is usually one of the first methods of promotion and can be arranged as
soon as the developer has acquired the site. In addition, site boards can be a very effective and
inexpensive means of communicating news about an upcoming property development scheme even
before there is any physical sign of land clearing or construction. Multiple site boards may be erected
during the course of the development depending on the information available at any particular time.
For example before the final details of the scheme are known then a simple ‘all enquiries’ or ‘register
your interest’ board may be erected providing the name of the developer or an agent and their contact
details.
It is now standard procedure to include all communication mediums and provide further
information; this typically includes the URL for a dedicated website address for the property and also
is accompanied by contact phone numbers (i.e. often a mobile number only) and email addresses. It is
also acceptable to include a QR code for scanning by a mobile phone and this will then automatically
lead a prospective purchaser/tenant to a third party website. For larger developments the contact
details for several agents are usually listed. A site board with brief details will often encourage
preliminary interest but must be replaced at the earliest opportunity by an updated site board providing
detailed information on the nature and size of the scheme. Practically all development sites will have a
site board giving details of the development, both during the course of construction and from the
moment the construction phase has been completed until sales or lettings have been effected.
The positioning of the site board and the actual wording (i.e. both spelling and grammar) are most
important to ensure maximum exposure value. For example if the site is positioned in a prominent
location (e.g. a busy major road) then a board may be the primary method of promotion for passing
traffic and may actually generate more enquiries than other advertising mediums due to the very high
profile. The site board should be bright and clean, lit by lighting (i.e. so it is visible at night and in dull
weather conditions) and regularly maintained. A site board in poor condition gives a poor first
impression and reflects badly upon the quality of the development itself. Potential purchasers and
tenants will quickly form their first opinion about the quality of the development; this perception may
be very difficult to change after this point in time.
Note that care should be taken to locate the board away from obstacles such as trees as they may
partially or fully obscure the board when they grow. Also the developer should ensure the advertising
boards of contractors, sub-contractors and the professional team are kept to a minimum and do not
adversely distract from the site board. Also if the developer sells advertising space on the site
hoardings to advertising agencies then care must be taken to ensure that their positioning does not
distract from the main site board. In other words the benefits associated with the on-site board may be
lost if the perimeter is too ‘busy’ with advertising material.
It should be remembered that a site board is actually an advertisement, therefore in many
jurisdictions it will require planning permission prior to its erection. Obtaining planning permission is
not usually a large hurdle since this matter can often be dealt with under a planning officer’s delegated
powers. However, some planning authorities may impose size restrictions or dictate the maximum site
board size (i.e. height and width) and even the actual colours. This also includes the maximum height
of the font or letters (e.g. 25 mm or 1 inch) which is the main reason why some site boards sometimes
appear to contain ‘squashed’ writing. Therefore producing a board where it does not comply with
planning regulations is a waste of resources.
Note that it is optimal to follow standard advertising protocol where the word count should be
minimal and succinct, only aiming to attract many website hits or phone calls. Detail can then follow
later. Above all, the message on the board must be very simple and uncluttered yet include the relevant
information. The board should inform any passer-by (i.e. in a fast-moving car or on public transport)
at a glance of the following information:

1. the name of the scheme (incorporating any logo);

2. the type and size (or range of sizes) of the accommodation available;
3. whether the accommodation is ‘to let’ or ‘for sale’;
4. the name and contact details (mobile phone, email address) of the contact who can provide
further information, typically either the developer or the appointed agents;
5. the website for the property (where applicable);
6. the band on a FM/AM/digital radio (where applicable) that broadcasts details about the property
only in close proximity to the site board; and
7. the location and inspection hours of the display unit (where applicable).

It is critical to ensure the site board is highly visible and well positioned for passing traffic (e.g. at eye
level) although not overly detailed or busy with too much information. Corner sites with dual street
frontage have a distinct advantage for this type of promotion. The address of a simple URL for internet
access is often a good tactic that directs interested person/s to the site where detailed information is
available. At times additional information could be added to the site board including the anticipated
completion date and what proportion of the development has already been sold (e.g. 70%). Note this
approach has the added advantage of encouraging a sense of urgency. Furthermore this could be
accompanied by a brief specification highlighting the existence of other influencing factors including
sustainability features, potential views (e.g. water, city) and internal finishes. Other options are also
possible, such as a coloured ‘high visibility’ written message placed diagonally across one of the top
corners of the board or alternatively some bunting or flags could be used.
In certain instances a monitor may play (on a continual loop) an internal view of the proposed
development and/or a simulated fly-by, although clearly this is for up-market or large developments.
Many signs are also lit up at night, often by a single light, which increases the profile of the site over
extended hours and also catches the eye of passing traffic as the remainder of the site is typically pitch
black. Often these lights are powered by a solar charger located on top of the sign.
A trend in some areas is to use decorative site perimeter hoarding to surround the development site
during construction to assist promotion of the scheme. Decorative site hoardings have two advantages.
First, they distract from the unsightly chaos of building sites and provide an attractive outlook to
passers-by. Second, they can provide information about the scheme in an imaginative and informative
manner to raise the awareness of the development. Often some passers-by will recall a property
development with decorative eye-catching hoardings rather than the contractor’s traditional painted
plywood effort.
Humans will always be very observant, especially potential purchasers or tenants who are already
seeking potential property and real estate acquisitions or tenancies. On the other hand, decorative site
hoardings can be costly when compared with ordinary site hoardings and they also lose the benefit to
the developer of revenue from advertising hoardings. In the case of a refurbishment where protection
of the building during construction is usually in the form of mesh hung from the scaffolding, in high
profile locations it has been increasingly popular to reproduce a life size image (or even a promotional
message) of the proposed building onto the protective mesh or scaffolding located next to the
construction project.

10.2.2 Particulars and brochures

In today’s increasingly competitive marketing environment practically every property development is
supported by particulars and/or brochures of the scheme providing the potential occupier with further
information in response to their enquiries. The advent of internet marketing, the desire to reduce costs
and the push for sustainability has decreased the importance of hardcopy material (i.e. a standard
comment is ‘it is all on the web’), however some prospective purchasers/tenants may still demand a
hardcopy flyer/information brochure outlining information and providing specifications about the
development. Importantly these particulars need to be aimed at potential occupiers and agents, where
the nature of the particulars will depend upon the actual nature of the property and the target market
identified by market research.
The fundamental question that needs to be asked is: ‘what information will the potential
purchaser/tenant require in order to progress to the next step – which is usually arranging to view the
property?’ This approach is based on the ‘AIDA’ marketing strategy referring to sequentially creating
(A) attention, (I) interest, (D) desire and (A) action by a prospective purchaser/tenant. The content and
nature of the flyers and brochures need to be targeted directly at the likely readership and arouse
interest in the project and eventually some form of action to purchase/rent. For example, with
reference to a new shopping centre development the target market may be residents visiting a nearby
older shopping centre in an adjoining area. For a new office building, the target market could be
existing tenants located in nearby office buildings.
The information about the available individual components in the development, usually for smaller
property development, should be set out on a single sheet of paper (e.g. A4) with a photo or on a
double-sided printed colour glossy sheet. For larger schemes then more detailed information is
required and the particulars need to take the form of glossy colour brochures or booklets. Property is
all about presentation and perception, therefore it is not appropriate to hand out a blurry photocopy of
black-and-white text with poor quality images on low-quality paper being hard to read although
inexpensive to produce. The prospective purchaser/tenant (or ‘prospect’ in marketing terms) will not
receive the initial impression of a high-quality development, regardless of the size of the project. The
objective here is to convert a ‘prospect’ into a purchaser, tenant or user by presenting a professional
image and showing the development in its best light. The ‘prospect’ is more likely to be impressed
with the development scheme and then act now to benefit from this perceived limited opportunity.
Basic particulars included on the flyers, which may be supported by photos or illustrations
depending the size of the project, should contain the following:

1. A description of the location of the property including a small locational map.

2. A description of the accommodation, giving dimensions/area and a brief specification.
3. 3 A description of the services supplied to the property, such as gas and electricity, as well as
other considerations such as sustainable attributes.
4. The nature of the interest being sold if it is freehold including the nature of any leases or
restrictions to which it is subject. If leasehold is sought then the length and terms of the lease.

The details must include the name, address and contact details of the agent and developer, as well as
the name of the person in the agent’s office or on the developer’s staff who is dealing with the
property. This is aligned with the ‘action’ phase of the previously discussed AIDA principle so direct
contact can be made by the potential occupier and additional information can be supplied on request.
Hopefully this will take place when the prospect is standing at the sign and contact will be made via an
email, calling a mobile/cell phone or visiting the website listed. A critical aspect here is replying to the
contact as soon as possible, especially in this modern era where expected email response times have
reduced to hours rather than days.
Care and attention must be taken to ensure that all information given in the particulars is accurate
and not ‘false or misleading’, therefore all information needs to be carefully checked to ensure its
accuracy as far as can be reasonably ascertained. This will rule out the use of inaccurate or subjective
language in the description of the property. Legislation varies between different jurisdictions but has
the common goal of protecting all prospective purchasers from misrepresentation or false advertising.
This legislation also applies to any information supplied or to statements made by agents and
developers in promoting the property; therefore it applies to practically all forms of promotion.
Usually it is necessary to prepare a multi-page colour brochure describing the property to provide
substantially more details than the brief particulars referred to in a one-page mass distributed flyer. As
part of the marketing campaign this brochure is sent to prospects who have previously registered an
interest and replied to any advertising, site boards, mail shots or preliminary particulars. It may be sent
directly to people who are known to be potentially interested. This type of target marketing can also
include emailing a softcopy of the brochure to a database of prospects who have been identified by an
external party, e.g. the developer may purchase a database of prospective purchasers/tenants from an
industry provider. Accordingly it is important that the brochure is integrated with the rest of the
promotional activities with all information being error-free and up-to-date. The appearance to a
potential purchaser is of great importance as it reflects the quality of the development that it describes.
Most developers or their agents employ a specialist outside designer or agency with experience in
property brochures since they can provide professional designers and copywriters with the most
effective use of words, typography, colour and shape. Furthermore, being externally designed is
usually more cost-effective considering the time delays that often occur between each property
development. It is critical to request and then receive extremely high standards of design and
production. All photos need to be taken professionally and many photographers specialise in property
and real estate promotion using wide angle lenses, aerial perspectives and drones for example. If
photos are considered hypothetical, such as a concept drawing, this must be noted as such and clearly
‘subject to change upon completion’. Photoshopped photos, for example where telephone lines are
brushed out and removed, are to be avoided at all times.
The brochure should provide clear directions and maps to enable the reader to locate the property’s
address easily. It also needs to provide information about the locality since this will be helpful to a
potential occupier. For example, when promoting a particular office location the relevant information
should be provided about the transit times to nearby access roads, towns, airports and cities, transport
routes and the availability of public transport services. Also, particularly if the office is in a regional or
rural town and the likely occupier is a firm decentralising from a major city, information should be
provided about local housing, shopping facilities and the availability of the local labour force.
For an extensive long-term promotional campaign it may be necessary to produce more than one
brochure at different stages in the development, especially when there are multiple high-rise buildings
in the development with a staged release. It is not normally advantageous to outlay substantial
financial resources on brochures; in addition to being expensive to produce, it should be remembered
they can quickly become dated. To reduce any wasted expenditure then simple particulars can be
printed on what is known as a ‘flyer brochure’ or ‘flyer’ (i.e. a single-sheet brochure); this flyer may
show an artist’s perspective of the proposed building and include very basic details about the
development. Later these flyers can be updated and replaced with photos of the completed building
and additional details as soon as they become available.
 At times it may be worthwhile to produce a tenant’s guide to the building for prospective occupiers
who show continued interest in the scheme. The guide should provide a detailed description of the
building and specifications, together with information about the operation, maintenance and energy-
saving data. Due to the relatively high expense associated with glossy brochures, care should be taken
not to hand out detailed brochures to prospective purchasers/lessees who are only showing a mild
interest. The underlying aim here should be to provide basic information (i.e. a flyer) to parties on
their initial enquiry, and then to forward a detailed brochure to parties who show a genuine interest.
For most development sites a dedicated internet web address (URL) is standard policy for each
development and often accompanied by a three-dimensional ‘walk through’ or a ‘fly by’. On
particularly large and complex development schemes there may be a three-dimensional computer
simulation and/or graphics combining video and voice in a multimedia presentation. The internet
profile could be hosted on a real estate agent’s site or via a stand-alone website for the property
development. Even though there is a reduced cost for being listed on a real estate agent’s internet site
without the added cost of a dedicated URL for the development, the downside is the loss of identity
for the development when competing with all of the other for sale or lease properties on an agent’s
website. Furthermore the initial attraction of the development could lead the prospective occupier to a
combined website where other competing developments are listed. Due to these factors many
developers set up their own individual website for each development, a process which is fortunately
becoming less expensive over time and can be undertaken in-house by larger real estate developers.
For interested potential purchasers it is possible to show three-dimensional images of the proposed
building if the architect is using a CAD (computer aided design) architectural design system to
produce drawings of the scheme. This technology enables the viewer of the computer screen to
effectively view the hypothetical building from every angle and perspective. Photographic stills of the
three-dimensional images produced can be also be used in any promotional material. Interestingly a
side benefit of employing a high level of computerisation will often result in lower operating costs
over the long term, primarily linked to lower staffing requirements (Piazolo and Dogan 2020).

10.2.3 Advertisements
Being a long established method of raising the profile of a new development and attracting interest,
advertisements are still considered a relatively cost-effective medium. Usually the advertisements are
either aimed directly at potential occupiers or indirectly through their agents depending on the target
market. Traditionally such advertisements were placed in the property sections of local and
national/international newspapers, as well as various industry property/real estate journals. However
the internet has quickly overtaken the printing press as the preferred medium for advertising a
development due to (a) the lower cost per advertisement, (b) the wider audience coverage, (c) the
ability to update the advertisement instantly, (d) higher level of professionalism including both visual
and audio responses, and (e) the ability to identify the number of views of the website including the
viewer’s computer location (i.e. country) and their actual search terms.
If the potential occupier is likely to be represented by an agent, then a combined presence on the
internet and in the newspaper property pages is often the most effective approach for spending money
on an effective advertising campaign. Whilst the content of an advertisement is undeniably important,
the design and layout are crucial to project the desired image in the marketplace. It is also essential to
reach a balance between too much detail (i.e. too ‘busy’) or insufficient detail to promote interest. The
goal of the advertisement should ultimately be to encourage action in the form of a purchase or lease.
Good design and layout increase the impact of the advertisement, whereas poor design not only
wastes money but can sometimes create an initial negative impression. Therefore poor design should
be avoided at all costs. It must be remembered, particularly with reference to the global internet with
millions of websites and in the dedicated property press, that each advertisement will compete with
many others of a similar nature and therefore must be designed to make an impression and elicit the
desired response. It must simply be ‘eye-catching’. The actual cost will vary with size and position on
the webpage, in the newspaper or magazine. An advertising link from a high-profile industry website
or a front page advertisement in the newspaper, while costly, may provide the opportunity to create a
bold, imaginative advert which will make a lasting impression. The cost of the website link or a one-
off advertisement on the front page has to be weighed up against the cost of a series of smaller
advertisements in less prestigious positions. The style and advertising media should be varied in a
constant attempt to improve results.
Special care needs to be taken about the manner in which the advertisement is worded and
presented. In nearly all cases it is worth employing an experienced advertising agency to ensure the
maximum impact, although some large firms of agents have an in-house advertising department. The
advertisement should contain sufficient information to attract the potential occupier but it should not
be so cluttered that it is difficult to read.
Information in the advertisement should include:

1. the type of property, e.g. office, industrial;

2. approximate size of the building area (and land area where applicable);
3. services available, e.g. electricity, lift;
4. location and proximity to transport and amenities, e.g. public transport;
5. if the property is for sale or to let;
6. the telephone number/email address of the agent or the developer, or both, should be given, so
that the potential occupier can make direct contact.

At times it may be extremely difficult to judge the short-term or long-term effectiveness and worth of
an advertising campaign however some attempt should be made to identify the source of any enquiry.
For example this could simply be recording the postcodes of the home address of prospective
occupiers. It must be remembered that some readers might see an advert and take no immediate action,
although the information will be retained in their long-term memory and subsequently when later
seeking accommodation, they hopefully will recall the advertisement and make enquiries. This is
referred to as ‘top of the mind’ advertising and for example is commonly used by billboard advertisers
on the side of motorways.
Internet, newspaper and magazine advertising is a common form of advertising where costs vary
depending on (a) the size of the readership (i.e. distribution) and (b) competition by other advertisers
for space in that medium. Other factors, such the number of words in the advertisement and the type of
photos (e.g. size of videos to be hosted on a website, alternatively the actual page number or photos in
black and white versus colour in a newspaper) will adversely affect overall advertising costs.
It is accepted that relatively little use is usually made of television and radio for advertising
individual properties, primarily due to cost restrictions including the expense costs associated with
making a high-quality professional 15- or 30-second advertisement. Other negative aspects including
the ‘one-off’ nature of an advertisement (i.e. either you see/hear or miss it) and the limited audience
(i.e. off-peak periods are cheaper with a smaller audience). Some developers argue that radio and TV
is only used when all else has failed, although advertisements on local commercial radio during ‘drive-
time’ are often effective for certain projects to spark interest. The decision to advertise here will be
made on a case-by-case basis and based on criteria including the marketing budget of the developer
and the perceived effectiveness of this approach.
At times the use of simple poster advertising is a medium that can be used to promote larger
development, often positioned in prominent locations such as railway stations, roadside hoarding, and
even on or inside public transport (e.g. buses, trains) and taxis. As an example of their effective use,
consider the promotion of an out-of-town office development with ample car parking. Posters
displayed in appropriate railway stations, in the underground commuter railway, on buses or in taxis
can be an effective and often overlooked means of advertising since they are viewed by commuters
every day. A poster advertisement, like a site board, should convey its message instantaneously as
people will only have time to glance at it and rarely be able to study it carefully. The downside is that
poster advertising is expensive and it is often difficult to target specific groups. This type of
advertising should always direct readers to the web address where detailed information can be
accessed.

10.2.4 Internet presence

As the property market is an important part of the information society it is important to appreciate the
wider role of stakeholders (i.e. residents, government and business) with regards to information and
communications technology (ICT). From an ICT perspective a successful property development
definitely must have a large presence on the internet in some form or another (Vasudevan and Peter
Kumar 2019). A search via Google or similar search engine should quickly locate the relevant website.
Many developments have their own domain name or web address that provides detailed up-to-date
information about the project and saves the cost of printing expensive colour brochures. Other sites
have live webcam feed of construction on the site so interest is maintained. In addition, many
newspaper/television/radio advertisements promote a web address that prospective purchasers/lessees
can instantly access for further information and contact details.
It is essential that a professional webpage designer and/or a high-quality website provider is
engaged to design and maintain the webpage/s. Although practically anyone can construct a simple
webpage in Microsoft Word (i.e. in html format), a professionally designed webpage is worth the
additional expense. In addition there are other benefits such as the time taken to load the website (note:
prospective purchasers/lessees using the internet are used to fast-loading webpages and will not wait
more than a few seconds), the use of multiple links to other pages and photos/videos, and the use of
high-quality sound (where applicable), which in turn collectively contribute to providing an
impressive window to the international world.
It is recommended that examples of successful webpages are examined and noted through the
course of a developer’s daily business so they can suggest these examples to the web designer. Finally,
the costs outlaid for web design and maintenance must be in proportion to the size of the property
development and within the overall advertising budget. There are no hard and fast allocation budget
models, but generally a project with a broad global purchaser base would be reached more efficiently
via the internet as opposed to advertising in multiple newspapers in other regions/countries.

Discussion point
From a property developer perspective why is the internet such a successful advertising
medium?

10.2.5 Direct mail

Direct marketing via post (i.e. mail shots) are commonly used as they are targeted for a geographical
location and relatively cost-effective. Mail shots are used on their own or collaboratively to support a
broader advertising campaign. However, as it has become such a widespread promotional method then
substantial care has to be taken if it is to be really effective. They should be aimed at a very carefully
selected list of potential occupiers and the success of the mail shot will depend largely on the
compilation of the mailing list, and any follow-up procedures. There are a number of specialist direct
mail organisations capable of producing mailing lists with a high level of specialisation and accuracy.
They maintain general lists of industrial or commercial firms where these can then be broken down
into particular categories such as company size, trade and location.
There is a limit to the frequency with which direct mail shots can be used and the employment of
one of the specialist firms will often be found to be advantageous. Care must be taken in selecting
firms and also mailing lists must be routinely and frequently updated. To be effective each mail shot
must reach the right person within the organisation who is responsible for property matters and also it
needs to be sent to the correct address. To overcome the almost automatic tendency of a mail shot
recipient to throw the contents of the direct mail into the wastepaper basket (i.e. ‘no junk mail’), make
sure that a key message can be seen at a quick glance. Very complex and extended wording that has to
be read before the message is fully understood, or a brochure or leaflet without any covering message,
will often fail. In contrast a succinct targeted covering message attached to a brochure or leaflet will
often be quickly absorbed by the recipient before they have sufficient time to discard it. Therefore
each letter should be prepared in such a manner that each one appears to have an original signature.
With direct mail, unlike broad advertising on the internet or in newspapers, the results and
effectiveness of any promotion can be quantified. In addition it can also be followed up by an email or
a telephone call to obtain a reaction or provide information about general property requirements. Such
telephone canvassing may be conducted by the agent or a representative employed in the show
office/suite. Mail shots, provided that the target market is accurately identified, can be cost-effective.

10.2.6 Email marketing

In the age of technology sending an email has become one of the primary communication mediums, if
not the most essential one. Email has many benefits including negligible delivery cost, low
maintenance/upkeep costs and the ability to send out bulk emails with attachments. As many
prospective purchasers/lessees are busy and do not have the time to always be interrupted and answer
the phone (e.g. either they are at work, at home or other), the email is accepted as a viable and
convenient alternative. To distribute the same information via postal mail is comparatively expensive
with an accompanying time delay, as well as the occasional incorrect or old address. Detailed
information can be accessed via the email using links (rather than as email attachments) as opposed to
sending out emails that have a large file size.
For larger projects it is possible to subscribe to regular information emails sent from the developers
that keep the reader up-to-date, as well as allowing the developer to gauge the level of interest in the
project. In addition it is possible to email special offers or highlight the current date for final
completion. Be wary, however, as a balance must be struck between saturating the reader with too
many emails and not keeping them up-to-date with progress. The core aim here should be to
encourage action by visiting the property development and/or committing to a detailed discussion.
Note there is a risk here that information within each email could include too much information,
therefore creating indecision and possibly deterring the prospective purchaser/lessee from taking any
further action.

10.2.7 Launching ceremonies

For a large-scale property development (e.g. a major office building) it may be appropriate to launch
the development by conducting a ceremony during the course of construction or by having a well-
publicised opening ceremony when the building is completed and ready for occupation. It is normal
practice to invite stakeholders to these functions as well as the local and national press, local and
national agents and sometimes potential occupiers. Local councillors or their officers may also be
invited to help with the development company’s public relations. For example the opening of a
shopping centre may be a high-profile event with a celebrity engaged to perform the opening
ceremony. Often this will result in media coverage considered priceless from a developer’s
perspective. It is important to pay great attention to detail not only in ensuring that the buildings are
ready for occupation with working services and landscaping but that the ceremony itself runs
smoothly. An unsuccessful opening ceremony, perhaps due to overcrowding, may result in negative
perceptions of the development itself. Planning here is key but also should be based on past
experiences of similar events and the accompanying ‘hits’ in the media or on the internet, e.g. via
Twitter feeds. In the case of a shopping centre it is standard practice for the major retail spaces to be
let and occupied, where the opening of the development will be linked to the opening of those units.
With an increasingly competitive environment in the real estate market, developers have had to
make their opening events both increasingly imaginative and innovative in order to encourage agents
to attend. In other words, agents will receive many invitations to ceremonies and they have to make a
choice about which to attend. Accordingly, such incentives as free gifts, a prize draw to win a holiday
or a night in a major hotel may have to be offered. The main advantage of this type of promotion is
where it attracts stakeholders including leasing agents, particularly those retained by a potential
occupier, to the property and also gains/retains their attention.

10.2.8 Show suites and offices

A promotional campaign must be timed to have its maximum impact when the building is completed.
For example it is essential for hypothetical completion photos to be included in the material so
stakeholders, including potential occupiers, can view the final product e.g. on the website and on
promotional advertisements. Due to the nature of property development itself and the large time period
prior to completion, the developer can be creative when marketing the final product.
To ensure the timely completion of a successful project it is essential that the developer places
importance on selling/letting the building before completion to maximise the cash-flow as soon as
possible after the end of construction. During the construction period any promotional activity can
only be supported by the use of conceptual drawing, plans, artist’s perspectives, 2D and 3D
visualisation models as well as CAD images to help build up a picture of what the completed project
will eventually look like. For larger developments including mixed-use or phased developments (e.g. a
business park) it is standard practice to set up a show or display office on-site during the course of
construction. This display office will be fitted out to the highest quality with display plans, models and
promotional material about the scheme. This will often include a video simulation of the completed
project; at times this display office will be elevated to give the prospective occupants an insight into
the view and location on completion.
Most often the office, often a temporary structure that has been appropriately decorated, painted
and fitted out inside, should be staffed by an on-site representative of the developer or agent who is
able to talk knowledgeably to leasing agents and prospective occupiers making the effort to visit.
Refreshment facilities should be available to offer to the prospective purchaser/tenant. A ‘finishes’
board should be on display showing samples of the internal finishes proposed for the scheme. It is
important to make sure the show suite or office is clearly signposted and, if possible, the landscaping
should be brought forward to enhance the environment. In any event the landscaping in a scheme
should be planted as soon as possible, after allowing for planting seasons, so that it can mature slightly
prior to completion of the property development.
After the development has been completed then its appearance is of vital importance. In the case of
an office scheme or an industrial scheme with a high proportion of office space, it will often be
advisable to completely fit-out a floor, or a part of a floor (including partitions, carpet and furniture) so
potential occupiers can confidently see how the offices will appear when they are occupied. This may
be supported by plans for all floors showing alternative open-plan or cellular floor plans. In addition it
is usually advisable to fit-out the main entrance hall and/or foyer and it is important to ensure that the
common areas, bathrooms and toilets are kept extremely clean to enhance first impressions. In most
buildings the carpet flooring throughout the building will be provided by the developer. Incentives will
become more commonplace in the market if there is limited demand, with the developer offering to
pay partially or wholly for the occupier’s fit-out. In the case of a shopping scheme or industrial
warehouse scheme where units are in shell form, a sales office located on site is usually recommended
to attract and welcome potential occupiers.

10.2.9 Public relations

Predominantly larger developers, particularly public quoted companies and REITs, place a large
amount of emphasis on ensuring they undertake effective public relations. Usually they either retain
external public relation (PR) consultants or employ their own in-house staff responsible for liaising
with stakeholders, the general public and the media. Everyone involved with public relations should
be linked to a particular development scheme from the beginning and be kept informed at all times
about all aspects of the development, especially the progress status. One of the main priorities of the
public relations team is to promote and enhance the reputation of the development company as a
corporate entity, however there will be spin-offs in relation to the promotion of individual
development schemes. Where a scheme is particularly sensitive, such as due to historical reasons or
political reasons within the local community, then it is practically essential to employ a PR consultant
specifically for the scheme to ensure it all runs as smoothly as possible.
Through their press contacts the PR consultants can achieve effective media press editorial at
significant stages in the development programme. For example, carefully controlled and timed media
or press releases may be circulated to the property press on one or more of the following occasions:
initial acquisition of the site, obtaining planning permission or consent, the completion of the scheme
and on the leasing of all or part of the scheme. Editorial coverage is often offered by a publication or
on a website if advertising space has been booked to coincide with coverage of a particular
geographical area or a particular type of property. It should be noted that editorial coverage is much
more likely to be read than an advertisement, with an added bonus that the editorial coverage can be
achieved at no cost.
Promotional material should be on display at every public relations event where either the
developer or the development itself is being promoted. Leasing agents should also have hardcopy
promotional material available in their office and should also promote the development, where
possible, at corporate hospitality events and exhibitions.

Discussion point
What are the options available to a developer when seeking to promote their project?

10.3 The role of the agent

A real estate agent is directly responsible for selling/leasing a particular property and they are engaged
by the developer. Although some developers may have their own experienced in-house marketing
team, it is not always possible to rely 100% on their efforts alone. The appointment of an external
agent will depend upon the circumstances of a particular development project and the potential market
for the scheme. In addition, many agents offer certain advantages over an in-house agent and this is an
important consideration.
One of the major benefits of enlisting the services of a local agent is because they are often
strategically positioned in a better location for attracting business. For example for an out-of-town
developer undertaking an industrial development in a provincial town it makes more sense to employ a
local agent with established offices in the particular provincial town. A good firm of agents should
have extensive networks and a detailed knowledge of the particular market in which they operate,
being thoroughly familiar with current and future levels of demand and supply. They should possess
up-to-date accurate information about this data. Furthermore they may also have additional specialised
knowledge and experience, such as specialising in certain types of property use and developments.
The agents will also have personal contacts with other agents retained by a specific client or decision-
makers within the property department of a potential occupier. For example many agents closely
monitor the status of leases for existing clients, therefore knowing exactly when a particular lease in
any building is coming up for renewal or expiry. The agent will then be able to contact the occupier
prior to the lease renewal/expiry at the exact time when they are in a decision-making mode. A
successful agent must be active and continuously involved in the marketplace so they are fully aware
of all changes in market conditions.
Agents can usually be retained either on a ‘sole/exclusive agency’ or ‘joint/multiple agency’ basis.
As a sole/exclusive agent they are alone responsible for disposing of the property and are solely
entitled to a financial remuneration or fee as a reward for each new lease or sale. The actual level of
remuneration will vary due to different factors. However a common range of fees might be 10% of the
first year’s rent for a lease (note: allowances will be made to take account of any rent frees or
inducements given to the tenant on a letting) or 2% of the sale price if sold, although again this can be
negotiated depending on the size of the development and the relationship between the developer and
the agent.
A joint agency arises where two or more agents are instructed to sell the same property and this can
often happen where both a national and local firm of agents are co-instructed together. In such a case it
is commonplace with each new lease or sale for the developer to pay a larger fee, perhaps one and half
times the normal amount, where the agents share the fee between themselves on some agreed basis.
For example the joint agents would each receive 7.5% of the fee from an agreed total fee of 15% of
the first year’s rent for a new lease. The appointment of a second or third agent (if two are already
appointed) is often not the decision of the developer; however this could be a condition of a funding
agreement where the fund requests that their own agents are to be involved.
Often a developer will employ a national or regional firm of agents operating either with or without
the input of a local firm. There is no general rule to apply and this largely depends on the size of the
development and the target market. Each scenario must be individually examined based on its own
merits. However a national agent, or at times an international agent, normally has a greater
understanding of the larger and more complex schemes and has more direct and frequent contacts with
the larger companies and multiple retailers attracted to them. A local agent typically does not have this
advantage. Also a national agent can usually offer additional advantages including investment advice
if the scheme is to be forward-funded or potentially sold on completion. On the other hand a local
agent will often have a better understanding of the particular characteristics of the local market and of
local occupiers and retailers.
Regardless of the final decision regarding the type of agent or combination of agents it is very
important the agent/s are not an ‘after thought’ and have the opportunity of contributing to the
planning, design and evaluation stages of the project. They should be able to draw attention to key
features of the design that add to or detract from the overall marketability of the property. Also the
agent/s must be able to accurately identify the market levels of rent on final completion, the nature of
competitive development and the most effective timeframe for leasing or selling the development.
Substantial time and resources can be wasted by undertaking a premature marketing campaign too
early prior to completion. On the other hand, commencing the campaign too late will result in
additional holding costs for an extended period post-completion.
It is recommended the agent/s are engaged at an early stage so this will allow them to become
thoroughly familiar with the property they are going to sell or lease. In other words, it can be a major
disincentive for a potential purchaser or tenant to feel the selling agent cannot provide full details of
the property they are promoting. In addition the agent/s should attend regular meetings with the client
to be kept informed of progress on the development and plan the promotional activities.
It is essential to distinguish between (a) the appointment of the agent/s and (b) offers to pay
commission to an agent who introduces purchasers or tenants. Note there is a contractual relationship
with (a) where the terms of which (both expressed and implied) need careful forethought and
consideration. In simple terms the binding agency agreement should clearly detail the length of time
each appointment will remain in existence and how the agreement may be terminated, specifying any
retainer payable and determining the rate of commission including within what circumstances and
when it will be payable. It will also specify whether the agreement is for a sole or joint (multiple)
agency and what the developer’s rights actually are concerning their discretion to employ additional
agents. It should be made clear whether agents are entitled to expenses if they do not succeed in
disposal of the property.
At times there may be offers made to pay commission to agents upon the signing of legal
agreements for sales or lettings to purchasers or tenants who were introduced by an agent. No formal
agency appointment is made in these circumstances and this type of arrangement is substantially
different from the binding formal appointment of an agent who acts for the developer in the disposal
of a particular scheme. Sometimes the offer is open to any agent/s formally introducing a purchaser or
tenant, or such an offer is only made to specific agents. Although a developer might argue that an offer
to pay introductory commission to any agent would be likely to result in wider exposure to the market
and attract the most prospective buyers or tenants, unfortunately this is not necessarily so. For example
if too many different agents are handling a particular property there is a danger the property may lose
its attractiveness as a unique location, which in turn may create an unfavourable impression in the
market. In other words, after an initial flood of enthusiasm many agents tend to lose interest if they
know the property is for sale via a large number of agents, where each agent is competing with many
other agents and their hard work is unlikely to be rewarded due to the competition. Therefore some of
the better performing agents might be reluctant to be involved with properties viewed as widely and
indiscriminately offered in such a way.
The most effective agents will devote their resources to the potential sales/lettings where they have
the highest likelihood of success, i.e. not shared with a large group of separate agents with associated
risks. Sole or joint agents, or perhaps three or four agents working on an agency basis, are much more
likely to have a sense of involvement. Whatever the agreed arrangements are, it is essential to keep
every agent up-to-date at all times. A worst-case scenario would be for the completed development to
be perceived as being poor quality and not in high demand in the market. This type of stigma can
potentially affect any development and should be avoided at all costs since overcoming negative
perception is difficult to reverse.
Communication and accurate record keeping of all enquiries is essential so it can be determined at a
glance which prospective purchasers or tenants have been introduced by which agents and precisely
when. Here the question of disclosure is important. Note that if an agent/s has already been retained to
find accommodation for the prospective purchaser or tenant, they will not be able to accept an
introductory commission from the developer. Furthermore when agents refer to ‘clients’ then they are
normally retained and will not seek a commission, however at the next level when they refer to
‘applicants’ they will normally expect a commission. In all cases these details must be explicitly
clarified at the outset.
 When an agent is appointed by a developer they should be involved at the very commencement of
the development process, not just in the final stage. In some cases an agent may have even been
responsible for initiating the development process by introducing the site to the developer and/or
arranging the necessary development finance. Often the agent/s has a valuable input, ranging from
their in-depth knowledge of both the occupier and investment market through to the final market
evaluation and design processes. Developers should note that most agents often tend to be cautious
when advising on design and the specification of the scheme from a letting/selling point of view,
mainly since they wish to ensure the scheme has the widest tenant/purchaser appeal. Furthermore,
developers should make their own judgements about the advice received and undertake their own due
diligence as supported by their own experience and research. In addition both developers and agents
should obtain direct feedback from tenants about similar schemes.
Regular meetings and communications between the developer and agent/s are essential and should
normally take place on a monthly or fortnightly basis, largely depending on the latest stage reached in
the development process. At these meetings the agent/s should provide status reports about the
leasing/selling status of the scheme. The report will normally take the form of an update detailing all
enquiries received from interested parties and include any known requirements for accommodation to
be followed up. The agent/s should advise on the availability of competing developments in the same
marketplace and what terms are being quoted on those buildings. The concluded sale or leasing
transactions of similar accommodation should be listed and discussed in light of the current
development at hand. The source of each enquiry should be noted so the developer can assess the
effectiveness of a particular method of promotion, e.g. via internet, direct email or newspaper
advertisement.
These promotional activities will also be closely examined to ensure the highest levels of efficiency
are achieved for the marketing budget. The agent should have a direct input into all decisions about
the content and design of all promotional material within a marketing efficiency context. In many
cases the agent will be responsible for the booking and scheduling of advertising space unless a
separate advertising agency has been appointed. As both agents and advertising agencies book
advertising space on a regular basis they should be able to pass onto the developer the benefits of any
discounts and should be able to obtain good positions within the relevant publications or on a
particular website.

10.4 Sales and lettings

After a potential occupier or an applicant has expressed their interest in inspecting a property, the next
step is for the agent to inspect the property with them at a mutually agreed time. Regardless of how
many telephone and email enquiries are received, the objective should be to convert this initial enquiry
into a physical initial inspection. If continued interest is shown (e.g. following a second inspection),
then the developer may be involved in all future viewings and also commence negotiations with the
interested party. There clearly remains no substitute for personal contact with the applicant although
there may be times, particularly early on in the negotiations, where the agent should lead the
discussion. The developer should make a judgement as to when it is appropriate to become involved.
During the ongoing regular meetings the agent/s will be able to advise the developer when it is
appropriate to quote terms and financial information, i.e. relating to the final purchase or leasing price.
The agent/s should be familiar with the level of flexibility they are permitted when negotiating terms,
bearing in mind the underlying requirements of the financiers and/or the investment market. This
information will vary between each development, however the terms of each sale/lease will be
determined by both the method of funding the scheme and the intentions of the developer; for example
whether it will be retained as an investment or alternatively on-sold to a third party investor.
 If a scheme has been forward-funded then the fund will need to approve the terms of every lease
and the actual type of tenant. If the intention of the developer is to fully on-sell the completed
development to an investor, it is essential for the leasing terms for all tenants (i.e. tenant risk) to be
acceptable to the investment market it is directed at. This aspect will largely depend upon to what
extent the property is considered to be ‘prime’ in terms of both its quality and location. The developer
should be advised on this matter by the agent/s who will be responsible for handling the investment
sale. Furthermore the developer must acknowledge that the terms of every lease will directly affect the
investment value of the completed development.
Even though a specific property may be initially retained by the developer, substantial
consideration must be given to any eventual sale in structuring the terms of a lease so it is generally
acceptable to investors and not perceived as being poorly let or managed. Now it is important to focus
on the various terms to be agreed upon when negotiating with a potential tenant. If negotiations are
being held directly with an owner-occupier then the only terms to be agreed upon are the leasing/sale
price and also any additional work to be carried out by the developer.

10.4.1 The demise

The accommodation space being let needs to be clearly defined and at times this is known as the
‘demise’. A decision needs to be made, in the case of an office development for example, as to
whether it is only possible to lease/sell entire individual floors or if it is acceptable to the financier
and/or the developer to lease/sell a portion of a floor. In many instances when seeking to achieve the
maximum investment value of the completed development, agents will be instructed to seek a single
letting of an entire building. In contrast a multi-let building may limit the appeal in the potential
investment market due to the additional management and risk involved for so many tenancies; this
aspect will also be reflected in an investor’s required yield.
Directly following each property market downturn in the property cycle there are often examples of
recently completed property development schemes that remain vacant due to the effect of the crisis
(Scofield and Devaney 2017). This scenario is then further complicated when a developer has strictly
adhered to a policy of accepting only single lettings. However the final decision about whether to
accept multiple lettings will usually need to be made only if the level of demand in the market for a
completed building is low. Note that other factors come into play here. For example the level of
flexibility with this decision will largely depend on the financial status of the developer and/or the
additional influence of any financier or development partner. Therefore it should be asked: is it a better
strategy to maintain cash-flow at the expense of maximising the capital value? Or alternatively: is it
better to have a building 100% let at a lower rate/m2 or 50% let at a higher rate/m2?In other words the
final capital value of a building is linked to the rate/m2 at which the building can be leased/sold for.
For example a lower rate/m2 will ensure cash-flow but may result in a lower overall capital value. This
is one of the dilemmas to be considered when a commercial property remains vacant.
If each unit in the completed development is not self-contained then consideration needs to be
given to adapting the premises to suit the alternative needs of other tenants. For example, access may
need to be reserved for the tenant/s in respect of the use of common areas such as foyers, staircases,
lifts, bathrooms and toilets. Arrangements will also need to be made in respect of separating services
for metering purposes (e.g. water, electricity) and heating/air-conditioning.

10.4.2 Rent
The developer will usually quote an advertised rental value for the accommodation in consultation
with the agent as based on a current assessment of the hypothetical market value of the property for
lease/sale. The developer will also calculate the rent required, which when capitalised at the
appropriate market-derived yield will provide the developer with a satisfactory return on investment
(ROI). In some markets this may be a gross rent (i.e. including outgoings such as cleaning and
utilities) or a net rent (where the tenant pays the outgoings). This return should compensate the
developer with adequate profit for their exposure to risk (i.e. profit/risk) for the entire project. At the
same time it is important for the developer and the agent to be aware of all recent leasing transactions
and the advertised rents quoted for other properties in order to be familiar with the interaction of
market supply and demand.
The real estate agent/s should be able to assist with interpreting and monitoring the overall level of
demand via the number of enquires received for the development. The level of supply is also critical,
which would be quantified by examining the number of buildings under construction or planned as
well as recent sales of similar property in the surrounding area. Note when analysing lease deals and
quoting rents, then allowances must be made for any differences in the specification and location of
the comparable properties.
The final rent agreed between the developer and a potential tenant will depend on how the
negotiation is conducted and the willingness of each party. Also it will be affected by the strength of
their respective bargaining positions in current market conditions. For example, in a difficult market
where supply exceeds demand and tenants have a considerable choice of competing developments in
the marketplace, the developer may consider offering incentives in order to maintain the required
rental value for the property. However such incentives should be kept within reasonable limits
otherwise the developer will be losing income via incentives in return for a rental level in excess of
market rent. In other words a developer may be ‘over-renting’ the building in the view of any potential
investor who will anticipate an incentive being included in the negotiations. At times there may be
reasonable inducements, such as (a) six months rent-free (to allow time for the tenant to fit-out the
building) or (b) a capital contribution towards specified fitting-out works (e.g. fit-out) being offered;
subject to the prevailing legislation this is often an accepted practice in many markets. A fit-out
contribution will usually be related to fixtures and fittings which are referred to as ‘landlord’s fixtures
and fittings’ for rent review purposes. Accordingly, when the rent is reviewed in accordance with the
terms of the lease then account will be taken of the benefit of those landlord’s fixtures and fittings in
determining the rent for that particular property.
From an historical perspective during periods of severe over-supply in the property market there
have been examples of substantial inducements or incentives (e.g. from 12 months up to five-year
rent-free periods) being offered in order to maintain a minimal rental level on office schemes. Even
though in theory this would ensure the building is 100% let at current market rates, the inducement
may not be readily transparent to a potential purchaser of the building. In other words this would
appear to maximise the investment value for the developer, especially if the rent review clause in the
lease is drafted on the basis of an upward-only or ‘rachet’ rent clause (note: this type of clause is
illegal in some markets), and in the process completely disregard the existence of incentives being
offered in the open market at the time of the rent review. The downside of achieving a higher rent is
during a period of low rental growth most potential investors will discount the value of the slice of the
rental income considered to be in excess of market rent; this is because they perceive there will be an
absence of rental growth until after the first review.

10.4.3 Lease term

For many property developments the circumstances surrounding the actual length of a lease and also
the existence of any lease options will be of significance if the property is viewed as a potential
investment for an institutional purchaser. In other words the strength and value of the lease (i.e. the
income flow) will be linked to the level of perceived risk affecting a reliable source of future cash-
flow. Note that most institutional investors prefer long-term leases in order to decrease the risk of a
tenant void and loss of income, as well as avoiding the associated leasing fees. Over time the length of
the lease term has been changing in the marketplace in response to changing tenant demands. For
example shorter leases have become increasingly acceptable since tenants have often been in a better
position to negotiate such terms to suit their particular business plans. At times tenants have also been
able to negotiate break clauses at certain specified times within their leases to allow flexibility if and
when their business needs change. Some institutions may, depending on the circumstances, agree to
such clauses provided the tenants also agree to the lease terms. Where necessary a developer may be
called to negotiate a landlord’s break clause to coincide with a major redevelopment or refurbishment
opportunity.
With forward-funded arrangements the financial institution will dictate the length of the lease in the
funding agreement and any flexibility will need to be strongly argued by the developer in the light of
current market conditions. For schemes where the likely tenants are small businesses or sole traders
with little or no financial track record, such as in a specialist shopping scheme or small industrial units,
then the developer will often be more flexible due to the limited market demand. Such schemes, due to
the type of tenant, will not be considered ‘prime’ therefore institutionally acceptable lease terms are
not so important.

10.4.4 The tenant

Above all the final value of the development will be linked to its ability to earn money and the strength
(i.e. reliability and security) of the tenant. The financial status and background of all potential tenants
will need to be thoroughly checked by the developer to ensure they have the ability to pay not only the
agreed rent, but also all outgoings on the property. For example an institutional investor may prefer the
tenant’s profits to meet a certain criteria, such as exceeding a sum equating to three times the rent. In
most cases the developer will insist on being provided with the tenant’s financial accounts for at least
the last three years confirming the tenant’s financial standing and therefore reducing the developer’s
exposure to tenant risk. In the case of new businesses or those with an inadequate track record, then
the developer should obtain bank references and trade references. In addition, the business plan and
cash-flow projections of the tenant should be closely examined to confirm viable long-term projections
over an equivalent timeframe as the proposed lease length.
If the developer or financier considers the financial covenant of a tenant is insufficient and therefore
too risky then bank, financier and/or parent company guarantees may be requested in order to reduce
perceived risk. They may also need to provide some form of guarantee in the event of non-payment of
rent during the lease period. In the case of private companies and sole traders, directors’ personal
guarantees will often be sought as well.
In a retail scheme the developer and/or the financier may wish to influence the tenant mix within
the scheme to ensure a variety of retail uses for the shopping public, which in turn will determine the
success of the scheme and reduce exposure to risk. For example the diversification of products offered
by different tenants will ensure a shopping centre can cater to a wide variety of shopping needs in the
market; this scenario may alter as seasons change or as shopper preferences vary over time. In addition
the promotion of tenancies with varying areas (m2) will be more attractive to the different demands of
multiple tenants than if there was only one size available.

10.4.5 Repair obligations

The responsibility for repairs and maintenance during the term of the lease will depend if the property
unit is self-contained or not. For example in the case of a single building the sole tenant will usually be
responsible for all internal and external repairs. On the other hand where the unit is only part of a
building and shared with other tenants and/or the owner, then that tenant will usually be responsible
for internal repairs in their specific area and the landlord will be responsible for the external and
common parts. Usually this will depend on how well each stakeholder (i.e. the landlord and the tenant)
negotiated the original tenancy agreement and what was agreed at that point in time. The landlord’s
expenses associated with repairing, servicing and maintaining the common areas will usually be
recovered by a ‘service charge’ directly levied on all tenants, most often in proportion to the area of
their demise. This is often referred to as ‘recoverable outgoings’. In addition the developer/s must
provide prospective tenants with estimates of the service charge.

10.4.6 Other considerations

There are many other related factors to be considered during the process of promoting and
selling/letting a completed property development. The information listed in the chapter has presented a
broad overview of the basic principles, however each development is unique and the circumstances
will vary much in the same way that each property itself differs. Nonetheless there is by no means an
exhaustive list of the matters to be considered by the developer when negotiating with tenants.
In order to be contractually binding then it is essential for every lease and/or sales transaction to be
legally documented in the form of (a) a lease or (b) a contract and transfer of title. It is essential for the
developer to instruct a solicitor as soon as the promotional campaign has commenced to ensure all the
necessary draft documentation can be prepared. Once negotiations are concluded with a tenant or
purchaser the legal work can then proceed quickly. A developer will also need to ensure all the
necessary draft deeds of collateral warranty (i.e. guarantees against faults in a new/refurbished
building for a period of time) have been agreed with the professional team and contractors (with
design responsibility), should either the tenant or the purchaser seek to benefit from them.
A tenant may require warranties on schemes where the repairing obligations could be considerable
if something goes wrong and they wish to be able to pursue the relevant professional or contractor for
a remedy. In this type of scenario the remedies under a warranty are limited and a tenant may wish to
benefit from decennial insurance to protect against latent defects. However the developer will need to
evaluate the likelihood of such insurance being required by either a tenant or purchaser since the
option to arrange cover must be confirmed before construction starts.
Prospective tenants and purchasers will typically make enquiries through their solicitors as to the
existence of services and normally request to see copies of all planning and statutory consents. A
potential tenant or purchaser will also require detailed information about the building in the form of
‘as-built’ plans and maintenance manuals. The developer should therefore ensure all the necessary
supporting paperwork is in place before draft contracts and leases are issued to reduce the risk of
delays in the legal process. The developer should be prepared to comprehensively answer all queries
and supply any documentation related to the development.
Most importantly it is acknowledged the development process does not cease after the
documentation has been completed and the keys are eventually handed over to the tenant or purchaser.
A successful developer has ongoing responsibilities in the post-completion phase, such as ensuring the
satisfactory completion of the defects identified at practical completion and assisting the tenant with
any ‘teething’ problems. The developer will maintain a continuing relationship with the tenant in their
role as ‘landlord’, unless the property is sold either for occupation or as an investment. Even if there is
no continuing contractual relationship, the developer should maintain contact with all their tenants or
occupiers and provide after-sales service. This is most important as it will pay future dividends and
help the reputation of the developer in the market, since failure to protect a reputation can adversely
affect future proposals although the developer may never find out the reason. For example, occupiers
may not communicate directly with each other but they may talk to their agents if they have cause to
complain about a particular development.
 Every tenant/purchaser in today’s increasingly competitive economic environment will be much
more vocal when things are going wrong in contrast to when things are going very well. The advent of
social media has assisted this process and many prospective tenants/owners would ‘Google’ a
developer to find out about their track record. Thus there is no substitute for direct feedback from
occupiers of completed projects from which invaluable lessons can be learnt for future developments.
Overall there is a strong argument that the development industry as a whole should increase its level of
research into occupiers’ needs to a much larger degree than currently undertaken. At all times it should
be remembered that the occupier is the customer and they should come first.

10.5 Reflective summary

When seeking to reduce their underlying exposure to risk then the task of securing of an occupier
should be at the forefront of a developer’s plans when commencing the development process, as
well as for all stages in-between. In other words, marketing should not be an afterthought or
considered an unnecessary expense. During the evaluation stage it is critical to research and
accurately quantify the level of occupier demand for the development in the proposed location
and in the prevailing market, where further research should be carried out to identify the target
occupier market and their exact requirements in terms of the design and specification. At the
same time consideration should be given to the level of competitive supply in the market and
when competing developments are scheduled for completion.
At times the task of conducting market research is overlooked by developers and this may
result in a building being difficult to sell or lease. Unfortunately this problem cannot be solved by
then simply throwing money into ad hoc marketing. The aim of promotion is to make potential
occupiers aware of the development scheme; for this campaign to be effective it must be carefully
targeted at and tailored to its audience. Leasing and selling agents, with their integral knowledge
of the market, have a critical role to play in disposal of the development to an occupier whether
through a letting or sale, together with any subsequent investment sale. Any letting should be
secured on terms acceptable to the investor market to maximise its value and reduce perceived
tenant and property risk.

References and useful websites

Pandey, R. and Jessica, V.M. (2019) ‘Sub-optimal behavioural biases and decision theory in real estate: the role of
investment satisfaction and evolutionary psychology’, International Journal of Housing Markets and
Analysis,12:2, pp. 330–48. https://doi.org/10.1108/IJHMA-10-2018-0075
Piazolo, D. and Dogan, U.C. (2020) ‘Impacts of digitization on real estate sector jobs’, Journal of Property
Investment and Finance, 21 March. https://doi.org/10.1108/JPIF-09-2019-0125.
Rust, R.T. (2019) ‘The future of marketing’, International Journal of Research in
Marketing.https://doi.org/10.1016/j.ijresmar.2019.08.002.
Scofield, D. and Devaney, S. (2017) ‘What sells in a crisis? Determinants of sale probability over a cycle and
through a crash’, Journal of Property Investment and Finance, 35:6, pp. 619–37. https://doi.org/10.1108/JPIF-
02-2017-0013.
Selvi, M.S., Pajo, A., Cakir, C. and Demir, E. (2020) ‘Housing sales of real estate developers in Turkey’,
International Journal of Housing Markets and Analysis, 18 March. https://doi.org/10.1108/IJHMA-12-2019-
0123.
Vasudevan, S. and Peter Kumar, F.J. (2019) ‘Changing reality: altering paths of brand discovery for real estate
websites in India’, Property Management,37(3), pp. 346–66. https://doi.org/10.1108/PM-03-2018-0020
Wisniewski, R. and Brzezicka, J. (2020) ‘Global real estate market: evidence from European countries’, Journal
of European Real Estate Research,30 July. https://doi.org/10.1108/JERER-09-2019-0031.
Chapter 11

Sustainable development

11.1 Introduction

The concept of sustainability is clearly embedded as an essential component when undertaking a

property development. The debate about climate change has gathered substantial momentum in
the twenty-first century and is accepted as a mainstream concern to be addressed in broader
society. Although the debate continues about how to effectively address climate change, there is
little dispute that buildings are large CO2 emitters and contribute substantially to climate change.
This argument is based on the environmental footprint of buildings including the heavy reliance
on resources due to increased use of air conditioning and heating. At the same time it is
commonly accepted that the value of a building is often directly or indirectly linked to the
building’s perceived level of sustainability. The underlying foundation of this chapter is placed on
the concept of ‘sustainability’ and ‘sustainable development’ in the context of property
development; being perceived as sustainable has become an important, if not an essential,
consideration for most developers.
In this chapter the concept of corporate social responsibility (CSR) is also discussed and the
relationship between sustainability and CSR is explained. Then consideration is given to why
property and related development is an important sector in relation to both sustainability and CSR
with the emphasis placed on the key areas of impact. This is followed by a discussion about how
these impacts are addressed by property development stakeholders including developers,
investors and occupiers.

11.2 What is sustainability and sustainable development?

It is accepted that the commonly used definition of sustainability was originally established by the
United Nations World Commission on Environment and Development report (WCED 1987) titled
‘Our Common Future’. This definition states:

Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.

From one perspective it can be argued that conducting a development in a sustainable manner it
partially already being undertaken by all developers since they re-use some of their resources (e.g.
computers, scaffolding, tools) for multiple developments. However the reference to sustainability has
moved from considering ‘which individual property development is sustainable?’ to ‘how sustainable
is each property development?’ The challenge at hand to increase the level of sustainability in the built
environment is (a) the task of undertaking the property development and (b) the operation of the
developed property after completion. This situation is further complicated since there are as many
definitions and interpretations of the terms ‘sustainability’ and ‘sustainable development’ as there are
groups trying to define it. To a large extent all of the definitions relating to sustainability are concerned
with aspects relating to the following broad parameters:

1. an understanding of the relationships between the economy, the environment and society;
2. equitable distribution of resources and opportunities; and
3. living within limitations.

Even though they create a level of confusion in society, the different ways of defining sustainability
are useful for varying situations and circumstances. For example there is urban development
undertaken in individual countries, although ranging from developed to developing countries. It can be
argued there needs to be a holistic approach to sustainability such as from a global climate change
perspective where all countries are fully committed to incorporating sustainable practices. In other
words, any less than 100% commitment by all countries will be inefficient because the actions of one
country also affect other countries co-existing on the same planet. For these reasons the various
industry groups have created different, albeit at times confusing, definitions of sustainability.
The long-standing definition of sustainability stated above (WCED 1987) established two key
principles and over time these have substantially influenced the sustainability debate. These principles
relate to both ‘inter-generational’ and ‘intra-generational equity’ where an understanding of both terms
is important in the context of property development. Inter-generational equity is based on the principle
of equity between (a) people in society who are alive today and (b) those in future generations,
although yet unborn. The inference here is that unsustainable production and consumption occurring
today (e.g. over-consumption) will diminish and degrade the environmental, social and economic
resources that would otherwise be available for tomorrow’s society. For example the widespread
consumption of fossil fuels, which is a finite resource taking millions of years to produce, is
unsustainable. Therefore if living a sustainable existence then this will potentially ensure future
generations will have the ability and means to achieve a quality of life, either equal to or better than
today’s life. On the other hand, intra-generational equity is based on the principle of equity between
different groups of people who are alive today. The emphasis is placed on social justice issues so
therefore it manifests itself in areas such as alleviating the debt and improving the health of
developing countries. There is direct relevance here to inequity therefore attention should also be
placed on assisting developing countries to be sustainable, rather than focusing only on reducing the
resource consumption of developed countries.
A more recent definition of sustainability was produced by the United States Environmental
Protection Agency (EPA 2020c) as stated below:

Sustainability is based on a simple principle: Everything that we need for our survival and well-
being depends, either directly or indirectly, on our natural environment. To pursue sustainability
is to create and maintain the conditions under which humans and nature can exist in productive
harmony to support present and future generations.

When incorporating sustainability in the business world there is often reference, either directly or
indirectly, to social, economic and environmental aspects of society. Most often this has been linked to
the ‘triple bottom line’ approach being originally introduced by Elkington (1994) and since widely
acknowledged as the initial recognition when seeking to incorporate sustainability in business (Figure
11.1). Triple bottom line (TBL) accounting requires moving from the traditional reporting only
framework to also accounting for environmental and social performance, as well as for standard
economic performance. When adopting a TBL approach then an organisation is broadening its level of
responsibility to also include stakeholders, as well as the traditional responsibility to shareholders. In
this context the term ‘stakeholder’ refers to those influenced, either directly or indirectly, by an
organisation’s activities.

Figure 11.1 ‘Three pillars’ model of sustainable development based on triple bottom line accounting

The main argument supporting the adoption of TBL is because all three aspects must be accounted
for when undertaking sustainable development. Over time it has been observed that social values have
gradually influenced these ideas and it has been argued that TBL is perhaps out-of-date. The
subsequent model (Figure 11.2) now includes a fourth pillar to reflect the importance of cultural
aspects in creating lively communities in which people want to live, work and visit.

Figure 11.2 Four pillars model of sustainability

It is important to acknowledge the significance of TBL and the overall contribution to our better
understanding about sustainability and organisations. Over time these ideas have also evolved into the
concept of corporate responsibility (CR) or corporate social responsibility (CSR) and require further
discussion.

11.3 Corporate social responsibility

From a historical perspective the foundations of CSR can be traced back to the philanthropy of
Victorian industrialists, such as Joseph Rowntree, Titus Salt and George Peabody and, in the 1920s,
American industrialists Andrew Carnegie and Henry Ford. Many years later CSR re-emerged in the
late 1970s and early 1980s as organisations became increasingly concerned about their public image.
In the twenty-first century CSR moved ‘from ideology to reality’ and became firmly entrenched in the
business community (Crane et al. 2019). Although many organisations consistently demonstrate their
commitment to CSR, it appears that others are not fully committed although perhaps this is partly due
to the continuing debate about what CSR actually is.
From an historical perspective the concept of specifically defining what is CSR was first identified
and debated in the early 1950s; this was arguably the beginning of the modern definitional construct of
CSR (Agudelo et al. 2019). It is even more surprising that there is no general consensus about a single
definition agreed between industry stakeholders, academics or other interested parties over the period
since there has been a documented history of CSR (Sheehy 2014). A commonly used reference to CSR
was provided by the European Commission (2011), which referred to CSR as the process whereby
enterprises integrate social, environmental, ethical and human rights concerns into their core strategy,
operations and integrated performance, in close collaboration with their stakeholders, with the aim of
(a) maximising the creation of shared value for their owners/shareholders and for their other
stakeholders and society at large and (b) identifying, preventing and mitigating their possible adverse
impacts.
As noted, today there still remains no universal definition of CSR as it is usually defined differently
by each stakeholder (Tran 2019), nevertheless it can be stated very broadly that CSR relates to the role
of acting ethically in business dealings at all times. This is based on the long-standing belief that
business organisations have a moral obligation ‘to pursue those policies, to make those decisions, or to
follow those lines of actions which are desirable in terms of the objectives and values of society’
(Bowen 1953). An alternative perspective relating to CSR is where the concept is a pragmatic public
relations exercise (Kemper 2019) and considers CSR as an attempt to gain a competitive economic
advantage by creating a favourable impression on stakeholders.
The bottom line is that with CSR the concept of ‘one size’ does not fit all and this view appears
unchanged over time. For example the perception of what CSR actually is also varies between
different sectors operating in the same market and also between different countries. In the United
States some view CSR as a form of philanthropy where organisations make profits and then they make
a donation to a charitable cause. In contrast, in many African countries CSR is seen as the link
between corporate profitability and social improvements. In Europe and North America it can be
argued that CSR is at times viewed as a combination of environmental responsibility, ethical
economics and charitable giving. However the European concept has been targeted on operating the
core business in a socially responsible way, complemented by investment in communities for solid
business case reasons. It could be argued that this approach is more sustainable as CSR becomes an
integral component of wealth creation, adds to business competition and also increases the value of
wealth creation to society. In difficult operating periods there is an argument to continue to adopt CSR
practices since CSR is generally philanthropic and located outside the core business mission and
objectives; therefore it will likely decrease in importance when economic times are tough.
At times CSR is linked to other terms including ‘corporate citizenship’, ‘responsible business’ or
simply ‘corporate responsibility’. Defining CSR is difficult since many definitions exist although there
is usually direct reference to being socially and ethically responsible at a higher level than required by
the law. A more detailed explanation is where CSR is linked to a company’s obligation to be
accountable in its operations and activities to all stakeholders with the aim of achieving sustainable
development, not only in the economic dimension but also in the social and environmental
dimensions. Overall then, CSR is generally about taking a broader approach to business activity. When
referring to standard economic theory it is accepted that most freehold businesses are profit-seeking,
being motivated primarily by financial or economic gain. Furthermore they pay little, or in some cases,
no regard to environmental issues such as pollution resulting from their activities or social issues such
as the exploitation of labour in developing countries to produce their services or goods. Therefore a
business when adopting CSR is fully committed to following ‘best practice’ for all stakeholders and
making all of their activities both open and transparent.
Maximising business returns from CSR policies necessitates some form of measuring the
subsequent impact. Studies in this area have primarily used one of three methods to measure CSR as
follows: (a) the use of expert evaluations, (b) content analysis of voluntary social disclosures and other
corporate documents, and (c) analysis of performance in controlling pollution. Analysing a company’s
financial performance can also help to explain variations in approaches to CSR and disclosure
practices. For example the amount of philanthropic activities are traditionally affected by a company’s
overall profitability and return on investment. The underlying argument here is that CSR can pay off,
however it really depends on how an individual company approaches the issue and a variety of other
relevant variables. For example all companies actually exist in many different formats with varying
degrees of complexity, ranging from those that are highly profit orientated in the private sector to those
in the public sector that are not-for-profit orientated.
The activities in which companies are engaged varies considerably and it is not surprising this then
translates to varying approaches to incorporating different types of CSR.

11.4 Different types of CSR

In a similar manner to the challenges faced when seeking to define what CSR actually is, there also is
no finite list of the different types of CSR. A useful discussion was provided by Carroll (2016) who
argued there were four distinct types of CSR as follows:

– economic responsibilities;
– legal responsibilities;
– ethical responsibilities; and
– philanthropic responsibilities.

This CSR construct is represented in Figure 11.3 and also highlights the expectations of society and
how the types differ.
Figure 11.3 CSR pyramid (Source: based on Carroll 2016)

In order for strategic CSR to operate effectively, corporations must be able to measure and
benchmark their activities. Without a form of reliable measurement then CSR is reduced to a public
relations exercise and little else. It is essential for strategic CSR to address the needs of the
stakeholders, be rewarded by financial markets, be defined in relation to goals of ecological and social
sustainability, be benchmarked, be audited and also be open to public scrutiny when necessary. Finally,
CSR has to be embedded both vertically and horizontally within the business and must also be
embedded in the corporate planning function.
When discussing CSR there are other important considerations that may affect a company’s
approach to CSR. For example a company’s approach to CSR may be complicated and adversely
affected by its legal position. In most legal frameworks a company is a legal entity with certain rights
and privileges, but also with specific liabilities. Another factor potentially influencing a company’s
overall approach to CSR is its position in a certain business sector and respective level of power. For
example some companies are so large they have a turnover exceeding the gross national product of
some smaller individual countries; effectively this means their power and influence can be immense.
Therefore the perception of larger corporations varies on an individual basis and these corporations
may have a completely different perception of the role of CSR. Given the variation in conceptual
understanding and the different types of CSR, each organisation will generally incorporate CSR in a
different way. With direct reference to property development, each developer is likely to observe some
variation both within and across the sectors based on different parameters such as company size.

11.5 Sustainability reporting

An essential task when undertaking CSR is to maintain a high level of accountability to all
stakeholders in relation to social, economic and environmental impacts. Within this context,
sustainability reporting is the method of demonstrating accountability. In addition, the role of reporting
also enables businesses to develop new targets and goals in terms of relevant social, economic and
environmental impacts, thus enabling performance gains to be made. Over time there have been
protocols developed for non-government businesses or NGOs to adopt when undertaking
sustainability reporting. For example when involving stakeholder consultation in order to identify the
goals and targets relevant to the business. It is imperative to benchmark activities to industry standards
where possible, such as where a relevant measurement may be the amount of waste products produced
by a company or the amount of water or electricity consumed per annum.
Following the establishment of benchmarks then targets can be identified, such as reducing
electricity consumption in an organisation by at least 15% per annum. It is necessary to establish a
measurable strategy whereby accurate reporting and documentation of the policy can be recorded
within a specific timeframe. At the same time a responsible person must be identified within a senior
management role so they have the power to ensure targets are implemented within the business. The
actual number of people engaged in CSR depends on the size of the organisation and its associated
activities. Each year an annual report is prepared by the CSR manager and then made available to the
public, usually also published on the company’s website. Within this annual report there will be
updated targets to cover the forthcoming period.
There are other important considerations with sustainability reporting that relate to an international
need to address climate change. For example the Global Reporting Initiative (GRI) was established in
1997 to provide businesses with a reporting framework to ensure consistency across and within
business sectors with reference to sustainability reporting. The GRI is a non-profit coalition of over 50
groups focusing on investment, environmental issues, religion, labour issues and social justice
considerations. Over time the GRI has elevated the importance of sustainability reporting to a
somewhat similar level as financial reporting by identifying metrics applicable to all businesses, also
sets of sector-specific metrics and a uniform format for reporting information relating to a company’s
sustainability performance. The GRI Sustainability Reporting Guidelines recommend specific
information related to environmental, social and economic performance and are structured around a
CEO statement, key environmental, social and economic indicators, descriptions of relevant policies
and management systems, stakeholder relationships and management, operational and product
performance as well as a sustainability overview. For further information refer to the Global Reporting
Initiative (2020).
Overall there is a close affiliation between CSR and GRI, referred to as ISO 14001 that specifies a
framework of control for an Environmental Management System (EMS) against which an organisation
can be certified by a third party. This was established in 1996 to set out a framework for businesses to
manage their operations in a more environmentally aware manner. For example ISO 14001 established
a system of record keeping, auditing, reporting and managing a business to identify environmental
impacts and to set targets for reductions. Such reporting has to be publicly available and therefore is
typically found on company websites and also within an annual CSR or Environmental Report.
Companies are required to identify key personnel within their organisation who has responsibility for
managing the EMS. There now exists a series of ISO 14000 international standards on environmental
management that provide a framework for the development of an environmental management system
and the supporting audit programme.

Discussion point
What is your understanding of a definition of CSR? State four different types of CSR in your
response.
11.6 Property development, sustainability and CSR
There are various ways that CSR and property development interface with each other. Given that CSR
is related to the quality of a company’s governance and strategy (including people and processes) as
well as to the nature of, and quantity of, their impact on society, CSR can affect property development
in the direct employment of staff. CSR also affects how they operate and occupy their property or in
the way a developer actually develops or redevelops real estate. This leads into a critically important
discussion about the importance of developing ‘sustainable property’ in a sustainable manner (Reed et
al. 2017).
One of the primary reasons the property sector is directly related to sustainability is linked to the
enormous impact that buildings have upon the environment in many different ways. It is now
generally accepted that climate change and global warming is linked to an increase of greenhouse
gases in the atmosphere (EPA 2020a). Carbon dioxide is the most commonly discussed greenhouse gas
which itself is produced during the consumption of fossil fuels such as oil and gas. Typically
electricity has been generated by gas and coal fired power generation plants, therefore electricity
consumption also releases carbon dioxide into the atmosphere. Note that some fossil fuels have a
higher carbon content; for example black coal has a lower carbon content than brown coal and
therefore emissions will be generally lower when black coal is used to generate electricity.
Global concern about environmental impacts from burning fossil fuels has led to the development
of alternate energy sources including solar, wind and wave power. However, this technology is still
emerging and currently only supplies a relatively small amount of the energy consumed on a daily
basis, i.e. for heating and light. Whilst developers can build a low or even zero carbon building it is
then the operational phase of a building’s lifecycle that is crucial in its overall environmental impact.
From a global perspective the construction sector accounts for more than a third of all resource
consumption, as well as 25–40% of produced energy and 30–40% of all CO2 emissions (Sedlakova et
al. 2016). Commercial and residential buildings in the United States were responsible for 11.6% of the
total US energy use in 2017, where other significant users were industry (22.2%) and agriculture
(9.0%) (EPA 2020b). These statistics confirm the overall environmental impact of buildings and the
urban environment, irrespective of size, is substantial and needs to be reduced to contribute to
addressing climate change.

11.7 Arguments for sustainability

In the twenty-first century there has been a substantially higher interest in the environment and
incorporating sustainability in all facets of life and the economy. At the same time the environmental,
social and economic arguments for sustainability in the built environment have been well proven. The
key references have been to ‘climate change’, ‘global warming’ and ‘greening the environment’. From
a starting point it has been argued that human activities are estimated to have caused approximately
1.0 degree of global warming above pre-industrial levels, with a likely range of 0.8 to 1.2 degrees
(IPCC 2018). The same study found that global warming is likely to reach 1.5 degrees between 2030
and 2052 if it continues to increase at the current rate.
From an environmental perspective the Fifth Assessment Report (AR5) on climate change for the
Inter-Governmental Panel on Climate Change (IPCC 2014) reported a high degree of confidence that
mankind’s decisions and associated activity has directly led to changes in the earth’s global warming
and higher sea levels. The 2014 report followed on from four earlier reports and also tracked changes
reported in research worldwide since the 1970s. Accompanying the release of each report was the
latest evidence that reaffirmed the established links between greenhouse gases and climate change. A
number of Working Groups have continued to gather and review data in preparation for the Sixth
Assessment Report published in 2021 (IPCC 2014).
 In 2008 the United Nations launched the UN-REDD Programme designed to reduce CO2 emissions
from deforestation and forest degradation (REDD) in developing countries. A broad brush approach to
tackling emissions was developed in 2009 when over 120 heads of state from at least 24 countries,
who together are responsible for more than 80% of the world’s global pollution, agreed to the
Copenhagen Accord.1 Under the Accord both developed and developing nations agreed to reduce their
emissions for the first time. They also agreed to provide funding to assist developing countries to
reduce their CO2 footprint; for example by deploying clean energy technologies and adapting to the
impacts of global warming such as flooding. Since this agreement is not legally binding there is
concern that it may not make a significant difference to the amount of CO2 emissions produced
globally; therefore it is anticipated global warming will continue to accelerate.
Supported by strong social and environmental arguments, sustainable buildings are increasingly
promoted as being healthier buildings for occupants and users (Reed 2018). One example is the use of
natural materials in the design specification that leads to less off-gassing of Volatile Organic
Compounds (VOCs). Sustainable buildings tend to maximise both natural daylight and fresh air
therefore improving both the internal air quality and the internal environment quality in their design
where research has shown this to be preferred by building users. However there is also evidence that a
building which is perceived as ‘too sustainable’ may not be suitable for the occupiers, arguably due to
features such as building management systems which, for example, regulate temperature inside a
building giving individual employees little or no control over the temperature of the environment they
work in. A careful balance needs to be struck here when discussing initial design specifications.
It has been shown that sustainable buildings can lead to less absenteeism from workers, less churn
or turnover of staff and increased productivity in workers; in turn this creates an increasingly stronger
economic argument for embracing sustainable buildings. Another aspect of this economic argument is
that sustainable buildings cost less to run over the long term. Similarly, if less waste is produced by
building users and more waste is recycled, then overall running costs are reduced. Water consumption
can be substantially lowered allowing users or owners to enjoy lower water bills, however this
depends on which party pays the actual bill. On the other hand there have been claims that the initial
capital outlay or construction costs of sustainable buildings typically have been higher than for non-
sustainable buildings. Clearly any additional cost will vary depending on the range of sustainable
measures incorporated into the design.
However not all sustainable buildings are excessively more expensive to construct and it is often
possible to also make some savings elsewhere in the specification to offset the cost of the requested
sustainability features. It is envisaged that in the future when the property market fully recognises the
added value from increased sustainability within a building in market valuations, then the gap between
the initial high capital cost and the current market value will lessen. There is also another argument
that sustainable buildings will attract higher rentals, often referred to as ‘green leases’, because of the
perceived health and productivity gains for occupants attributed to sustainable buildings. In addition,
some countries (i.e. the UK) have introduced legislation to make it almost impossible to lease a
commercial building with a low sustainable rating. This will undoubtedly result in some building stock
becoming obsolete or at the very least in low demand.

11.8 Sustainability and property development

Since it is evident that property development has direct links with important sustainability issues and
this cannot be overlooked, it is possible to examine the different stages of the property development
cycle and identify sustainability issues affecting each stage.

11.8.1 Developmental land and sustainability

The main sustainability issues directly affecting land include loss of habitat and bio-diversity, as well
as contamination of land either by natural causes or as a result of a previous use, e.g. from industrial
processes. Protection of natural resources is high on the agenda of many governments and frequently
linked to election pledges. The development of land with existing contamination issues can add
substantially higher costs, therefore developers need to take appropriate steps to reduce their risks
when acquiring land with a previous use. In order to determine a viable solution it is often necessary to
enlist the services of a contamination expert.

11.8.2 Development finance and sustainability

In addition to the traditional sources of finance for property development, new products have
continually emerged as financial institutions and lenders adopt and promote CSR and risk management
strategies. Such forms of finance may require sustainable features to be a requirement of the finance
package and/or offer incentives and discounts on finance for sustainable developments. For example
‘eco finance’ is a developing area as financial institutions integrate sustainability into their policies,
practices, products and services. There is a clear awareness of the potential benefits for banks and
financiers when integrating sustainability into their business strategy where many financial institutions
report positive changes as a result of integrating social and environmental issues in their business.
Many banks and financiers have adopted environmental related policies and procedures when
seeking to lend funds. An example of relevant investment guidelines includes reference to lending-
related activities guidelines such as dangerous chemicals, freshwater infrastructure and forest
products. Many financiers exercise higher caution when faced with environmentally sensitive
transactions, in turn minimising the environmental, credit and goodwill risk associated with their
investments. From a global perspective it is essential that banks and financiers fully investigate and
consider the broader context of sustainability.
Some lenders will screen environmental risks surrounding corporate loans to help clients to
improve their regulatory compliance and environmental management programmes. As environmental
risks become more complex, the financial community has evolved its traditional approach. For
example, to reduce the exposure of commercial loans, increasingly more lenders place additional
importance on a business’s ability to manage environmental liabilities. Environmental consultants
estimate the nature and likelihood of risks and their professional advice informs the bank’s decisions
about whether to accept, avoid, manage or mitigate risks, or even to seek insurance cover. This
approach works when risks are quantifiable and there is a level of certainty; however the qualitative
nature of many risks generates a level of ambiguity. At times there are consultant panels used on the
development of contaminated land where the consultants recommend actions (i.e. conditions) to
minimise risk and liability where this may become a condition of the loan approval.
There are certain sectors and industries associated with high environmental risks, such as waste
management, forestry and oil and gas, which sometimes involve developers. Banks and financiers rely
heavily on guidance from experts to outline the environmental and social impacts of lending, covering
risks, regulation and international best practice. The lender will identify each client’s environmental
risks and help to reduce exposure. Where necessary, loans are made conditional on a client taking
measures to reduce exposure to environmental risks.
Loan decisions are often informed by three risk considerations as follows: (a) direct risk which can
be affected by land contamination; (b) indirect risk related to regulatory impacts and changes; and (c)
reputational risk. Larger development schemes may be considered by the banks under these
provisions, as well as smaller property development schemes on land that was previously used or
contaminated. There is a strong argument for such policies relating to environmental considerations to
continue to be developed and also supported by an increasing number of banks and financiers.
11.8.3 Planning and sustainability
The key sustainability issues relating to planning are usually linked to:

transport;
ecology and site issues; and
zoning and land use issues.

Transport directly impacts on work, leisure and recreation patterns and on the environment in which
society exists. Dependence on cars and road freight has continued to increase since the early twentieth
century, being associated with a substantial environmental, social and economic impact. Carbon
emissions produced by transport account for approximately a quarter of total carbon emissions for a
developed nation. Social impacts revolve around the frequency and severity of the health impacts
indirectly related to inhaling emissions. Economic impacts relate to the costs of social and
environmental impacts. To create an increasingly sustainable environment it is important to provide a
means of access with less impact on the environment. In planning terms this can be achieved by
developing and implementing policies that:

i. improve and promote walking, cycling and public transport and change habits resulting in a
reduction in the amount of car use;
ii. manage freight transport by moving to rail, canal or river thereby reducing reliance on heavy
truck traffic;
iii. make streets, bus and light rail/tram stops safer including lower traffic speeds and better security;
iv. reduce fossil fuel dependence and shift to alternative cleaner, renewable energy for transport;
v. ensure transport impacts are fully reflected in investment decisions and costs the users actually
pay; and
vi. plan in an integrated manner to involve the community and link both land use and transport
together.

When property development schemes are considered in this framework the typical transport issues
include:

Access to public transport access nodes and facilities. For example the environmental
assessment schemes advocate a proportion of a development has to be within a specific distance
from peak and hourly off-peak public transport services.
Provision of bicycling facilities and changing rooms for cyclists. Assessment schemes stipulate
minimum requirements expressed as a percentage of number of dwellings or occupants
depending on the property type.
Proximity to local amenities such as banks, shops, pharmacy, school, medical centre, place of
worship, parks and so forth.

Ecology and site issues centre on losses resulting from the development of land and also destroying or
impacting on the local eco-systems such as flora and fauna; for example refer to some of the high-
profile media stories about developments directly impacting on ecology including wind farms, airport
extensions, high speed railways and other transport infrastructure. When an ecological feature exists
on a development site then protection of this feature should be a core objective of the development
team who may even be able to include it as a unique selling point (USP) for a particular development,
e.g. rare bird habitat. Developers with proposals enhancing the ecological value of sites are usually
welcomed by planning authorities. Therefore developers must fully consider the ecology and site
issues at an early stage to avoid negative attention from environmental groups or unwanted media
coverage. Ecological issues should also be benchmarked via measuring the ecological footprint of all
proposed building/s in the development.
On a regional and local level, sustainability by itself can be affected by the zoning of the land and
the different uses being envisaged by the planner. Clearly a property developer has less influence as an
individual on the regional plans and therefore should identify the prevailing trends in the locations or
regions in which they operate. Consultation with the local authority plans will normally provide
important insights into an authority’s intentions with respect to zoning and land use issues; this is in
addition to the local authority’s sustainability agenda.

11.8.4 Sustainable design and construction

There are alternative approaches when seeking to assist the construction phase of property
development to become environmentally friendly. First, there is the selection of contractors on the
tender list. Second, environmental considerations can be incorporated into the procurement process.
Finally, there are the sustainable activities undertaken during construction itself. Increasingly many
contractors have been adopting CSR and are committed to reducing the environmental impact from
each development by including social responsibility in their business operations. They often post a
visionary statement on their website that sets out their goals and drivers in terms of environmental,
social and economic sustainability factors. Such publicly available statements allow property
developers to select contractors on the basis of their environmental credentials. In addition, these
websites outline their progress towards embracing sustainability visions and goals. It is essential to
ensure each organisation has targets they monitor and audit.
An annual sustainability report should detail relevant information about sustainability. Contractors
will often illustrate their expertise by referring to case studies of sustainable building projects they
have undertaken. Another approach to selecting environmentally aware contractors is based on their
past performance in respect of the construction of sustainable buildings. Based on past experiences a
developer can also build up a list of potential contractors with whom they work well on certain
projects. Therefore this list may form the underlying basis of contractor selection for future projects.
In terms of design and build projects, the specific environmental issues will depend on variables
such as the property type and specific location. Key sustainability areas impacting on the task of
undertaking a property development include:

reducing carbon dioxide emissions;

minimising pollution;
Lifecycle costing (LCC) or whole life costing (WLC); and
using construction resources efficiently including creating minimal waste.

Approximately 50% of all carbon dioxide emissions come from the construction process or using
buildings in the urban environment, therefore improving energy efficiency is an important way to
reduce emissions. Relatively simple approaches include the provision of additional insulation, using
efficient glazing (e.g. double or triple glazing), introducing measures such as recovery of heat from
waste water or air and installing individual meters for heating and hot water to reduce the level of
energy consumed, in turn leading to cost savings. In addition such measures will also improve indoor
air quality.
Embodied energy is generally described as the energy required to create or manufacture the
materials used in the original construction process. For example certain materials, such as brick or
concrete, have a high embodied energy because the manufacturing process has a very high energy use
resulting from the very high heat required. However, offset against this must be the capacity for a
material to retain heat to later be released back into a building. It is necessary to determine the best
combination of materials for a new development adopting an environmentally friendly approach. The
intended use of the property must be taken into account, along with services including the heating
system and other installations to be used. It is essential to look holistically at the process rather than
simply focusing only on the construction technique and materials.
Renewable energy has an important role in reducing carbon dioxide emissions. Whilst there are
many renewable technologies that can be used, some are more appropriate than others for particular
projects. Examples of renewable energy technologies include solar panels (photovoltaic and solar
thermal), wind turbines, geothermal (e.g. ground source heat pumps), heat exchange systems and
micro-scale hydro-generation. It must be noted that the capital costs behind the majority of renewable
technologies have been relatively high, however as their use is becoming more widespread then the
economies of scale have started to drive costs down. Some governments offer grants and rebates to
encourage the use of renewable energy and also to offset the initial installation costs. Other incentives
include feedback tariffs for any surplus electricity produced and then fed back into the main electricity
grid for use by other consumers. Pollution from the construction process can take many forms other
than simply pollution into the atmosphere of greenhouse gases. Other common examples include fuel
spillages, fly-tipping and mud/silt from sites or the wheels of transport vehicles. In addition many
construction materials can pose a direct pollution risk during their manufacturing or even in use.
Lifecycle or whole life costing is a technique that integrates the capital expenditure committed to a
project with the operational costs involved in operating and maintaining the building. Clients
procuring buildings will be adversely affected if their developments require expensive maintenance
soon after completion. It is also acknowledged that well thought out designs incur relatively little
ongoing maintenance costs and are to be encouraged.
The concept of maximising efficiency by fully utilising resources is commonly viewed as an
optimal approach for increasing levels of sustainability. However in reality this will not always deliver
the best product for end-users. Therefore it is important to look to the end-users and then make
decisions based on optimising the level of utility, not only efficiency. The design phase and
construction phase of development schemes are important here.
Reducing the amount of waste management during construction can both increase profitability and
lower construction costs since wasted materials are an added expense. Sustainable property developers
need to consider reducing waste to save money and reduce environmental impact. Developers pay to
dispose of construction waste and since landfill taxes and disposal costs are increasing, minimising
waste makes clear financial sense. A waste management strategy can help to design out waste,
minimise waste creation on site and ensure any resulting waste is dealt with appropriately while this
results in a tidier, safer site. It is estimated that an active use site waste management plan can produce
savings approaching 3% of total construction costs.
As many developments involve some component of demolition then a pre-demolition audit is
essential for effective waste management. Contractors and/or developers must identify the type and
amount of waste generated on the site. An increasingly common approach is to use a spatial mapping
program incorporating geographical information system (GIS) to locate the closest waste management
site and therefore reduce both costs and time associated with the transport of waste. Following a
similar approach it is possible to locate nearby recycling sites, reclamation companies, composting
facilities, manufacturer take-back schemes, transfer stations, landfill sites and incinerators. Clearly this
is a very important area so it is vital to measure and benchmark the level of construction,
refurbishment and demolition waste with industry standards.
The construction industry must continue developing minimum reporting requirements for
construction, refurbishment and demolition waste to facilitate the generation of performance indicators
and benchmark figures. With an increasing amount of legislation being introduced in many
jurisdictions for site waste management plans (i.e. for projects exceeding a specified value), rising
landfill costs and an increased focus on sustainability ensure it is virtually essential to keep measuring
and monitoring generated waste. This practice is becoming widely accepted so developers seeking to
procure sustainable construction in their projects will need to explicitly set out requirements in respect
of waste management.
An alternative approach for a developer seeking to increase the sustainability of a development
project would be to specify the re-use of materials where possible, especially if the development
involves the partial or complete demolition of a pre-existing building. This is a common approach in
the change of land use on a site, e.g. from industrial to residential land use. In addition the designer
can specify the use of recycled materials such as recycled concrete for hardcore or recycled timber. In
some locations there are strict policies and legislation protecting the existing building and/or fabric,
such as for heritage purposes, which may force the developer to keep or re-use some of the existing
building. An example would be the retention of the original facade of a brick pressing factory that is
heritage listed. Re-use is better than recycling since no further embodied energy is used to physically
transform the materials from one form into another form. However the use of recycled materials is
clearly preferable to the consumption of raw resources and materials. Many environmental rating tools
such as BREEAM assign credits to projects that incorporate recycled materials.
With reference to the selection of building materials, the following questions should be asked
during the property development process:

i. What is the environmental impact of the materials? All materials have varying levels of
environmental impact therefore the choice of construction materials is important. For example
the excessive logging of timber can lead to deforestation and loss of the carbon sink.
ii. Has responsible sourcing of materials been undertaken? For example has the timber been
sourced from a sustainable re-forestation supplier?
iii. Has the provision of recycling facilities for materials used within buildings during their lifecycle
been made? This includes internal storage and provision for external collection.

Embodied energy is directly related to sustainability and commonly viewed as the total energy used to
produce the construction material or product used in a development. It refers to the total energy
involved in the extraction or mining, transportation and manufacturing of a specific material or
product. Some materials, such as concrete and steel, have a relatively high amount of embodied
energy. In direct contrast the level of embodied energy in other materials, for example stone and
timber, is relatively low. If a developer seeks to undertake a project with low embodied energy then
they must avoid using large amounts of high embodied energy materials.
The amount of volatile organic compounds (VOCs) in the project is another important
consideration for the developer. Simply explained, VOCs are emitted as gases from certain solids or
liquids and include a variety of chemicals that may have short- and/or long-term adverse health
effects. VOCs are emitted by a wide array of products including paints and lacquers, paint strippers,
cleaning supplies, pesticides, building materials and furnishings, office equipment such as
photocopiers and printers, correction fluids and carbonless copy paper, graphics and craft materials
including glues and adhesives. At the very least the best practice is to avoid the use of VOCs where
possible and also limit exposure. Some individuals have a very low tolerance to these compounds and
many undesirable health side effects include eye, nose and throat irritation; headaches; loss of
coordination; nausea; damage to the liver, kidney and central nervous system. Some organics are
suspected or known to cause cancer in humans. Key signs or symptoms associated with exposure to
VOCs include irritation, nose and throat discomfort, headache, allergic skin reaction, nausea, fatigue
or dizziness.

11.8.5 Water
Water is an essential requirement for human survival yet increasing populations with associated higher
water usage is causing water shortages throughout the world. Drought is now relatively commonplace
in many countries. This strong reliance on water is obvious in densely populated areas where there is
increased demand from a comparatively larger population for a reliable water supply. However in
many locations a reduction in supply has coincided with increases in consumption. Water shortage
also seems an obvious consequence of a drought yet flooding, which is becoming increasingly
common, impacts both water supply and wastewater. Typically the reference to water within the
context of sustainability either refers to (a) water shortage or (b) reusing existing water such as ‘grey
water’ from washbasins or washing machines or ‘black water’ from toilets. A developer can influence
both occupiers and users to reduce water consumption and running costs by incorporating such
measures as water efficient appliances (e.g. low flush toilets), water metering, leak detection systems
and water butts. Environmental assessment schemes measure what is considered a reasonable
consumption level for a specific property type based on a benchmark amount.

11.8.6 Health and wellbeing

Increasingly the residents of many countries are spending more time every day inside buildings either
at home, in education, at work or undertaking social and leisure activities. Another example is the
stay-at-home lockdowns enforced in many countries due to the COVID-19 pandemic. In a global city
it is estimated a typical resident may spend the vast majority of their time inside a building, being their
primary form of protection from the environment. Therefore the relevance of sustainable buildings to
this high level of occupancy is obvious. Sustainable buildings are often promoted on the basis of their
benefits to health and much consideration is given to optimising the health of occupants in the final
design of a project. These reasons are frequently cited as a strong rationale for incorporating
sustainability in the built environment. With the needs of the occupiers in mind, developers should
consider features such as:

i. maximising natural daylight;

ii. installing sound insulation to reduce the transmission of airborne and impact sound;
iii. in residential property the provision of adequate private space for occupants;
iv. avoiding the use of materials containing volatile organic compounds (VOCs); and
v. reducing the amount of air conditioning and also recycled air in buildings to reduce the
likelihood of sick building syndrome.

11.8.7 Market research and sustainability

There has been a significant change in attitudes towards sustainability since the early 2000s and now
there is broad commitment at local, national and global levels towards improving sustainability in the
built environment. The first major global focus on sustainability in relation to property was the
development of green buildings in the 1990s; in turn this commenced a substantial change in attitudes
towards sustainability in the built environment. Surveys show that many people believed the
environment to be increasingly important. Marketing firms also conduct primary consumer research to
investigate the percentage of the population for whom environmental, social and healthy lifestyle
values play an important role in purchasing decisions. Findings from this type of research have
observed a shift in consumer attitudes towards embracing sustainability where these general trends and
perceptions filter down to the property development process.
Property developers form an integral part of society and must keep abreast of social and cultural
trends, especially relating to sustainability to ensure their properties meet market requirements, reduce
environmental impacts and are future-proofed to some extent. Although there are varying perceptions
of sustainability depending on which section of society is approached, surveys indicate that society
already expects a certain level of sustainability to be incorporated in the products we use. For example
this includes high levels of energy efficiency in domestic appliances (e.g. heaters, refrigerators) and
lower emission/more economical motor vehicles.
An increasing focus on CSR has also raised the profile of environmentally friendly products and
services. These changing perceptions have directly and indirectly affected the property market where
the environmental impact is considered to be substantial. Clearly, then, a successful twenty-first
century developer needs to accommodate these changing attitudes and perceptions towards
sustainability to ensure their products meet market expectations and do not suffer from a negative
form of building obsolescence, namely environmental obsolescence.

11.8.8 Marketing a sustainable development

A developer needs to correctly identify their target market and use the optimal marketing strategy to
reach that specific market sector where it is essential to include the features in the development
deemed attractive to that section of the market. It has become increasingly common to use a two-tier
marketing strategy for a residential project; for example where one advertising campaign is targeted at
a mature purchaser and a second campaign focused on a younger or single household group. Different
sustainability features might appeal more to different groups. For example an older resident might
prefer closer proximity to public transport or healthcare facilities although a younger household might
prefer access to recreational facilities such as health or fitness clubs.
A marketing campaign focused on a sustainable property development will seek to highlight the
social, economic and environmental benefits of buying or renting in a particular development. It has
been increasingly observed that marketing campaigns now promote the features of sustainable
buildings due to the higher level of purchaser demand for this product and the perceived benefits from
occupation. The developments not able to accommodate some form of sustainability, either directly or
indirectly, will disenfranchise themselves from a section of the market.

11.8.9 Promoting and selling sustainability

There is strong evidence that property developments are being promoted to the market and sold on
their sustainability credentials as a core selling feature, therefore having a competitive advantage over
other developments. As property value is directly linked to perception, this approach has capitalised
on the positive buyer perception of sustainability. For example, in the residential sector a higher
volume residential property developer can promote a development as being sustainable because it is
located closer to the city centre, as well as being both energy and water efficient.
With reference to the commercial sectors, office developments are often partly promoted on the
basis of their sustainability rating. For example there are some regions where government departments
will only commit to buildings with minimum accredited environmental standards (e.g. 4.5 star Green
Star). Developers keen to promote their developments as complying with these standards will need to
ensure they keep their current sustainability marketing information up-to-date.
Some argue that the task of ‘selling sustainability’ is an oxymoron. This is because sustainability is
about conserving resources and reducing environmental impact, however selling is about increasing
consumption. Clearly there are challenges with selling sustainability features like energy efficiency
because consumers are often unable to see any physical benefit from their investment, unlike, for
example, a new kitchen. This barrier to the adoption of sustainable products or processes appears to be
diminishing as levels of awareness are increased and benefits such as reduced running costs are
accepted in society. Such arguments are easier to make when energy and fuel prices are increasing and
sustainable options become more financially viable. So how can the two conflicting concepts be
resolved? Clearly some degree of development is inevitable to cater for the changing needs of the
community and changes in demographics, as well as to maintain economic activity, e.g. creating
employment. In today’s property market it is both appropriate and necessary to promote developments
on the basis of their level of sustainability. It can also be argued that the promotion of sustainable
buildings is highly desirable to further raise the awareness of sustainability in buildings amongst a
wider audience.
As with any marketing and promotion campaign it is necessary to engage specialists to identify
target groups and markets for the product. Advertising campaigns in a range of media can then be
developed to target each group effectively and create demand for the development. The key property
development stages are summarised in Table 11.1 with the main potential sustainability issues also
noted.

Table 11.1 Property development stages and the key potential sustainability issues
Property development stage Potential sustainability issue
Land for development Loss of habitat
Loss of bio-diversity
Contamination (naturally occurring or due to previous use)
Development finance Planning Consider eco-financing
Transport
Ecology and site issues
Zoning and land use issues
Design and construction Selection of contractors – including their CSR performance
Reducing carbon dioxide emissions
Minimising pollution
Use of lifecycle costing or whole life costing techniques
Using resources efficiently
Waste management on site
Re-use of materials and recycling materials
Specification and selection of materials – health and embodied energy issues
Water
Health and wellbeing for users
Environmental assessment ratings
Market research Awareness of changing social and cultural perceptions towards sustainability
Promotion and selling Awareness of changing social and cultural perceptions towards sustainability

11.9 Sustainability rating tools

Although there are no identical parcels of land in the world and every country is unique in its approach
to land use, development and sustainability, there are common approaches to the valuation of land and
buildings and also the analysis of those values in order to identify current trends. However,
environmental rating tools have not followed this trend and unfortunately many different countries
will have their own unique measurement tools and rating standards. Although it is possible to compare
the value of an office building in New York, Berlin, London or Melbourne which may be valued on a
ten-year discounted cash-flow valuation approach (after allowing for exchange rates), making a similar
direct comparison of the sustainability rating of the same building is more complex. The first widely
recognised environmental assessment method and rating system for buildings was BREEAM, which
set a standard for best practice in building design, construction and operation. BREEAM was arguably
the catalyst for sustainability changes within the property industry as well as the development of new
sustainability rating systems like LEED, CASBEE and Green Star. The second generation rating tools
combined components from different systems of the first generation. The next step in this process is
the arrival of third generation rating tools (Figure 11.4).

Figure 11.4 Evolution of rating tools

11.9.1 The development of rating tools

The commencement of rating tools for commercial buildings began in 1990 with the introduction of
the BREEAM rating tool and five years later this was followed by the French system, HQE, and then
by LEED in 1998. The evolution and adoption of rating systems in different countries is largely based
on the initial rating systems. For example see BREEAM (Netherlands), LEED (Emirates) and Green
Star (South Africa). Some countries have more than one rating tool, while others have yet to develop
or adopt their own rating tool.
 In an era of international property development and investment where it is possible to compare
valuations of buildings in different countries, it is unfortunate that rating tools do not exhibit the same
level of comparability due to their unique characteristics and specific focus. Arguably this potentially
hinders the take-up rate of sustainable rating tools and may be a barrier to increasing knowledge about
the sustainable attributes of comparable office buildings located in different countries. European
countries with high population densities appear to have embraced the sustainable office rating tools.
Uptake of the retail and industrial tools is lower, partly reflecting the subsequently later development
of the tools and the overall number of new buildings constructed in the sector. As the Green Star tool
does lead to lower levels of sustainability compared to BREEAM, one challenge is to increase the
proportion of 6-star rated buildings, which in turn will contribute to addressing climate change in the
built environment. This remains the single greatest challenge and continues to increase in importance
at the same time as the new rating tools enter the market and contribute to the increasing complexity
for all stakeholders.
Finally, there is nothing to stop a property developer obtaining a bespoke assessment for a property
development scheme. It can make it less easy to promote and convince the market that the bespoke
building is as, or more, sustainable because the recognised benchmarks have not been adopted.
Bespoke assessments may be more useful to those developers or owners wishing to retain a long-term
interest in the building or scheme.

Discussion point
Why do sustainability rating tools exist and who are the stakeholders that would use them?

11.10 Reflective summary

We are in an environment where developers must embed sustainability in their development at

some level. This chapter commenced with an overview of sustainability and how it relates to
CSR. The question of why property is an important sector in relation to sustainability and CSR
was addressed and the key areas of impact were identified. Finally the chapter discussed how
these impacts are being addressed by government and by developers, investors and occupiers.
There was attention placed on rating tools, especially from an international perspective, to
highlight the increasing complexity of sustainable buildings.
It is simply impossible to ignore sustainability since many issues are now embedded within
legislation such as planning and building regulations, for example energy efficiency and water
economy. However developers should be also aware that these regulations represent the
minimum allowable standards and not the best practice. A successful developer should adopt best
practice, whenever possible, including sustainability of course. The standards and quality of the
built environment should be improved for both inter- and intra-generational benefits.
Sustainability can be embedded throughout the development process from inception to site
selection and acquisition to the financing of the scheme. The design and procurement phase is
another key area where decisions will have a substantial impact on the sustainability of a project.
Environmental assessment tools enable benchmarks to be set which the market recognises and
acknowledges.
The importance of market research was highlighted with the need to consider the different
types of sustainability features that would appeal especially to the target groups that a particular
project would be aimed at. In all areas of property development and at all stages in the process,
 the trends are for incorporating higher levels of sustainability. Over time the sustainability tools
adopted by the industry will continue to improve thereby allowing developers to deliver more
sustainable buildings to the market.

11.11 Case study: large-scale development – Canary Wharf, London

Canary Wharf is a unique large-scale development in London that is recognised as one of the most
successful repurposing or ‘change of land use’ international regeneration projects. It occupies the site
of the former West India Docks, which closed in 1981 after years of decline and then remained empty.
Canary Wharf came to symbolise the return of life to inner London and the transition from an
industrial to a service based economy, notably as a product of globalisation.
The project is not yet complete but currently includes 1.533 million m2 (16.5 million sq. ft. net) of
high-quality office, retail and leisure space, and over 3,700 homes in construction; for sale, for rent,
intermediate and affordable. The development currently includes 37 completed buildings making
Canary Wharf an instantly recognisable part of the London skyline. Canary Wharf includes three
shopping malls, Canada Place, Cabot Place and Jubilee Place, together forming one of the largest
retail complexes in London (see Figure 11.5).

Figure 11.5 Canary Wharf (Source: photo provided by W. Hughes, 2020)

 According to the Canary Wharf Group (2020b) the Canary Wharf development includes:

– acres of outdoor space;

– over 300 shops, bars, restaurants, services and amenities;
– daily working population of approximately 120,000 workers and expected to double in the future;
– million visits each year; and
– over 200 events every year.

Previous land use

Canary Wharf is located in an area called the ‘Isle of Dogs’ within the London Borough of Tower
Hamlets, being to the east side of London approximately 4 miles (6.5km) east of the traditional City of
London financial district. The site was formerly known as ‘The West India Docks’, regarded as the
world’s busiest shipping port from its opening in 1802 and as an integral part of the British Empire,
handling goods from the United States, the Carribean and other countries. The list of imported goods
included sugar, rum and even elephants from all over the world (Saco 2018). During the Second World
War there was extensive bombing of London’s docks which destroyed much of the nineteenth-century
infrastructure. It is estimated that approximately 2,500 bombs were dropped over the area during the
war.
After the war there was a brief resurgence in the fortunes of the docks but the introduction of
shipping containers in the 1960s and 1970s made the docks less attractive. By the early 1980s the
docks and many other industries had moved, leaving the area in a state of decline and relative disuse.
Many residents departed the area in search of new employment and businesses were forced to close or
relocate. In 1980 the UK government set up the London Docklands Development Corporation
(LDDC), initially seeking a new industrial use for the land but a chance encounter led to an American
banker proposing to relocate to the docks. The deregulation and computerisation of bank trading in
1986 created huge demand for large floor-plate offices and the old docks provided an ideal location for
these large new buildings. At ‘Canary Wharf’, named after a banana warehouse, land was cheap, there
were tax incentives plus the new skyscrapers would not affect London’s existing historic built
environment. The first phase of the development was completed by Olympia and York, the Canadian
developer, in 1991, but the company entered administration due to poor transport links and the timing
of a deep recession.
However the principle of providing large and efficient offices at a lower rent compared to the
traditional City of London or West End locations was correct. Within a few years the development
came out of administration and began the successful regeneration and redevelopment of the entire
docks area. This has been widely acknowledged as a successful transformation of practically derelict
land into one of the most sought-after commercial and residential locations in Europe.
The Canary Wharf project was helped by strong planning policies from the LDDC which enabled
buildings to be designed in a bespoke way to suit individual tenants, but also constructed very quickly.
The Canary Wharf Group is a virtually integrated company which owns the land, finances and designs
each building, acts as the main construction contractor and then manages the built products afterwards
(see Figure 11.6).
Figure 11.6 Canary Wharf construction (Source: photo provided by W. Hughes, 2020)

Transport and connectivity

Transport has been a critical consideration for the project. When the docks were operational most staff
walked to work as few commuted in or out of the area. Therefore new transport links had to be
provided. The Docklands Light Railway was part-funded by the development and cleverly made use
of existing redundant railway viaducts to link Canary Wharf to the City. The London Underground
Jubilee line was opened in 1999 with a contribution of some £400m from the Canary Wharf project
and is now one of the busiest stations on the entire network. A major regional metro line called
Crossrail (The Elizabeth Line) is scheduled to open in 2022 and will link the Canary Wharf estate to
London Heathrow airport in 39 minutes.

Infrastructure
A major expenditure throughout the project has been the installation of new infrastructure including
roads, telecoms, power and water. Starting with an empty site enabled the developers to create a six-
metre ‘box’ across the entire development, linking buildings underground with shopping malls and
corridors, and allowing generous space for utilities links.
Sustainability and environmental considerations
The Canary Wharf Group is an industry leader in sustainability. The company has purchased 100%
renewable electricity for Canary Wharf since 2012 and has carried out a programme of replacing all
outdoor lighting with LEDs. It has achieved zero waste going to landfill since 2010 and pioneered new
initiatives like banning plastic straws, setting up water bottle refill stations and recycling coffee cups.
A total of 24 buildings are BREEAM-certified including One Bank Street which is classed as
‘outstanding’ both in terms of construction and fit-out, making it one of the best environmentally
performing buildings in the UK. There is extensive green space in the estate with eight major parks,
gardens and squares and two more under construction. There are 650 established trees (30 different
species) equating to 2,000m2 (21,500 sq. ft.) of tree cover. Both Jubilee Park and the Crossrail roof
garden are technically green roofs; in combination with other buildings this means that Canary Wharf
has the largest area of green roofs in the country. Regular cleaning has made the dock’s water more
attractive to various species of freshwater and saltwater fish along with nesting waterbirds and even
seals have been spotted in the North Dock. Canary Wharf Group was the first developer to create a
Biodiversity Action Plan to encourage wildlife onto the estate.

Objections to the development

When the idea of Canary Wharf was first proposed it was met with hostility from the local community
(Guide London 2020). From their perspective the local residents viewed the development as the final
nail in the coffin for the closed docks, which had been the cornerstone of the local economy. Some felt
the high-rise US-style towers were better suited to the New York style of skyline than to their local
working-class community and feared that local people would not find employment in the banks and
offices. An example of this strong local feeling was when a procession of protesters carried a coffin
containing a giant ‘dead canary’ to symbolise the ‘death of the community’. However Canary Wharf
Group employed the leader of the protest group to act as a bridge with the local residents, and set up a
number of jobs, education and economic support programmes. Today there is strong support for the
development which has brought both jobs and prosperity to the local area, supporting many charitable
and community projects.

Canary Wharf today

Today Canary Wharf houses the world or European Headquarters of HSBC, Barclays, Clifford
Chance, Credit Suisse, J P Morgan, Morgan Stanley, State Street, Bank of America, KPMG, Northern
Trust, Societe Generale, the European Bank of Reconstruction and Development, and major offices for
BP, EY, the UK government, Total, Thomson Reuters and many others. In 2013, Canary Wharf Group
launched ‘Level39’, a Financial Technology hub and accelerator based across three floors of One
Canada Square with more than 300 member companies including fast growing ‘unicorns’ valued at
over $1bn like the challenger bank Revolut.
It is interesting that over time the Estate has matured so that the ratio of financial and non-financial
services tenants at Canary Wharf had changed from 70:30 ten years ago to 55:45 in 2020. Increasingly
space is being let to technology, media, telecoms and fast-growing smaller companies. As the Estate
matures into a city district in its own right, now including residential units, it has become a shopping
and leisure destination, busy in the evenings and weekends. There are more than 300 bars, cafes and
restaurants along with over 200 shops, and each year more than 200 events are staged ranging from
opera to visual arts.

References and useful websites

Agudelo, M.A.L., Johannsdottir, L. and Davidsdottir, B. (2019) ‘A literature review of the history and evolution
of corporate social responsibility’, Journal of Corporate Social Responsibility,4(1).
https://doi.org/10.1186/s40991-018-0039-y.
Bowen, H.R. (1953) Social Responsibilities of the Businessman, Harper & Row.
Canary Wharf Group (2020a) Canary Wharf Group PLC,https://group.canarywharf.com/ (last accessed 16
August 2020).
Canary Wharf Group (2020b) Canary Wharf Factsheet, https://group.canarywharf.com/wp-
content/uploads/sites/2/2019/02/canary-wharf-media-canary-wharf-factsheet-feb-2019.pdf (last accessed 22
August 2020).
Carroll, A.B. (2016) ‘Carroll’s pyramid of CSR: taking another look’, International Journal of Corporate Social
Responsibility, 1:3. https://doi.org/10.1186/s40991-016-0004-6.
CBRE (2020) Canary Wharf, London, www.cbreresidential.com/uk/en-GB/area-guides/canary-wharf (last
accessed 16 August 2020).
Crane, A., Matten, D. and Spence, L. (2019) Corporate Social Responsibility: Readings and Cases in a Global
Context, 2nd edn, Routledge.
Elkington, J. (1994) ‘Towards the sustainable corporation: win-win-win business strategies for sustainable
development’, California Management Review, 36, pp. 90–100.
Environmental Agency (2006) Sustainable Construction Position Statement 2006.
EPA (2020a) Climate Change Indicators in the United States,United States Environmental Protection Agency,
www.epa.gov/climate-indicators (last accessed 2 February 2020).
EPA (2020b) What is Sustainability?,United States Environmental Protection Agency,
www.epa.gov/sustainability/learn-about-sustainability#what (last accessed 4 February 2020).
EPA (2020c) Sources of Greenhouse Gas Emissions, United States Environmental Protection Agency,
www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions (last accessed 4 February 2020).
European Commission (2011) EC Communication, https://ec.europa.eu/info/sites/info/files/recommendations-
subgroup-corporate-social-responsibility_en.pdf.
Galliard Homes (2020) 20 Facts About Canary Wharf, www.galliardhomes.com/investor-information/investor-
guides/guide (last accessed 14 August 2020).
Global Reporting Initiative (2020) www.globalreporting.org (last accessed 2 February 2020).
Guide London (2020) Top 10 Facts about London’s Canary Wharf and Docklands,
www.guidelondon.org.uk/blog/around-london/top-10-facts-about-londons-canary-wharf-and-docklands/ (last
accessed 21 August 2020).
IPCC (2014) Inter-Governmental Panel on Climate Change AR5 Fifth Assessment Report,
www.ipcc.ch/report/ar5/syr/.
IPCC (2018) Global Warming of 1.5°C, www.ipcc.ch/sr15/.
Kemper, G. (2019) ‘How to incorporate CSR into your public relations strategy’, The CSR Journal, 2 March.
https://thecsrjournal.in/how-to-integrate-csr-into-your-public-relations-strategy/.
Reed, R.G. (2018) ‘The foundations of sustainability in real estate markets’,in Companion to Real Estate
Development, Routledge.
Reed, R.G., Bilos, A. and Reed, M.A.J. (2017) ‘Environment and sustainability in real estate development’,in
Encyclopedia of Sustainable Technologies,1st edn, Elsevier.
Saco (2018) Five Fascinating Facts about Canary Wharf,www.sacoapartments.com/blog/five-fascinating-facts-
about-canary-wharf/ (last accessed 23 August 2020).
Sedlakova, A., Tazky, L., Vilcekova, S. and Burdova, E.K. (2016) ‘Use of traditional and non-traditional
materials for thermal insulation of walls’, in Advances and Trends in Engineering Sciences and Technologies,
Taylor & Francis.
Sheehy, B. (2014) ‘Defining CSR’, Journal of Business Ethics, 31 July. DOI 10.1007/s10551-014-2281-x.
Tran, B. (2019) ‘Corporate social responsibility’, in Advanced Methodologies and Technologies in Business
Operations and Management,IGI Global, pp. 270–81.
UK Government (2019) Implementing the Sustainable Development Goals,
www.gov.uk/government/publications/implementing-the-sustainable-development-goals.
United Nations Climate Change (2020) U.N. Framework Convention on Climate Change,
http://unfccc.int/meetings/copenhagen_dec_2009/items/5262.php (last accessed 4 May 2020).
WCED (World Commission on Environment and Development) (1987) Our Common Future, Oxford University
Press.

Note
1 UN Framework Convention on Climate Change. United Nations. 18 December 2009. Retrieved from.
http://unfccc.int/meetings/copenhagen_dec_2009/items/5262.php [accessed 4 May 2020].
Chapter 12

Emerging markets

12.1 Introduction

This chapter discusses property development in the broader context of internationalisation,

created by the increasing interaction between national economies and the globalisation of
businesses as a result of access to fast, reliable information due to advances in communications
technology. The concept of globalisation is described and then explained within the broader
context of property. The opportunities for international property development are examined,
along with the drivers for international property development.
We also provide an overview of the opportunities, barriers and risks associated with
international property development and provide an outline of potential international strategies
before moving onto specific examples of international property development.

12.1.1 International property trends

There has been an observed global trend towards higher levels of urbanisation which have often
focused on the provision of living space within city centres. In some countries, previous planning
policies and high land values led to the practice of converting residential property to office use and, as
a result, many city centres in the late twentieth century became devoid of residential property. In turn
this caused many inner cities to become lifeless areas outside daytime working hours.
Strategies to promote inner-city ‘urban regeneration’ represent a complete change in land use policy
and have been introduced as targeted initiatives in many global cities, with the core objective being to
rejuvenate and bring city centres back to life. Indirect advantages from increasing the residential
component have included lower crime rates and increasing ‘liveability’ profiles, which importantly has
attracted the attention of both residents and visitors. These policies and initiatives have led to
sustained growth in inner-city residential apartment buildings in global cities ranging from Frankfurt
to Chicago and Melbourne to Hong Kong.
There are other external factors that influence land use changes in cities and subsequent change in
property development requirements. For example in some cities it has been observed that during
downturns in property cycles and in associated periods of high vacancy rates in commercial building
stock there have been an increasing number of conversions of high-rise property from office use to
residential use. Primarily this trend is associated with the overall higher rate per square metre for
residential land use over commercial.
It has been observed that some organisations have chosen to locate in outlying office ‘nodes’ (e.g.
business/science parks) at the same time as residents sought inner-city locations in order to be close to
their place of work, central transport facilities and CBD retailers. Interestingly this is an example of a
global property trend replicated at approximately the same time in Canada, the United States and the
United Kingdom. Such trends demonstrate the increasing levels of internationalisation of property,
therefore affecting development practice and property markets at many levels. The use of ‘agile’ or
‘flexible’ buildings are another example of international property development trends which have now
been globally adopted.
There have been changing trends which property developers need to always keep up-to-date with.
For example one feature of changing global practice in the property industry is the relatively rapid
growth in purchasers of investment property ‘off the plan’ from overseas investors who reside in
another country. Most of these purchasers are individuals and not large investment funds. For
example, many seaside locations are heavily promoted in overseas markets to overseas investors living
in Asia. An indirect result can be the emergence of a two-tiered market which consists of sectors with
different demand driving and possibly different pricing structures, namely (a) local buyers and (b)
overseas buyers. In this scenario a property developer, who is seeking to obtain the highest value for
the completed units in the project, should market the development to both the local and international
market with different targeted promotional campaigns. In the EU for example many European
property transactions have occurred where ‘cashed up’ baby boomers have been looking to purchase
holiday homes or alternatively purchase second homes as retirement properties that are sound
investments.
Another influencing factor has been the widespread global uptake of internet access by prospective
purchasers, regardless of their location in the world. This trend has clearly made it easier for overseas
investors to research property in other countries and proceed directly to purchasing stage, at times
without physically inspecting the property itself. Arranging property transfer details (e.g. engaging a
solicitor, transferring funds) also has become simplified due to the internet. At the same time there has
been an increased number of property agents able and willing to facilitate these international property
transactions.
In this era of globalisation and interconnected economies it is apparent that an economic event in
one country can have an adverse and almost immediate effect on other global markets, especially
when referring to exchange rates, equity markets and interest rate levels. It is commonly accepted that
the diversity between products offered for sale in different countries has decreased. Many
organisations conduct business by operating on different continents, where the actual location of the
head office is often challenging to identify.
The expansion of multinational organisations and their internal communication requirements have
been substantially assisted by advances in technology including the internet (e.g. Skype and FaceTime
enabling free and real-time face-to-face discussions). Therefore these companies, especially
construction companies and property developers, have diversified their primary geographic location of
operation in order to benefit from a favourable taxation environment as well as enhanced profit (partly
due to lower operating costs with a local office and labour force) in accordance with conventional
economic theory.
Profit-seeking companies in addition to free market trade have led to the massive expansion of
outsourced labour, such as the widely acknowledged increase in the number of call centres based in
India. In other words many international companies such as telecoms are able to provide telephone
help lines at a much lower cost due to cheaper labour and infrastructure costs sourced offshore, e.g.
rather than in the country of customer location. This in turn has caused an expansion in demand for
property development in specific countries which have embraced this trend. Consequently there was
increased market demand to provide high-tech office space (i.e. with high-speed internet cabling)
which was not previously in demand or even constructed in these countries.
Local real estate markets were historically viewed as being primarily influenced by local economic
activities, although with the increasing acceptance of internationalism this perception has changed
over time. However property developers have not benefited from entering global markets as much as
other organisation types, even though investment in and development of real estate has traditionally
been linked to wealth creation and achieving specific investment goals. Interestingly, from a historical
perspective, there have rarely been any real estate companies in the largest 100 transnational
companies ranked by foreign assets in the world, as this list is dominated by oil, electronic and
automobile companies; for example only one real estate developer was listed in the 2017 report
(United Nations 2019).
In the context of property development a local organisation no longer has the distinct advantage
that it once held and is no longer most likely to be the successful bidder. After consideration is given
to the scope of the property development, for example if the project is a large-scale football stadium or
alternatively a small detached house, in today’s competitive environment the developer is not
automatically located in the immediate or local vicinity. Consequently there is a need to develop an
understanding of property development processes on a regional basis as well as understanding
differences between regional level knowledge versus external knowledge from outside the region
(Johansson and Karlsson 2019).
Following the integration of technology coupled with the acceptance of globalisation throughout
the western world, many geographical boundaries that previously existed have now been removed.
Therefore the head office of a property development project may be located across town, across the
country or across the world and still be able to compete directly with a local provider. Such increased
levels of international practice have caused higher levels of competition, where a truly international
property developer must be up-to-date with the local customs, government regulations and current
state of the market in many different areas. The consultants who service property developers such as
services engineers, architects, agents and quantity surveyors, for example, have also become
internationalised. Sometimes this has taken the form of mergers and acquisitions of local practices,
whilst at other times partnerships have been formed. This expansion and internationalisation has
meant that consultants who work on projects in one particular country may find themselves working
together in project teams in other countries at the same time.
It is essential to discuss this concept of globalisation because it has had a substantial impact on
many levels of property development (Reed 2015). This impact looks set to increase as previous
country level boundaries are dissipated. In general terms globalisation refers to the increasing
worldwide connections, integration and interdependence in political, economic, environmental, social
and technological areas of interest. One single definition of globalisation is not available although it is
widely understood to (a) refer to processes of global political-economic integration and also (b) it
operates on an ideational level as a key term in political discourse about the governmental norms and
ideals of integration (Sparke 2019). Globalisation is an undeniable, established and irreversible trend
as a result of the lowering or removing of political and trade barriers, the advent of fast safe and cheap
air travel, rapid development in new technologies, and a very high level of productivity from emerging
economies such as India and China. Historically when large amounts of capital flowed across national
borders then it was usually deposited into the equity or government bond markets, although now there
is also a global real estate market to invest in. The search for higher yields and returns has also
increased the level of interest in international property investment.
There has been an ongoing debate about whether globalisation results in a homogenised society and
culture with converging patterns of consumption, or alternatively whether society can retain individual
cultural differences in the long term. This has meant that identical products and services are found in
an increasing range of countries incorporating property development. There is clear evidence of
increased architectural similarity with property in global cities, where for example some office
buildings in Toronto look much like other office properties in Atlanta, Frankfurt or Sydney. Such
practices are further encouraged by global companies insisting that their branding is adopted globally.
For example the food retailer McDonald’s uses similar generic design and criteria for fit-outs for all of
its properties throughout the world. Other examples are international hotel chains using identical
specifications in their buildings as a major selling point to customers.
From an economic perspective the concept of globalisation is about the convergence of products,
wages, prices, interest rates and profits towards the accepted normalities in developed countries. In
addition the International Monetary Fund (IMF) has commented on the increasing economic
interdependence through the growing amount of cross-border transactions, international capital flows
and more rapid and widespread diffusion of technology. However globalisation is very wide-ranging
and has a number of impacts which can be summarised as:

industrial;
financial;
economic;
political;
informational;
cultural;
ecological;
social; and
technical and legal.

All of these stated impacts can affect property developments. For example, the cultural impact of
globalisation is associated with a raised consciousness and awareness among the peoples of the world
who desire to consume foreign products and ideas. People nowadays want to participate in a world
culture and increased overseas travel has also contributed to the phenomenon. For example, in
Australia the European-style kitchens are considered very sophisticated and up-market in residential
property developments so the marketing and promotion of the developments highlight these sought-
after specifications. Equally many developments market aspects of ‘feng shui’ being the ancient
Chinese practice of placement and arrangement of space to achieve harmony with the environment.
Feng shui is a discipline with guidelines that are applied in architecture and property design.
Advocates claim feng shui affects health, wealth and personal relationships. Some property developers
are promoting and marketing their projects stating the principles of feng shui have been adopted
throughout the design of the scheme.
The result of globalisation has been that many large corporations have become transnational firms
where companies focus on staying competitive by outsourcing services or production to developing
countries with very poor labour, environmental and economic standards. Such business practices allow
companies to economise, leading to larger returns for investors and cheaper services and products for
consumers. There is an increasingly strong argument that such practices encourage governments in
developing nations to retain poorly paid labour with associated poor working conditions and also resist
implementing environmental legislation.
Some international corporations actively lobby governments so they can gain entry to developing
countries, however the advent of CSR is beginning to curb some organisations with an undesirable
track record in overseas activities. Such organisations seek to avoid any negative publicity resulting
from associations with poor business and environmental practices in developing countries.
The globalisation environment is very complex and countries actively seek to maintain their
economic advantage. In other words many developed countries still have protectionist policies to
prevent or restrict developing countries from exporting to developed markets. Critics of the expanding
global economy argue that the reduction of trade barriers will create higher levels of competition for
previously protected companies in developing countries, while its advocates point to the new
possibilities in global markets for emerging market companies such as Haier (China) and the Tata
Group (India). The global economy continues to expand so that most individual, corporate and
government borrowers are following through on their obligations, which in turn has kept financial
markets performing well and therefore property developers are working to meet market demands for
new or improved facilities.

12.2 Globalisation of property development

With reference to property development there are implications of increasing levels of globalisation. In
addition there is the ebb and flow of capital between the regions. For example in 2018 the commercial
real estate markets were diverse where the US investment was up 19% and investment in Europe
decreased 10% (PWC 2020). On a national level a sustained increase in capital levels ensured that
many property developers now operate in more countries rather than being restricted to just their own.
Some have established second or satellite offices in other countries whereas others operate solely from
overseas locations and no longer have sole country operations. There has been a substantial growth in
investing in and purchasing property in multiple countries and developers are taking advantage of the
increased opportunities this presents. For example many UK buyers overseas are generally happier
dealing with UK nationals who are able to explain the process of property acquisition and
development in an overseas setting. Similarly, property developers from countries outside the UK will
operate within the UK if the economic circumstances and business opportunities present themselves.
Presenting an example of the market for overseas property buyers and investors, consider
residential investment properties or retirement/second homes for individuals. The UK Office of
National Statistics (ONS) has the most reliable figures concerning UK ownership of properties outside
the UK. However even its figures are not perfect as it only considers the number of households
owning property overseas and does not take into account the households which own more than one
property overseas, regardless of this cohort being quite substantial.
Over time there has been the emergence of alternative overseas markets with substantially lower
property prices. Furthermore the increase in residents working overseas selling and promoting these
developments encourages buyers because there is a sense that they will trust people from their own
country. If residents buying and investing in property abroad were dealing solely with indigenous or
local people they would come across language and cultural barriers which would deter the more
cautious buyers from making the purchase.
In order to cater for transnational businesses and cross-border developments there are three key
ways in which property developers can obtain general economic and property market information.
First, an effective approach is to use international property consultants since many high-profile
property companies now operate in multiple countries and have an international profile. They have
local employees who know their own market well and can advise developers on all aspects of property
development in their locality. Furthermore these consultants have access to networks of other allied
consultants that can assist with the process.
Second, there are also organisations which provide independent, accurate, comprehensive and up-
to-date research on industries which operate in their country. The data includes reports providing
statistics, analysis and forecasts. These companies may prepare reports on the nationally best
performing companies and also produce reports with risk ratings of different industries.
The third approach for developers to find out about market conditions and opportunities in
countries outside their home country is to use affiliated professional bodies where available. For
example, RICS is a global professional body representing land, property and construction. Members of
RICS operate in many countries and can offer a range of professional advice and services to property
developers.
12.3 Opportunities
Many property developers are closely monitoring the global market for opportunities to identify
markets with potential for future growth, or alternatively markets that are currently under-developed.
In many instances this will require the developer to be an early adopter in the marketplace, rather than
waiting until the market reaches maturity with many property developers competing for the limited
supply of prospective sites. Hence a developer with foresight to enter a growing market has the benefit
of rapidly establishing goodwill and strong links with the local market, as opposed to entering a
competitive mature market from a standing start.
At the same time as property developers are expanding globally, there has been a commensurate
increase in the level of global investment. Since ownership regulations and differential taxation are not
usually large barriers and sources of segmentation in different property markets, many larger buildings
in western civilisations are owned by international investors. It should be noted that the mix of
international investors change over time. In contrast, there are different challenges for projects in
developing countries. For example in Ghana it has been noted that land legislation is viewed at times
as ‘unwieldy’ and has resulted in several unresolved issues on land ownership (Awuah et al. 2015).
There have been long-term trends such as the sustained input from Asia and therefore many
overseas companies have benefited from the Asian development boom, especially from a Chinese
perspective. The gradual ‘opening up’ of previously ‘closed’ economies has been encouraging news to
international property developers, although caution should be exercised before undertaking a large
capital commitment without completing a thorough due diligence process. For example, in many
countries there are still difficulties in accessing reliable and timely detailed property data, such as the
volume of sales and actual transfer prices. Some countries still have their supply of property largely
controlled by the government and this should be carefully monitored. Operating in an environment
that does not operate freely can increase the exposure to risk.
International property development affects each country in a different way and to a varying extent.
For example, a developing country’s fledging firm may confront formidable competition from
corporations possessing far greater economies of scale and global networks. However the same
argument is supported by the belief that less developed countries have accessible hidden reserves of
labour, savings and entrepreneurship. These strengths and weaknesses should be clearly identified by
the progressive property developer, showing that opportunities do exist in many countries, however
each country is in a varying stage of development itself. For example, partnering has been occurring
for quite some time between British and Chinese firms in some Asian countries (including China).
This trend appears likely to continue into the foreseeable future, partly due to the increasing
population base in this region.
In certain countries it was noted that geographical clusters have formed. Cluster development has
rapidly developed in North America, Europe and newly industrialised countries where a group of
similar companies (e.g. IT and computer related services) are located in a specific area. Cluster
development has attracted the attention of different countries seeking to establish an identity, which in
turn may provide an opportunity for an international developer who is able to bring specialised skills.
Clearly each country, and in particular each region in a country, can promote a limited number of
clusters. In this example a specialist property developer will have the competitive advantage of
assisting to develop a cluster based on their previous experience in other countries.
One of the key drivers behind establishing global links is the desire to be recognised as a truly
international property company. There are many organisational models possible which range from (i) a
management structure with the majority of the workforce sourced from the local economy to (ii)
relocating an entire workforce from another country with associated relocation and housing costs.
Initially a property developer in this scenario will seek to reduce costs as well as their overall exposure
to risk, therefore relocating the minimum number of workers required for the initial property
development will often be the preferred option.
 Discussion point
What are some of the benefits of undertaking property development in another country?

12.4 Barriers and limitations

The transitional steps to becoming a truly international property market can result in being faced with
many challenges, especially when considering differences in currency, culture and varying levels of
development in each country. As some real estate markets move through the transitional stage to a
truly market-based structure, it is important that assessed valuations and the underlying business case
for each property development meet the expectations of the global real estate market.
One of the largest single barriers to a successful property development in an overseas country is
often the limited knowledge about the inside workings of the relevant property market. In contrast to
the type of information which is freely available and in general circulation in many developed
countries, especially in terms of reliability, accessibility and cost, the access to property-related
information about that market may simply not be as readily available as anticipated. However even if
this information is available, there may be a substantial premium attached for ‘non-locals’ and also
questions raised about the level of reliability. When considering the high importance placed on the
final sale price of the property development, some companies venturing into overseas countries have
been disadvantaged by the barriers associated with the lack of local knowledge.
Cultural barriers may exist, for example, when a property company used to conducting business in
a western civilisation then seeks to develop property in a country with a transitional or emerging
economy. Depending on the different cultures it may take time to establish a strong trust between the
property developer and the local property stakeholders. Most international property developers are
keen to develop and improve upon these attributes. For example the Chinese culture comprises of
certain core values such as trust and guanxi (relationship) that influence business operations in other
countries (Zhang et al. 2019). In such an environment it may be essential for project participants to
identify those risks inherent in relationships and what tools for fostering trust and managing risks
should be adopted. On the other hand some overseas contractors can be accused of poor performance
and low effectiveness in terms of quality and performance.
Language and cultural barriers can vary substantially between countries and also to varying
degrees. It is commonly accepted that rich media including face-to-face meetings are perceived to be
good practice for the transfer of knowledge, although leaner media such as email is also considered
efficient if less detail is required. In other words the language barriers can be partly broken down using
media and technology including email and teleconferences. Hence communication with a distant
geographical location can be maintained on a regular basis if accompanied by adequate forward
planning and organisation.

12.4.1 Risks in international property development

The increasing internationalisation of property markets has increased the level of demand for property,
although arguably at times this has exposed property investors to additional risk.
An international property developer is exposed to different types of risk, some of which may not
occur if the developer is restricted to operating only in their home country. Structural risk may come
from within the property development industry itself, although growth risk may occur from the
anticipated growth of the overall property market. External risk can result from forces external to the
development but once again remain outside the control of the property developer. It is accepted that
risk cannot be fully removed from the project, although identifying the varying types and levels of risk
will assist to understand the threats to successful completion of the property development.
Establishing trust between stakeholders involved in the property development is absolutely critical
when seeking to undertake a project in an emerging market. The importance of this relationship is
fully appreciated when the actual property development site is located at a remote location, or at least
not in the vicinity of the head office. Furthermore as these tools are applied in different stages of the
property development, trust develops which in turn assists to counterbalance the risks. This, in turn,
partially reduces the risks associated with achieving a successful and timely completion of the project.
Many regions promote a ‘buy local’ culture which may indirectly create barriers for companies that
are perceived as ‘outsiders’. In order to overcome this barrier it is important to consider the culture
and environment of the area surrounding the property development. Employing local workers and sub-
contractors, where possible, will partly overcome these concerns and improve local relations with the
developer. For larger projects then a public relations expert may be employed to ensure interested
stakeholders are kept up-to-date with important facets of the development, as well as emphasising how
much the project will contribute to the local economy.
Another approach for addressing the pressures associated with responsiveness and integration is to
identify the strengths and weaknesses of each approach, namely at the global, regional and local
levels. This is represented in Figure 12.1 although the model needs to be customised for every unique
scenario and the associated influencing factors. Pressures for global integration appear when a
property developer is selling a standardised good or service with little ability to differentiate its
products through features or quality. It is commonly accepted that there are four main types of
international business strategies (Norwich University 2017) as follows:

i. International strategy occurs when companies using this strategy are often headquartered
exclusively in their country of origin, allowing them to circumvent the need to invest in staff and
facilities overseas to a large extent. However this strategy can have significant business
challenges, such as legally establishing local network offices in major international cities,
managing global logistics and ensuring compliance with relevant foreign regulations.
ii. Transnational strategy is one of the most intricate methods that businesses can employ when
expanding internationally. This approach can be seen as a combination of the global and multi-
domestic strategies. A business’s headquarters and core technologies are in the country of origin
however the decision making, production and other associated responsibilities are evenly
distributed to facilities in other markets.
iii. Global strategy is adopted when there are pressures to expand and sell products in more foreign
markets. Such businesses follow a global strategy and leverage economies of scale as much as
possible to benefit their reach and revenue.
iv. Multi-domestic strategy occurs when a business invests in establishing a presence in a foreign
market and tailors its products or services to the local customer base. Usually there is a head
office in the country of origin, however there are also headquarters located overseas.
Figure 12.1 Construct for combining global, multinational and regional strategies (Source: adapted
from Verbeke and Asmussen 2016)

Currency risk is an important consideration when undertaking a venture on an international level,

for example when payments are linked to the US dollar which will fluctuate over the period of the
property development. Although careful identification and assessment can be undertaken of the
standard risks associated with a typical property development, operating in another country will
usually dramatically increase exposure to new risk factors, e.g. currency risk, future exchange rates
and more recently the threat from conflict. Other indirect risks can also be adversely affected when
working in a foreign country, such as transport risks to a distant location where there is a heavy
reliance on air travel. For example, travel by air is relatively expensive and may be affected by
irregular services. In contrast to a local property development readily accessible by road, air travel is
subject to flight schedules and availability with associated waiting periods of days. An urgent crisis
may arise and suffer adversely if the correct person cannot be available on-site due to transport delays.
The relevant legislation and political climate are also major considerations that may hinder a
prospective international property development. Although these factors are outside the control of the
developer, careful research should be undertaken prior to entering the marketplace to ensure the
developer is aware of the likely risks and can at least consider some contingency plans in the event of
a particular event occurring. If, after completing extensive research a cost-benefit analysis indicates
that the proposal is not viable due to the added risk involved, the project should not be pursued.
Exceptions to this decision may occur, such as when the company is willing to accept a higher level of
risk in order to make a strategic high-profile entry into the market with a long-term perspective and
establish a foothold. The added risk should be factored into all aspects of the analysis (i.e. not only the
overall level of profit and risk) including sourcing of local labour and local materials, timely
completion of the project as well as demand for the finished property development, i.e. either for sale
or rent.
There is a view that due to climate change and associated changes to the weather patterns and
changes in sea levels, then there will be a need for considerable international infrastructure and
development in the future. Rising sea levels will create the need for improved and/or new flood
defences or even the relocation of communities considered no longer viable in their current location.
In some countries (e.g. Australia) there have already been planning applications declined as a direct
result of projected higher sea levels. Equally there will be a need for changes to the ways in which
energy is produced and this may involve changing coal fired power stations to gas fired power or the
construction of new power plants or using renewables such as wind farms for example. However such
developments take several years to progress from inception to completion. There remains a view that
action needs to be taken immediately and therefore the extensive planning consultations previously
enjoyed may need to be shortened in the drive to reduce carbon emissions. Arguably this would partly
address the effect of global warming and climate change.

Discussion point
What are the four common types of international business strategies and how do they differ?

12.5 Developing an international strategy

A decision to develop a global profile must be accompanied by well planned and executed strategy.
According to Griffin and Putstay (2015) there are five independent steps, listed below, that must be
undertaken, as shown in Figure 12.2.

Step 1: develop a mission statement for the property developer that clarifies the organisation’s
purpose, value and directions. This is a means of communicating with internal and external
constituents and stakeholders about the company’s strategic direction.
Step 2: undertake environmental scanning and a SWOT (strengths, weaknesses, opportunities and
threats) analysis. An environmental scan is a systematic collection of data about all elements of
the property developer’s external and internal environments, including markets, regulatory issues,
competitor’s actions, production costs and labour productivity.
Step 3: set strategic goals, being the major objectives the developer wishes to accomplish through
pursuing a particular course of action. Importantly they should be measurable, feasible and with
time restrictions.
Step 4: develop specific tactical goals or plans which normally focus on the details of implementing
a property developer’s strategic goals.
Step 5: a control framework is required, being the set of organisational and managerial processes
which keep the property developer moving towards its strategic goals.
Figure 12.2 Steps in international strategy formation (Source: adapted from Griffin and Putstay 2015)

12.6 Reflective summary

Never before has globalisation been such an integral and accepted part of society. Advances in
international transportation (e.g. overnight airfreight) and immediate communication (e.g. email,
teleconferences via Zoom, Skype, Microsoft Teams) have ensured that no single country now
operates in isolation but rather benefits from some degree of globalisation. Therefore a property
developer can no longer work in isolation and is constantly exposed to global risk. Today many
property developers have long-term plans to expand their operations beyond their country’s
borders. Although this will provide new opportunities, the downside is that the increased risk
(e.g. from a lack of knowledge about local conditions) will require the developer to be more
diligent at the planning stage. The extent and scope of world trade has increased substantially
since the early twenty-first century and economic events in one country directly impact
economically on other nations – the fluctuating exchange rate being a good example of this.
Each successful property developer fully understands that a considerable amount of
investment occurs in property markets which operate across national borders. Globalisation has
 homogenised market expectations to a large degree in many areas, including property investment.
For example the standards and specifications in respect of the commercial office, international
hotel and retail property sectors are highly aligned in the developed countries. It is no longer a
surprise that a property developer’s head office may be located in a different country.
To date, many property developers have successfully embraced the concept of global business
and accordingly have adopted an international perspective. This has presented numerous
opportunities for progressive property developers who have now expanded their horizons.
Globalisation has provided many opportunities for property developers to meet increased market
requirements and demands in all property sectors in their home country as well as providing new
opportunities for undertaking property development outside of their home country.
Following the uptake of globalisation then many of the aspects and theoretical approaches to
property development remain unchanged (e.g. design and timing aspects), however other aspects
(e.g. labour and material supply) differ substantially. In many regions the relaxation of trade
barriers has assisted to encourage international property development. In addition the growth of
information technology and the internet has made the operation and management of the property
development process much easier to undertake, regardless of whether the developer is located in
their home country or elsewhere. In some niche areas there are opportunities which have arisen
for commercial property development supporting the expansion of firms internationally.
Additional opportunities were noted in the residential property development sector to service the
growing number of buyers seeking to purchase homes outside the boundaries of their home
country. It is now evident that buyers are becoming more used to the concept of buying and
owning property outside their country of residence and as a result these buyers are becoming
more confident of buying, not only ‘off the plan’ without seeing the property but also of
purchasing or renting in other countries.
It is essential to undertake extensive market research prior to completing a successful
international property development where access to local knowledge and expertise ‘on the
ground’ is essential. Different emerging markets offer different opportunities within the various
market sectors for property development, although the level of each opportunity varies
considerably over time and should be monitored.
Along with additional opportunities there are numerous tangible risks, intangible risks and
associated barriers. The key barriers are those related to language and cultural issues, local
knowledge and practices, along with the benchmarking of relevant local standards of property
development. This is also directly applicable to the adherence of relevant legislation which
differs substantially between regions and also between countries. Property developers must
appreciate that the subtle yet significant differences in the way business is conducted can make
working outside of national boundaries a challenging yet rewarding experience. However
property developers who ignore or underestimate cultural issues do so at their peril.
It must be remembered that a lack of local market knowledge and market volatility can lead
developers to experience much lower returns and expose them to much higher risk than
anticipated. Many regions promote a ‘buy local’ culture so it is important to consider the culture
and environment of the locality or region surrounding the property development. Employing local
workers where possible will partly address these concerns, and for large projects a public
relations expert may be employed to ensure interested stakeholders are kept up-to-date with
important facets of the undoubtedly successful property development.

12.7 Case study: instant property development – Huoshenshan hospital, China

This case study examines the challenge of a completing a major specialised property development for
a government project within a very short period of two weeks. The project was the development of the
Huoshenshan hospital in Wuhan, China. The brief was for the construction of a two-level, 34,000 m2
(366,000 square feet) large-scale hospital to accommodate 1,000 patient beds. Whilst outside the
scope of most property developers it is advantageous to examine the process undertaken. The reason
for this short timeframe was the imminent need by the client (the Chinese government) to
accommodate many patients in Huoshenshan, Wuhan, China at the outbreak of the COVID-19
pandemic.
The two-storey, four-wing hospital features an intensive care unit, patient wards, consultation
rooms and medical equipment rooms, as well as separate quarantine wards to reduce the risk of cross-
infection (Engineering 2020). To complete the development in this extremely short timeframe it was
essential to undertake substantial preplanning. The largest single advantage was the use of
prefabricated modules assembled off-site and then moved to the site at the commencement of
construction. Therefore it was built using pre-fabricated modules assembled before arriving on-site to
reduce the cost of construction, as well as completion time (Hospital Management 2020).
On 24 January 2020 a total of 10 bulldozers, 35 excavators and a large quantity of trucks
commenced to clear and level the ground at the 3.2 hectare (8 acre) site (see Figure 12.3). Soon after
the foundations were laid workers assembled the frames of the units and constructed the field hospital.
It took 7,000 construction workers and 1,000 construction machines working 24 hours a day to
construct the facility (Engineering 2020).
Figure 12.3 Wuhan Huoshenshan hospital under construction (Source: Wikimedia Commons 2020a)

The use of pre-fabricated construction methods can potentially reduce standard construction
timelines by between 30 and 50%. Arguably the use of steel frame pre-fabricated units can reduce
conventional construction methods by up to 80% (Construction Dive 2020). All hospital units are
supported by pillars to keep them above the ground to assist with preventing soil pollution and also
accommodating pipelines (Engineering 2020). The foundation itself consists of concrete, although
under that surface are alternating layers of geotextiles made of synthetic fabric and waterproof mats.
The completed hospital is equipped with safety and protective equipment so it can provide enhanced
care to patients. Approximately 1,400 medical staff also are assigned to treat the patients at the
hospital (Construction Dive 2020)
Most often the primary benefits from using a pre-fabricated modular building approach is to
minimise (a) building cost and (b) waste. However for this project neither one was the main driver
behind this approach, rather the primary catalyst was to undertake an extremely fast construction
method (Figure 12.4).

Figure 12.4 Wuhan Huoshenshan hospital construction site (Source: Wikimedia Commons 2020b)

Further challenges were associated with the specialised requirements for the hospital. This building
was not designed as a conventional general practice hospital, it was limited to COVID-19 patients
only. Therefore the design and construction included a detailed brief about sterilisation requirements
and ensuring many different areas in the development are separate and sterilised. It was intended for
the hospital to incorporate assessment and triage areas, as well as incorporating a clinical laboratory, a
pharmacy and isolation rooms. The completed hospital included 30 highly specialised intensive care
units and isolation wards (Architectural Digest 2020). This case study provided an insightful
examination of how the requirements of a client can be met. Although the circumstances here are
extremely unusual, the continued uptake of pre-fabricated construction has been observed in many
different land uses including residential, commercial and now hospitals.

References and useful websites

Archdaily (2020) www.archdaily.com/933080/china-completes-hospital-in-10-days-to-fight-wuhans-coronavirus
(last accessed 25 March 2020).
Architectural Digest (2020) www.architecturaldigest.com/story/china-building-hospital-10-days-what-design-
must-get-right (last accessed 24 March 2020).
Awuah, K.G.B., Hammond F., Lamond, J. and Booth, C. (2015) ‘Impact of land use planning on real estate
development return in a developing world context’, in International Approaches to Real Estate
Development,edited by G. Squires and E. Heurkens, Taylor & Francis, pp. 123–36.
BBC (2020) www.bbc.com/news/in-pictures-51280586 (last accessed 2 April 2020).
Construction Dive (2020) www.constructiondive.com/news/china-aims-to-construct-coronavirus-hospitals-in-
less-than-2-weeks/571478/ (last accessed 29 March 2020).
Engineering (2020) www.engineering.com/BIM/ArticleID/19914/China-Built-Two-Hospitals-in-Just-Over-a-
Week.aspx (last accessed 28 March 2020).
ENR (Engineering News-Record) (2003) The Top International Contractors, 251:8, pp. 36–41.
Griffin, R.W. and Putstay, M.W. (2015) International Business, 8th edn, Pearson.
Hospital Management (2020) www.hospitalmanagement.net/news/coronavirus-first-hospital-china/ (last accessed
22 March 2020).
Johansson, B. and Karlsson, C. (2019) ‘Regional development and knowledge’, in Handbook of Regional Growth
and Development Theories, Edward Elgar.
Norwich University (2017) International Business Strategies in a Globalizing World, 1 September,
https://online.norwich.edu/academic-programs/resources/international-business-strategies-globalizing-world.
PWC (2020) Emerging Trends in Real Estate: The Global Outlook for 2019, PricewaterhouseCoopers,
www.pwc.com/gx/en/industries/financial-services/asset-management/emerging-trends-real-estate/global-
outlook-2019.html (last accessed 2 February 2020).
Reed, R.G. (2015) ‘Real estate development in the fastest growing free market democracy’, in International
Approaches to Real Estate Development, edited by G. Squires and E. Heurkens, Taylor & Francis, pp. 150–66.
Royal Institution of Chartered Surveyors (RICS), www.rics.org.
Sparke, M. (2019) ‘Globalisation and the politics of global health’, in The Oxford Handbook of Global Health
Politics, Oxford University Press.
United Nations (2019) World Investment Report, https://unctad.org.
Verbeke, A. and Asmussen, C.G. (2016) ‘Global, local or regional? The locus of MNE strategies’, Journal of
Management Studies, 53:6, pp. 1051–75. https://doi.org/10.1111/joms.12190.
Wikimedia Commons (2020a) Wuhan Huoshenshan Hospital under construction 04.jpg,
https://commons.wikimedia.org/w/index.php?
title=File:Wuhan_Huoshenshan_Hospital_under_construction_04.jpg&oldid=421685115 (last accessed 27
August 2020).
Wikimedia Commons (2020b) Wuhan Huoshenshan Hospital under construction 02.jpg,
https://commons.wikimedia.org/w/index.php?
title=File:Wuhan_Huoshenshan_Hospital_under_construction_02.jpg&oldid=421684194 (accessed 29 August
2020).
Zhang, C., Hong, S. and Ohana, M. (2019) ‘Measuring guanxi in Sino-Franco buyer and supplier relationship’,
Global Business and Organisational Excellence, 38:4, pp. 46–53. https://doi.org/10.1002/joe.21934.
Appendix
CPI by country, 2010–19

Source: based on World Bank (2020) World Bank Indicators, https://databank.worldbank.org/ (last
accessed 28 August 2020)

Country 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Afghanistan 2.18 11.80 6.44 7.39 4.67 −0.66 4.38 4.98 0.63 2.30
Albania 3.62 3.43 2.03 1.94 1.63 1.90 1.28 1.99 2.03 1.41
Algeria 3.91 4.52 8.89 3.25 2.92 4.78 6.40 5.59 4.27 1.95
Angola −60.50 13.48 10.28 8.78 7.28 −21.53 32.38 31.69 20.19 17.15
Armenia 8.18 7.65 2.56 5.79 2.98 3.73 −1.40 0.97 2.52 1.44
Aruba 2.08 4.32 0.63 −2.37 0.42 0.47 −0.93 −1.03 3.63 4.26
Australia 2.92 3.30 1.76 2.45 2.49 1.51 1.28 1.95 1.91 1.61
Austria 1.81 3.29 2.49 2.00 1.61 0.90 0.89 2.08 2.00 1.53
Azerbaijan 5.73 7.85 1.07 2.42 1.39 4.01 12.45 12.94 2.26 2.61
Bahamas, The 1.34 3.20 1.97 1.03 47.78 −30.24 −0.33 1.50 2.27 2.49
Bahrain 1.96 −0.40 2.76 3.30 2.65 1.84 2.80 1.39 2.08
Bangladesh 8.13 11.40 6.22 7.53 6.99 6.19 5.51 5.70 5.54 5.59
Barbados 5.82 9.43 4.53 1.81 1.77 −1.11 1.28 4.66 3.67 4.10
Belarus 7.74 53.23 59.22 18.31 18.12 13.53 11.84 6.03 4.87 5.60
Belgium 2.19 3.53 2.84 1.11 0.34 0.56 1.97 2.13 2.05 1.44
Benin 2.21 2.70 6.74 0.43 −0.55 0.22 −0.79 1.77 0.85 −0.92
Bhutan 7.04 8.85 10.92 7.01 8.27 4.55 3.22 4.96 2.72 2.73
Bolivia 2.50 9.88 4.52 5.74 5.77 4.06 3.62 2.82 2.27 1.84
Bosnia and Herzegovina 2.00 3.67 2.05 −0.09 −0.90 −1.04 −1.58 0.81 1.42 0.56
Botswana 6.95 8.46 7.54 5.88 4.40 3.06 2.81 3.31 3.24 2.77
Brazil 5.04 6.64 5.40 6.20 6.33 9.03 8.74 3.45 3.66 3.73
Brunei Darussalam 0.36 0.14 0.11 0.39 −0.21 −0.49 −0.28 −1.26 1.03 −0.39
Bulgaria 2.44 4.22 2.95 0.89 −1.42 −0.10 −0.80 2.06 2.81 3.10
Burkina Faso −0.76 2.76 3.82 0.53 −0.26 0.72 0.44 1.48 1.96 −3.23
Burundi 6.49 9.59 18.16 7.94 4.41 5.54 5.56 16.05 −2.81 −0.69
Cabo Verde 2.08 4.47 2.54 1.51 −0.24 0.13 −1.41 0.78 1.26 1.11
Cambodia 4.00 5.48 2.93 2.94 3.86 1.22 3.05 2.89 2.46
Cameroon 1.28 2.94 2.74 2.05 1.85 2.68 0.87 0.64 1.07 2.45
Canada 1.78 2.91 1.52 0.94 1.91 1.13 1.43 1.60 2.27 1.95
Chad −2.08 2.03 7.52 0.22 1.68 4.38 −0.79 −1.54 4.27 −0.97
Chile 1.41 3.34 3.01 1.79 4.72 4.35 3.79 2.18 2.43 2.56
China 3.18 5.55 2.62 2.62 1.92 1.44 2.00 1.59 2.07 2.90
Colombia 2.27 3.42 3.17 2.02 2.90 4.99 7.51 4.31 3.24 3.53
Congo, Rep. 0.39 1.76 5.01 4.63 0.91 3.17 3.19 0.45 1.15 2.21
Costa Rica 5.66 4.88 4.50 5.23 4.52 0.80 −0.02 1.63 2.22 2.10
Cote d’Ivoire 1.23 4.91 1.30 2.58 0.45 1.25 0.72 0.69 0.36 −1.11
Croatia 1.03 2.27 3.41 2.22 −0.22 −0.46 −1.13 1.13 1.50 0.77
Curacao 2.78 2.33 3.18 1.33 1.50 −0.48 −0.05 1.59 2.58 2.62
Cyprus 2.43 3.29 2.39 −0.40 −1.35 −2.10 −1.43 0.53 1.44 0.25
Czech Republic 1.47 1.92 3.29 1.44 0.34 0.31 0.68 2.45 2.15 2.85
Denmark 2.31 2.76 2.40 0.79 0.56 0.45 0.25 1.15 0.81 0.76
Djibouti 3.95 5.07 3.73 2.71 1.34 −0.85 2.74 0.57 0.15 3.32
Dominican Republic 6.33 8.46 3.69 4.83 3.00 0.84 1.61 3.28 3.56 1.81
Ecuador 3.55 4.47 5.10 2.72 3.59 3.97 1.73 0.42 −0.22 0.27
Egypt, Arab Rep. 11.27 10.06 7.11 9.47 10.07 10.37 13.81 29.51 14.40
El Salvador 1.18 5.13 1.73 0.76 1.14 −0.73 0.60 1.01 1.09 0.08
Equatorial Guinea 7.79 4.81 3.66 2.95 4.31 1.68 1.41 0.75 1.35 1.24
Estonia 2.97 4.98 3.93 2.78 −0.11 −0.49 0.15 3.42 3.44 2.28
Eswatini 4.51 6.11 8.94 5.62 5.68 4.95 7.85 6.22 4.81
Ethiopia −27.79 32.01 23.38 7.46 6.89 9.57 6.63 10.69 13.83 15.81
Fiji 3.69 7.28 3.42 2.91 0.52 1.37 3.86 3.35 4.08 1.77
Finland 1.18 3.42 2.81 1.48 1.04 −0.21 0.36 0.75 1.08 1.02
France 1.53 2.11 1.95 0.86 0.51 0.04 0.18 1.03 1.85 1.11
Gabon 1.46 1.26 2.65 0.51 4.69 −0.34 2.11 2.65 4.75 2.46
Gambia, The 5.05 4.80 4.25 5.70 5.95 6.81 7.23 8.03 6.52 7.12
Georgia 7.11 8.54 −0.94 −0.51 3.07 4.00 2.13 6.04 2.62 4.85
Germany 1.10 2.08 2.01 1.50 0.91 0.51 0.49 1.51 1.73 1.45
Ghana 10.71 8.73 7.13 11.67 15.49 17.15 17.45 12.37 7.81 7.18
Greece 4.71 3.33 1.50 −0.92 −1.31 −1.74 −0.83 1.12 0.63 0.25
Grenada 3.44 3.03 2.41 −0.04 −0.98 −0.52 1.65 0.91 0.80
Guatemala 3.86 6.21 3.78 4.34 3.42 2.39 4.45 4.42 3.75 3.70
Guinea 15.46 21.35 15.23 11.89 7.07 10.82 8.17 8.91 9.83 9.47
Guyana 3.73 4.98 2.39 1.90 0.85 −1.00 0.84 1.90 1.28 2.09
Haiti 4.83 6.33 5.02 4.77 3.44 6.73 11.50 10.68 12.48
Honduras 4.70 6.76 5.20 5.16 6.13 3.16 2.72 3.93 4.35 4.37
Hong Kong SAR, China 2.31 5.28 4.06 4.32 4.44 3.00 2.41 1.48 2.41 2.86
Hungary 4.86 3.93 5.65 1.73 −0.23 −0.06 0.39 2.35 2.85 3.34
Iceland 5.40 4.00 5.19 3.87 2.04 1.63 1.70 1.76 2.68 3.01
India 11.99 8.86 9.31 10.91 6.35 5.87 4.94 2.49 4.86 7.66
Indonesia 5.13 5.36 4.28 6.41 6.39 6.36 3.53 3.81 3.20 3.03
Iran, Islamic Rep. 10.09 26.29 27.26 36.60 16.61 12.48 7.25 8.04 18.01 39.91
Iraq 2.88 5.80 6.09 1.88 2.24 1.39 0.56 0.18 0.37
Ireland −0.92 2.56 1.70 0.51 0.18 −0.29 0.01 0.34 0.49 0.94
Israel 2.71 3.47 1.68 1.57 0.49 −0.63 −0.54 0.24 0.81 0.84
Italy 1.53 2.78 3.04 1.22 0.24 0.04 −0.09 1.23 1.14 0.61
Jamaica 12.61 7.53 6.90 9.34 8.29 3.68 2.35 4.38 3.74 3.91
Japan −0.72 −0.27 −0.05 0.35 2.76 0.79 −0.12 0.47 0.98 0.48
Jordan 4.85 4.16 4.52 4.82 2.90 −0.88 −0.78 3.32 4.46 0.76
Kazakhstan 5.10 5.85 6.71 6.67 14.55 7.44 6.02 5.25
Kenya 3.96 14.02 9.38 5.72 6.88 6.58 6.30 8.01 4.69
Korea, Rep. 2.94 4.03 2.19 1.30 1.27 0.71 0.97 1.94 1.48 0.38
Kosovo 3.48 7.34 2.48 1.77 0.43 −0.54 0.27 1.49 1.05 2.68
Kuwait 4.50 4.84 3.26 2.68 2.91 3.27 3.20 2.17 0.54 1.09
Kyrgyz Republic 7.97 16.64 2.77 6.61 7.53 6.50 0.39 3.18 1.54 1.13
Lao PDR 5.98 7.57 4.26 6.37 4.13 1.28 1.60 0.83 2.04 3.32
Latvia −1.08 4.37 2.26 −0.03 0.62 0.17 0.14 2.93 2.53 2.81
Lebanon 3.98 4.97 6.58 4.82 1.85 −3.75 −0.78 4.32 6.08 3.01
Lesotho 3.46 5.04 6.05 4.87 5.37 3.22 6.60 4.45 4.75 5.19
Liberia 7.29 8.49 6.83 7.58 9.86 7.75 8.83 12.42 23.56
Libya 2.80 15.52 6.06 2.61
Lithuania 1.32 4.13 3.09 1.05 0.10 −0.88 0.91 3.72 2.70 2.33
Luxembourg 2.27 3.41 2.66 1.73 0.63 0.47 0.29 1.73 1.53 1.74
Macao SAR, China 2.81 5.80 6.11 5.51 6.05 4.56 2.37 1.23 3.01
Madagascar 9.25 9.48 5.71 5.83 6.08 7.40 6.04 8.59 8.60 5.63
Malawi 7.41 7.62 21.27 27.28 23.79 21.87 21.71 11.54 12.42 9.37
Malaysia 1.62 3.17 1.66 2.11 3.14 2.10 2.09 3.87 0.88 0.66
Maldives 0.50 2.82 −0.13 0.22
Mali 1.11 2.96 5.32 −0.61 0.88 1.45 −1.80 1.76 0.30 −1.66
Malta 1.52 2.96 2.38 1.18 0.31 1.10 0.64 1.36 1.16 1.64
Mauritania 6.28 5.69 4.90 4.13 3.53 3.24 1.49 2.28 3.05 2.30
Mauritius 2.93 6.52 3.85 3.54 3.22 1.29 0.98 3.67 3.22 0.41
Mexico 4.16 3.41 4.11 3.81 4.02 2.72 2.82 6.04 4.90 3.64
Micronesia, Fed. Sts. 3.31 5.08 5.02 1.75 0.65 −0.30 −1.04 0.52
Moldova 7.48 7.69 4.55 4.60 5.09 9.68 6.36 6.57 3.05 4.84
Mongolia 10.05 8.41 14.33 10.49 12.25 5.73 0.74 4.31 6.81 7.30
Montenegro 0.65 3.45 4.15 2.21 −0.71 1.55 −0.27 2.38 2.61
Morocco 0.99 0.91 1.29 1.88 0.44 1.56 1.64 0.75 1.91 0.20
Mozambique 12.43 11.17 2.60 4.26 2.56 3.55 17.42 15.11 3.91 2.78
Myanmar 7.72 5.02 1.47 5.64 4.95 9.45 6.93 4.57 6.87 8.83
Namibia 4.87 5.01 6.72 5.60 5.35 3.40 6.73 6.14 4.29 3.73
Nepal 9.33 9.23 9.46 9.04 8.36 7.87 8.79 3.63 4.06 5.57
Netherlands 1.28 2.34 2.46 2.51 0.98 0.60 0.32 1.38 1.70 2.63

New Caledonia 2.43 1.75 1.28 0.18 0.57 0.58

New Zealand 2.30 4.03 1.06 1.13 1.23 0.29 0.65 1.85 1.60 1.62
Nicaragua 5.46 8.08 7.19 7.14 6.04 4.00 3.52 3.85 4.95 5.38
Niger 0.80 2.94 0.46 2.30 −0.93 −0.58 1.65 2.80 2.97 −2.49
Nigeria 13.72 10.84 12.22 8.48 8.06 9.01 15.68 16.52 12.09 11.40
North Macedonia 1.51 3.90 3.32 2.79 −0.28 −0.30 −0.24 1.35 1.46 0.77
Norway 2.42 1.28 0.70 2.12 2.04 2.17 3.55 1.88 2.76 2.17
Oman 3.26 4.04 2.95 1.05 1.02 0.07 1.11 1.60 0.88 0.13
Pakistan 12.94 11.92 9.68 7.69 7.19 2.53 3.77 4.09 5.08 10.58
Palau 1.44 4.67 3.61 3.35 4.19 0.95 −1.04 1.28
Panama 3.49 5.88 5.70 4.03 2.63 0.14 0.74 0.88 0.76 −0.36
Papua New Guinea 6.01 4.44 4.54 4.96 5.22 6.00 6.67 5.42 4.72 3.64
Paraguay 4.65 8.25 3.68 2.68 5.03 3.13 4.09 3.60 3.98 2.76
Peru 1.53 3.37 3.66 2.81 3.24 3.55 3.59 2.80 1.32 2.14
Philippines 3.79 4.72 3.03 2.58 3.60 0.67 1.25 2.85 5.21 2.48
Poland 2.58 4.24 3.56 0.99 0.05 −0.87 −0.66 2.08 1.81 2.23
Portugal 1.40 3.65 2.77 0.27 −0.28 0.49 0.61 1.37 0.99 0.34
Qatar −2.43 1.14 2.32 3.22 3.35 1.81 2.68 0.39 0.26 −0.67
Romania 6.09 5.79 3.33 3.98 1.07 −0.59 −1.54 1.34 4.63 3.83
Russian Federation 6.85 8.44 5.07 6.75 7.82 15.53 7.04 3.68 2.88 4.47
Rwanda −0.26 3.10 10.27 5.94 2.33 2.53 7.18 8.27 −0.31 3.35
Samoa 0.78 5.24 2.05 0.61 −0.41 0.72 1.30 1.75 4.20 0.98
San Marino 2.59 2.90 2.83 1.60 1.11 0.15 0.57 1.05
Sao Tome and Principe 13.34 14.33 10.64 8.11 7.00 5.25 5.43 5.70 7.86
Saudi Arabia 5.34 5.83 2.87 3.53 2.24 1.21 2.07 −0.84 2.46 −2.09
Senegal 1.23 3.40 1.42 0.71 −1.09 0.14 0.84 1.32 0.46 1.76
Serbia 6.14 11.14 7.33 7.69 2.08 1.39 1.12 3.13 1.96 1.85
Seychelles −2.40 2.56 7.11 4.34 1.39 4.04 −1.02 2.86 3.70 1.81
Sierra Leone 7.19 6.79 6.59 5.52 4.65 6.69 10.88 18.22 16.03 14.80
Singapore 2.82 5.25 4.58 2.36 1.03 −0.52 −0.53 0.58 0.44 0.57
Sint Maarten (Dutch) 1.34 4.58 4.02 2.53 1.89 0.33 0.11 2.19
Slovak Republic 0.96 3.92 3.61 1.40 −0.08 −0.33 −0.52 1.31 2.51 2.66
Slovenia 1.80 1.80 2.60 1.77 0.20 −0.53 −0.05 1.43 1.74 1.63
Solomon Islands 1.05 7.34 5.91 5.39 5.17 −0.57 0.51 0.49 3.46 1.63
South Africa 4.06 5.02 5.72 5.78 6.14 4.51 6.59 5.18 4.50 4.12
South Sudan 1.17 47.31 45.08 −0.04 1.66 52.81 379.85 187.85
Spain 1.80 3.20 2.45 1.41 −0.15 −0.50 −0.20 1.96 1.68 0.70
Sri Lanka 6.22 6.72 7.54 6.91 3.18 3.77 3.96 7.70 2.14 3.53
St. Kitts and Nevis 0.85 5.84 0.82 1.11 0.25 −2.30 −0.69 0.69 −1.04
St. Lucia 3.25 2.77 4.18 1.47 3.52 −0.98 −3.09 0.12 1.94

St. Vincent and the Grenadines 0.75 3.19 2.60 0.81 0.19 −1.73 −0.15 2.15 2.32
Sudan 13.25 18.10 35.56 36.52 36.91 16.91 17.75 32.35 63.29 50.99
Suriname 6.94 17.71 5.01 1.92 3.38 6.89 55.41 22.00
Sweden 1.16 2.96 0.89 −0.04 −0.18 −0.05 0.98 1.79 1.95 1.78
Switzerland 0.69 0.23 −0.69 −0.22 −0.01 −1.14 −0.43 0.53 0.94 0.36
Syrian Arab Republic 4.40 4.75 36.70
Tajikistan 6.42 12.43 5.83 5.01 6.10 5.71 6.00
Tanzania 6.20 12.69 16.00 7.87 6.13 5.59 5.17 5.32 3.49 3.46
Thailand 3.25 3.81 3.01 2.18 1.90 −0.90 0.19 0.67 1.06 0.71
Timor−Leste 6.77 13.50 11.80 11.08 0.73 0.55 −1.34 0.56 2.64
Togo 1.45 3.56 2.58 1.83 0.19 2.59 1.29 −0.98 0.93 0.67
Tonga 3.53 6.27 1.15 0.78 2.51 −1.05 2.58 7.44
Trinidad and Tobago 10.55 5.11 9.26 5.20 5.68 4.66 3.07 1.88 1.02
Tunisia 3.34 3.24 4.61 5.32 4.63 4.44 3.63 5.31 7.31 6.72
Turkey 8.57 6.47 8.89 7.49 8.85 7.67 7.78 11.14 16.33 15.18
Uganda 3.98 15.13 12.68 4.90 3.07 5.41 5.45 5.64 2.62 2.87
Ukraine 9.37 7.96 0.57 −0.24 12.07 48.70 13.91 14.44 10.95 7.89
United Arab Emirates 0.88 0.88 0.66 1.10 2.35 4.07 1.62 1.97 3.07 −1.93
United Kingdom 2.49 3.86 2.57 2.29 1.45 0.37 1.01 2.56 2.29 1.74
United States 1.64 3.16 2.07 1.46 1.62 0.12 1.26 2.13 2.44 1.81
Uruguay 6.70 8.09 8.10 8.58 8.88 8.67 9.64 6.22 7.61 7.88
Vanuatu 2.76 0.87 1.35 1.46 0.80 2.48 0.84 3.08 2.33 2.76
Vietnam 9.21 18.68 9.09 6.59 4.08 0.63 2.67 3.52 3.54 2.80
West Bank and Gaza 3.75 2.88 2.78 1.72 1.73 1.43 −0.22 0.21 −0.20 1.58
Zambia 8.50 6.43 6.58 6.98 7.81 10.11 17.87 6.58 7.49 9.15
Zimbabwe 3.03 3.48 3.72 1.63 −0.21 −2.41 −1.57 0.91
Arab World 3.91 4.75 4.61 3.24 2.77 1.81 2.07 1.97 2.46 1.34
Central Europe and the Baltics 1.80 4.13 3.33 1.44 0.05 −0.46 −0.05 2.08 2.53 2.66
East Asia & Pacific 3.06 5.08 3.01 2.58 2.51 0.79 1.27 1.85 2.43 1.77
Euro area 1.53 3.29 2.49 1.22 0.24 0.04 0.18 1.38 1.70 1.45
Europe & Central Asia 2.42 3.67 2.77 1.73 0.59 0.34 0.37 1.88 2.01 1.78
European Union 1.53 3.29 2.66 1.22 0.20 −0.06 0.18 1.43 1.74 1.63
Latin America & Caribbean 3.52 5.04 3.90 2.61 3.40 1.68 1.69 2.31 2.43 2.76
Least developed countries: UN 4.83 7.34 6.44 5.52 4.27 3.96 5.45 5.15 3.49 3.32
classification
Middle East & North Africa 3.75 4.52 3.73 2.96 2.35 1.49 1.85 1.49 2.00 1.09
North America 1.71 3.03 1.79 1.20 1.76 0.62 1.35 1.86 2.36 1.88
South Asia 8.13 9.23 9.31 7.53 6.99 4.55 4.17 4.52 3.39 4.55
Sub-Saharan Africa 3.96 5.69 6.59 4.87 4.36 3.55 5.45 5.48 4.09 2.78
World 3.29 4.84 3.71 2.61 2.35 1.39 1.49 2.23 2.46 2.30
Index

access to site 7, 13, 16–18, 42, 44, 47

accountants 11, 34; see also quantity surveyors (QS)
acquisition: decision pathway, in preparation for 11–12
as part of development process 11–12
of sites 5, 11–12, 52, 59, 71, 143, 294
advertising 59
marketing through 280–1 see (marketing)
regulations 174
affordable land purchase price approach 84
AIDA marketing strategy 285
amenity societies 30, 170, 173
anchor tenants 20, 47, 109
appeals, planning 199–200
architects 11, 32–3, 52, 180, 214–15, 217, 223, 334
certificates for building costs 145
handover of completed development 227–8
issuing of project changes 211
resident 226
Royal Institution of British Architects 208
snagging list preparation 227–8
architectural drawings 15, 109, 181, 188–9, 209, 211, 214–15, 218–21, 224–5
Armstrong Creek (case study) 76–81
Asian Financial Crisis (AFC) 174
auctions 53, 56

banks 25–8, 30–1, 25, 26, 93–4, 122–4, 135–8

clearing 25, 122–3, 151–2
corporate loans 136, 137, 151, 152
environment-related policies 315–6
foreign 124, 136
globalisation of the banking sector 151
interest rate options 156
investment loans 154–5
merchant 122–3, 136, 122–3, 151, 155
project loans 151–2, 154–5
short term finance 84
syndicated project loans 155
syndicates of 128
bar charts 229–31, 207
Barkly Street development (case study) 114–19
Barras, R. 172
base rent 147, 148
big data 267
Bills of Quantities 209, 211–12
BIM (building information model) 274–5
BREEAM 320, 324–5, 329
British Property Federation 208
brochures, marketing 285–7
brownfield sites 48, 66, 270
Bruntland Commission/Report 185
building contractors see contractors
building contracts see contracts
building costs 15, 84–7, 91–2, 97–9, 100, 103, 107, 109–12, 126, 135, 147
architect’s certificates for 147
financial reports 231, 233, 311; see also development appraisal
building regulation fees 93
buildings: complicated, design and build erection 18, 47, 109, 208, 216–20
demolition work on 66, 114, 115, 188, 193–4, 319
environmental impact 317
green 36, 321
handover of completed development 227–9
leased see (leaseholds/leases)
listed 17, 188, 193–4
name and identity of 282
occupiers see (occupiers)
opening ceremonies 292
repair obligations 301
sustainable 27, 36, 209, 313–14, 317, 313–14; see also (sustainable development)
building societies 189
business cycles 36, 169, 171–4
‘buy local’ 340, 345

CAD (computer aided design) 180, 287, 292

Caldes Developer Model 270
Canary Wharf (case study) 326–30
carbon: emissions 316, 318, 325, 342
low carbon building 312
low carbon transport 62
sink 320
Carnegie, Andrew 308
CASBEE 324
cashflow method 92–9, 93–7, 100
discounted 99–102, 101, 120, 124
cashflow tables and graphs 102
Castle Towers (case study) 202–4
checklists for development activities 207, 234–5
Clash detection 274–5
clearing banks 123, 136, 152
climate change 11, 36, 49, 186, 193, 200–1, 306, 311–13, 342; see also global warming
cluster development 338
collateral warranties 34, 150, 154, 210, 218–19, 223, 302
combined or integrated system 272–3
commitment phase 12
competition process 5
compulsory purchase powers 12, 21, 58, 60
computer technology 264, 266, 273, 276
3D modelling/ design software 109, 206, 266, 274, 292
4D modelling 292
Argus software 270, 273
BIM (building information model) 274–5
CAD 180, 287, 292
future trends 248
information tools 271
installation options 272
marketing 279
mobile computing 267
program users 272
project management software 273
property development appraisal software 269–70
real estate agent, realtor or letting agent software 273
scheduling tools 271
software package options 271–3
spreadsheets 268–9
construction 206–42
contractors 28–9, 211–17, 220–2, 225, 237, 317
contract terms 72, 215
cost calculation 106
design and build approach 18, 33–4, 208, 217–19
design-bid-build traditional approach 208–16
economists 208
modular 346
management contracting 208, 220–2
partnering 237–8
procurement 207–8, 220
professional team member roles 31–4
project management see (project management/managers)
public private partnerships see (public-private partnerships (PPPs))
and sustainability 14, 317–20
Consumer Price Index 126
global inflation 125, 349–52
contamination 65–9, 84, 92
case study of due diligence and contaminated sites 114–19
pollution from construction process 318
contingency allowance 97
contractors 28–9
building 28–9
calculating the cost 213–14
choosing 188–9
 design and build approach 216–19
duration of contract 214–16
management contractors 220–2
paying 213
project manager’s appointment of 223
selecting the contractor 211–13
contracts 18
conditional 72, 108
duration of 214–16
exchange of 57, 63
packaging of 221
PFI 236–7
risks of 218
signing of 72
Subject to Satisfactory Planning Consent status of 72
Copenhagen Accord 313
corporate loans 151–2, 315
corporate responsibility (CR) 308, 309
corporate social responsibility (CSR) 308–11
large corporation behaviour 336
and planning 186
and sustainability 317, 322, 323
types of 309–11
costing 14–16
COVID-19 36, 38, 45, 114, 160, 164, 172, 174, 260, 262, 321, 345, 346
CPI, global inflation 123, 125, 349–52
CSR see corporate social responsibility
currency risk 341

debentures 158
debt finance 27, 124, 140, 152, 157–8
bonds 27, 128, 158–9
debentures 158
unsecured loan stock 138
defects: latent defects insurance 210
liability period 228
snagging lists 227
demand: site-specific analysis 6, 244, 249, 251
supply and 37, 42, 44
demise 298, 301
design 14–16
commitment phase for design changes 16
computer aided (CAD) 180, 287, 292
drawings 15, 16, 56, 109, 181, 188, 189, 209, 215, 218, 224–5
plans 16
design and build approach 216–19
design-bid-build approach 208–16
desk research 252
developers: appraisal by see (development appraisal, financial perspective; development appraisal, risk
perspective)
base rent arrangement 147, 148
and contractors see (contractors)
corporate social responsibility see (corporate social responsibility (CSR))
and the design and build approach 216–19
and the environment see (environment)
finance see (development finance)
guarantees and performance obligations 149
joint venture partners 143–4
lettings by see (leaseholds/leases)
and management contractors 237
ongoing responsibilities 302
priority yield arrangement 149
profit/risk allowance 96–7
profit with forward-funding 145–6
public-private partnerships with see (public-private partnerships (PPPs))
site acquisition see (development sites: acquisition)
site initiation by 48–51
as stakeholders 27
visionary skills of 11, 44, 167
development appraisal, financial perspective 82–119
affordable land purchase price approach 84–5
building regulation fees 93
cashflow method 102
contingency allowance 96
conventional technique of financial evaluation 83–7
developer’s profit/risk allowance 96–7
discounted cashflow method 103–6
evaluation of profit 84–5
funding fees 93
interest costs 93–5
investment risk/return model 83–4
land costs 84
letting agent’s fees 95
net terminal approach 103, 104
planning fees 92
professional fees 92
promotion costs 95–6
purchaser’s costs 91
residual valuation 83–7
sale costs 96
site investigation fees 92
stamp duty 91
development appraisal, risk perspective 83, 106–8
building costs 91–2
investment yield 110–11
land costs 108
rental value 109
sensitivity analysis 111–14
short-term interest rates 110
Development Corporations 327
development finance 26, 121–61
bank loans 151–6; see also (banks)
base rent arrangement 148
bonds 158
building society loans 25, 135–8
collateral warranties 150, 154
corporate finance 136
debentures 158
debt finance 140, 158
design and costing 14–16
and development site investigation 63
eco finance 315
economic consultants 31
and the environment 306–7
equity partners 73
evaluation see (development appraisal, financial perspective)
future trends 126
and the global market 38–9
ground rent 24, 62, 73, 74
historical perspective 122–4
interest costs 93, 94
interest rate options 156
joint venture partners 143–4
Loan to Cost (LTC) 155
loan-to-value ratio (LVR/LTV) 38, 93, 137
long-term funding 122
mezzanine finance 155
mortgages 156–7
overseas investors 141–2
priority yield arrangement 149
private investors 142–3
profit-seeking 10
project loans 152–4
property companies 138–140
public/private project distinctions 24
securitisation 159–160
short-term 14, 26, 83, 106, 110, 112, 151
sources 121–161
and supply and demand 124, 161
and sustainability 315–6
syndicated project loans 155–6
unitisation 159–60
unsecured loan stock 158–9
development process 4–20
acquisition 11–13; see also (development sites: acquisition)
commitment 17–18
‘commitment phase’ for design changes 5
consent and permission 16–17
contract signing 18
decision pathway, in preparation for acquisition 12
 design and costing 14–16
financing see (development finance)
implementation 18–19
initiation 5–9
investigation and analysis of viability 9–11; see also (planning)
leasing/ management/disposal 19–20; see also (leaseholds/leases)
legal investigation 11–13
main stakeholders in 21–36; see also (stakeholders)
physical inspection and examination 13
development sites 42–81
access 61–2
acquisition 11–14, 48, 49, 61, 63, 72–4
advertising 53, 96, 194, 282–4; see also (marketing)
auctions 56–7
boards and hoardings on site for marketing 282–5
brownfield 48, 66, 270
competition process 55–6
contamination 13, 48, 49, 64, 65–9
developer initiation 5–9
ecological impact and issues 317; see also (environment)
finance and site investigation 92
formal tenders 54
government assistance see (government assistance)
greenfield 48, 187
ground investigation 64–5
handover inspection 227–9
identification 42–7
industrial 19, 37, 46–7, 65, 89, 129
informal tenders and invitations to offer 54
infrastructure 61
initiation avenues 59–1
investigation fees 92
landowner initiatives 53–7
legal title 70–1
office development 45
open ‘for sale’ listings 54–5
and public-private partnerships see (public-private partnerships (PPPs))
real estate agent approach 51–3; see also (real estate agents)
residential 44–5
retail 45–6, 89, 109, 132, 133, 202–4
services 69
site-specific analysis 251–4
supervision by project managers 217
surveys 68, 92, 224
and sustainability 314–17; see also (sustainable development)
waste management 315, 319
and zoning 316, 317
development timetable 94, 110, 231
direct marketing 290
discounted cashflow (DCF) method 103–6, 130, 138, 270
disposal 19–20; see also leaseholds/leases
drop lock loans 157

Earth Summit, 1992, Rio de Janeiro 185

eco finance 315
economic consultants 31–2
economy: global see (global economy)
local see (local economy)
national 37–8
electricity production 318
email 51, 234
addresses 283, 289
alerts 30
databases 278
marketing 96, 291
surveys 253
embodied energy 318, 320, 323
emerging markets and internationalism see international property development
Empire State Building (case study) 179–82
energy: embodied 318, 320
renewable 275, 316, 318
enforcement notices 70, 198, 199
engineers 33, 217, 228
environment: brownfield sites 48, 66
climate change 11, 36, 49, 184, 186, 200, 312, 313, 325
consultations with pressure groups 193
and development report 305
Earth Summit, 1992, Rio de Janeiro 185
environmental impact assessments/studies 47, 191–4
environmental rating tools 320, 324–6
environmental statements 191–2
greenfield sites 48, 187
greenhouse gas emissions 312
liabilities 315
and planning 185
pollution 47, 65, 189, 192, 259, 309; see also (contamination)
risks 315
and sustainable development see (sustainable development)
World Commission on Environment and Development 305
Environmental Health Officers 189
Environmental Management System (EMS) 311–12
equity finance 139, 152
new shares 157
retained earnings 158
rights issues 157
equity partners 73
Estate Master DF 270, 273
Estates Gazette 53
Estimated Rental Value (ERV) 84, 86, 97
evaluation process see development appraisal, financial perspective; development appraisal, risk
perspective

Facebook 273
Face Time 311
Factories Acts 191
fair market rent 88
fees: building regulation 93
engineer 88
funding 93
letting agent’s 95
planning application 189
professional 18, 92, 216, 219
site investigation 154
feng shui 336
finance see development finance
Finance Act 2006 (UK) 140
financial institutions 25–8, 35, 74, 93, 122, 125–35, 157, 315
and the hedge against inflation 126, 130
and illiquidity of property 127–8
and indivisibility of property 127–8
institutional leases 126–7
insurance companies see (insurance companies)
and the lack of a centralised marketplace 128
life assurance companies 125
management 125
pension funds see (pension funds)
real estate investment trusts 140–1
research and performance measurement 128–35
unit trusts 125
financial reports 231–4
FinTech see PropTech
flyers 285, 287
Ford, Henry 308
forecasting 254–6
formal tenders 54
forward-funding 26, 110, 122, 125, 145–6, 151
developer’s guarantees and performance obligations 151
yield 147
fossil fuels 306
freehold titles 72
funding fees 93

Gantt charts 229, 230, 270

gardens 329
gearing 138, 139
Geographical Information Systems (GIS) 249, 273
global economy 39, 141, 336
GFC see (Global Financial Crisis)
Global Financial Crisis (GFC) xii, 2, 122, 123, 124, 129, 135, 164, 172, 173, 177
 and property cycles 164, 172, 173
global inflation CPI 125, 349–52
globalisation 2, 151, 201, 326, 332, 333, 334, 335
of the banking sector 151
global markets 336–7; see also (international property development)
of property development 336–7
Global Reporting Initiative (GRI) 311
global warming 312, 313, 342
government agencies: as stakeholders 23–4
for urban regeneration 74–5
government assistance 74
agencies 74–5
grants 28, 40, 75
greenfield sites 48, 187
greenhouse gases 312, 313, 318
grey water 321
Griffin, R.W. and Putstay, M.W 342–3
ground investigation 64, 68, 92
ground leases 18, 24, 74
ground rent 24, 59, 62, 73, 74, 143
ground source heat pumps (GSHPs) 318

Haier 336
health 65, 180, 236, 262, 314, 316, 320, 321
Health and Safety Executive 189
Heating 312, 318
design 209
ground source heat pumps 318
solar photovoltaic panels 318
hedge against inflation 126, 130
hedging, interest rate 156
Highway Authorities 201
hoardings 282–5
hot-desking 45
Huoshenshan Hospital (case study) 345–7
HQE 325
hybrid financiers 25

ICT see computer technology

illiquidity, property 127
IMF (International Monetary Fund) 335
indivisibility, property 127
industrial development sites 19, 37, 46–7
informal tenders 54
information and communications technology see computer technology
InfoTech see PropTech
infrastructure 22, 61, 77
and economic development 22
and government agencies 23–4, 74
international 334
 local authority initiatives 23
off-shore costs 312
and PPPs 236
railway 62
and site access 49
initial purchase offering (IPO) 139
in-house land buyers 294
insulation 318, 321
insurance: and handover of completed development 227–9
latent defects 210–11
public indemnity (PI) 210
insurance companies 22, 25, 122, 123, 124, 135, 156, 215
interest costs 99–100, 102
short-term interest rates 110
interest rate options 156
inter-generational equity 306
internal rate of return (IRR) 105, 130
International Monetary Fund (IMF) 335
international property development 332–43
approaches to balancing global expansion with local market 333
barriers and limitations 339–40
cluster development 338
developing an international strategy 336–7
globalisation of property development 3, 201, 332, 333, 336–7; see also (globalisation)
global strategy 341
multidomestic strategy 341
risks 344
transnational strategy 341
trends 170; see also (globalisation)
International Valuation Standards Committee 82
internet: and internationalism/globalisation 288, 333
and multi-national companies 333
online/email marketing 96, 282, 284, 285, 287
presence 290
research 128, 256
social media 267, 273; see also (email)
intra-generational equity 306
investment loans 154, 155
investment risk/return model 83–4
investment yield: and risk 106–7
variable in net development value 87, 89–91
ISO 14001 311, 312

Joint Contractors Tribunal (JCT) 208, 218, 223

joint venture (JV) companies 63, 108, 143–4
Juglar, Clement 169
‘just in time’ (JIT) approaches 47

Kondratieff cycle 170

Kuznet cycle 170
land assembly 58–60
land banking 18, 26, 48
land contamination 65, 84, 92
land costs 91, 106
land for development see development sites
landlords 19, 116–17, 271, 272, 273
landlord’s fixtures and fittings 270
landowners 12, 21–2
initiatives by 55, 59
and planning obligations 197
latent defects insurance 210, 302
leaseholds/leases 19, 73, 74, 111, 126, 134, 147, 243, 295, 300, 302
and agents 95
definition 88
demise 298
disposal 19
and forward-funding 298
ground leases 18, 24
institutional leases 126–7
lease terms 70, 111
and market information 285–6
monitored by agents 265
rent 88, 147
review 20
and risk 121
sale and leaseback 150–1
and tenants 134, 301; see also (rent)
LEED 324, 325
legal investigation 11–12
legal title 70–1
lenders 14, 25–8, 71, 122, 155, 156, 160
banks see (banks)
building societies 135–8
environment-related policies 315
funding fees 93
letting agent’s fees 95
lettings see leaseholds/leases
life assurance companies 125
lighting, energy efficient 204, 329
LinkedIn 273
listed buildings 17, 188, 193, 194
Loan to Cost (LTC) 155
loan-to-value ratio (LVR/LTV) 38, 93, 137
local authority initiatives 57–61
economic development 57–9
as equity partners 63
infrastructure 59
land assembly 59
planning application 50, 188
local development partner 43
local economy 37, 177, 247, 248, 250, 252, 329, 339, 340
Local Land Charges register 70
local market 142, 252, 255, 295, 338
local planning authorities (LPAs) see planning: authorities
LTC (Loan to Cost) 155
LTV see loan-to-value ratio
LVR see loan-to-value ratio

McDonald’s 335
magazine advertising 288, 289
management 10, 20, 32, 42, 128, 142, 154, 159, 202
contracting 29, 33
financial institutions 125, 136
project management/managers see (project management/managers)
marketing 278–303
advertisements 231, 288–9
AIDA strategy 285, 86
approaches 280–1
brochures 285–8
with computer simulations 287
direct mail 290
email 291
internet 156, 285, 290
and legislation 286, 299
research 247
and the naming of buildings/ developments 56, 282
opening ceremonies 292
particulars 285–8
promotion costs 95–6
and public relations 293–4
radio 284, 289
show suites and offices 292–3
with site boards and hoardings 282–3
a sustainable development 321, 322
television 280, 289, 290
of unique selling points 281, 317
market rent 52, 74, 83, 88, 107, 128, 147, 255, 299
market research 9, 10, 30, 31, 42, 84, 173, 243–62
agent’s role in 251, 254
analysts 31–2, 251
best/worst case scenarios 247
broad to specific approaches 245
case study of due diligence and contaminated sites 114–19
cross-tabulation 246
desk research 252
forecasting 254–5
impact 256–7
meanings of 244
portfolio analysis 244, 256
and the prevailing real estate market conditions 247, 250, 253, 280
 qualitative surveys 253
quantitative analysis 253
real estate market information 249
relationship between areas of 245
site-specific analysis 251–2
sourcing real estate market information 248
strategic analysis 251
supporting information 250
and sustainability 321–2
SWOT analysis 254, 343
merchant banks 122, 123, 125, 136, 151, 155
mezzanine debt 155
Microsoft: Excel 264, 266, 268, 269, 270
Word 269, 290
mobile staff 45
Modelski, G. 170
modular buildings 346
mortgages 31, 70, 122, 123, 138, 141, 156–7
MSCI index 131, 132, 133

national economy 37–8

net asset value (NAV) 139, 157
net development value (NDV) 87, 91, 96
and investment yield variable 97
and rent variable 148
net lettable area (NLA) 88, 109, 148
net terminal approach 103, 104
networking 29, 52, 53, 165, 253
newspaper advertising 53, 288, 289
Niehans, J. 169
non-government organisations (NGOs), sustainability reporting 311

objectors 24, 34–5

occupiers 12, 20, 31, 35–6, 110, 131, 253, 257, 268, 274, 289, 293, 301, 302, 321
anchor tenants 19, 46, 109, 260
leasing see (leaseholds/leases)
repair obligations 301
sustainable buildings 36
tenant covenant 134
tenant risk 12, 298, 301
tenant’s guide 287
tenants’s financial position 301
office development sites 45, 102
Office for National Statistics (ONS, UK) 337
opening ceremonies 292
open market 51, 53, 54, 60, 71, 300
Our Common Future 305
overseas investors 38, 141–2, 333

partnering 237–8; see also public-private partnerships (PPPs)

party wall agreements 96
Peabody, George 308
pension funds 25, 123, 125, 128, 159, 160, 161
peppercorn rent 62, 73
Petronas Towers (case study) 239–42
PFI (Private Finance Initiative) 236
PINCs (Property Income Certificates) 159
planners, as stakeholders 24–5
planning 184–204
appeals 199–200
applications 186–91, 194
authorities 9, 25, 31, 35, 187, 192
consent and permission 195–6
consultants 17, 25, 31
control breaches 198–9
design plans 295
enforcement notices 198
and the environment 185
evaluation see (development appraisal, financial perspective); development appraisal, risk
perspective
fees 92–3
fees for applications 189
future directions 200–1
market research see (market research)
obligations/agreements 197–8
of promotional campaign 281
and the process in the UK 190
satisfactory planning consent 72
and sustainability 316–17; see also (development process)
pollution 47, 65, 189, 192, 259, 309, 313, 318; see also contamination
portfolio analysis 244, 249, 256
poster advertising 289
priority yield arrangement 148, 149
Private Finance Initiative (PFI) 236
private investors 142–3
private-public partnerships see public-private partnerships (PPPs)
procurement 207–8, 216, 219, 222, 236
professional fees 18, 92, 100, 106, 219
profit-seeking 10, 28
program users 272–3
project changes 220
project loans 152–4
syndicated 155–6
project management/managers 10, 16, 18, 32, 33–4, 55, 92, 107, 109, 223–36
appointing the contractor 225
checklists 234
financial reports 231–2
handover of completed development 227–8
monitoring of construction progress 226
precontract preparations 94
 preparation of contract documents 224
site supervision 226
software for 229
promotion costs 95–6, 106
property companies 138–40
property cycles 163–82
and business cycles 172–3
and the changing nature of the real estate market 167
characteristics of a typical cycle phase 164
definition 164
and equilibrium in a real estate market 175, 176
existence of 164, 165, 168, 169
and external shift in demand for real estate 176
and the fixed nature of land parcels 167
global extremely long-term 170
and investment by infrequent traders 168
Kondratieff cycle 170
Kuznet cycle 170
long-term 170
and the ‘lumpiness’ of property and real estate assets 127
medium-term 170
multiple cycles in a single market 171
seven-year cycle notion 169
short-term 173
and structural change 173
surviving market downturns/GFCs 174–8
time lag between transaction and release of information 165–6
types of 168–71
and uniqueness in terms of duration 164
property developers see developers
property development: appraisal see (development appraisal, financial perspective); development
appraisal, risk perspective
cluster development 338
construction see (construction)
definition 2, 186
economic context 37–9
and the environment see (environment)
finance see (development finance)
globalisation of 336–7; see also (international property development)
handover of completed development 227–9
international see (international property development)
marketing see (marketing)
naming of buildings/developments 56, 282
objectors 34–5
opening ceremonies 292
process see (development process)
project management see (project management/managers)
sales and lettings 297–8; see also (leaseholds/leases)
sites see (development sites)
software and computer technology see (computer technology)
 sustainability see (sustainable development)
timetable 94, 110, 130
Property Income Certificates (PINCs) 159
property market research and performance measurement 128–35
property unit trusts (PUTs) 159
PropTech 264–76
appraisal software 269–70
building information model (BIM) 274–5
concept of 266–8
estate agents or letting agents software 273
GIS and spatial analysis 273–4
project management software 270–1
project management software package options 271–3
sectors 268
spreadsheets 268–9
Public Health Acts 191
public liability insurance 229
public-private partnerships (PPPs) 24, 28, 55, 236–7
and PFI 236
public relations 34, 281, 292, 293–4
public sector 23–4
public transport see transport
PUTs (property unit trusts) 125, 159

qualitative surveys 253

quantitative analysis 253
quantity surveyors (QS) 11, 32–3, 52, 208, 214, 223, 225, 334

radio marketing 289, 290

rainwater tanks 262
rating tools, sustainability 320, 324–5
real estate agents 14, 15, 20, 29–31, 43, 49, 50–3, 91, 96
and leasing 88, 95, 109
marketing role 54, 287, 294–7
software for 244
as stakeholders 49
real estate investment trusts (REITs) 140–1, 159
real estate market 9, 10, 19, 43, 49, 141, 160, 167, 236, 245, 250, 253, 273, 292
and the barriers of illiquidity and indivisibility 127
changes in 36
cyclical nature of 49; see also (property cycles)
emerging markets and internationalism see (international property development)
equilibrium 158, 175
external shift in demand 36
indexes 248
information 165
‘knowledge is power’ adage 10, 177
lack of a centralisedmarketplace 150
lumpiness of 176
and marketing approaches 249
 and the national economy 37
prevailing conditions 167, 175
property market research and performance measurement 168
research see (market research)
surviving market downturns/GFCs 168, 174
sustainability 186
uncertainty 72
Real Estate Times 53
realtors 29, 51; see also real estate agents
recycling 262, 319, 320, 323, 329
REDD Programme, UN 313
REITs (real estate investment trusts) 140–1, 159
renewable energy 275, 316, 318
rent 14, 59, 96, 102, 106, 113, 126, 295, 299–300, 326, 328
base rent arrangement 147, 148
current market 128
fair market 88
ground 24, 62, 73, 74, 143
peppercorn 62
reviews 20, 36, 135, 300
variable, net development value 87
zoning for retail rent 89
rental value 91, 95, 109, 175, 299
review 70, 150, 154, 158
Estimated Rental Value (ERV) 84, 86, 93
repair obligations 301
residential development 6, 7, 9, 44–5, 76, 106, 187, 229
residual valuation 83, 84, 86, 97
restrictive covenants 70
retail development 19, 91, 93, 196, 202, 250, 252, 258
retained earnings 158
re-use 185, 206, 305, 319, 323
RICS (Royal Institution of Chartered Surveyors) 89, 137, 207, 337
risk: appraisal see (development appraisal, risk perspective)
of building contracts 207
currency 341
decreasing exposure to 131
developer’s profit/risk allowance 96–7
downside 114
environmental 315
international property development 38, 318–21
investment risk/return model 22, 83–4
with leases 134
with project loans 152–4
systematic 107
tenant 12, 110
transport risks 342
unsystematic 107
roads 45, 61, 62, 76, 77, 80, 188, 189, 191, 192, 228, 236, 301, 329
private 64
 and the Private Finance Initiative 212
roof garden 329
Rowntree, Joseph 308
Royal Institution of British Architects 208
Royal Institution of Chartered Surveyors (RICS) 89, 137, 207, 337

sale and leaseback 150–1

sales 297–303
costs 96
sale and leaseback 150–1
unique selling points 281, 317
Salt, Titus 308
satisfactory planning consent 72, 108
scenario modelling software 9
scheduling tools 271
securitisation of property 140
sensitivity analysis 111–14, 247
services 69
access to 49; see also transport
shared economy 268
shareholders 10, 23, 26, 27, 102, 126, 137, 138
of property companies 139
rights issues 157
shares 22, 63, 102, 122, 124, 125, 126, 139, 140, 143, 157, 170
the Shop Acts 191
show suites and offices 292–3
Single Property Ownership Trusts (SPOTs) 159
sites see development sites
site-specific analysis 251–4
Skype 333, 344
smart real estate 268
snagging lists 227
social media 34, 35, 185, 193, 195, 273, 303
software see computer technology
solar photovoltaic panels 318
solicitors 34, 52, 71, 93, 127, 302
SPOTs (Single Property Ownership Trusts) 159
spreadsheets 268–9
stakeholders 8, 11, 14, 19
building contractors 28–9
commitment phase acknowledgement 16
developers 22–3
financial institutions and lenders 25
landowners 21–2
main stakeholders in development process 21–36
objectors 34–5
occupiers 35–6
planners 24–5
professional team 31–4
public sector and government agencies 23–4
 real estate agents 29–31
trust between 339
stamp duty 80, 82, 86
stock market 26, 138, 139, 140, 141, 157, 158, 159, 279
crash 175; see also (Global Financial Crisis (GFC); shares)
strategic analysis 251
structural change 36, 173
structural engineers 33
Subject to Council Approval (STCA) 18
supply: and demand 29, 37, 42, 44, 88, 124, 132, 136, 146, 160, 166, 169, 174, 177, 247, 255, 280
site-specific analysis 251
surveys: qualitative 253
site 64
sustainable development 25, 61, 314
case for 313–14
and construction 317–20
and corporate social responsibility 308–9, 309–11, 312–13; see also (corporate social
responsibility (CSR))
definitions and models 305–8
and demolition work on existing buildings 319
and design 317–20
and development finance 315–16
development land and sustainability 314–15
and health and well-being 321
issues in development stages 294
marketing and selling a development 322–3
and market research 321–2
and planning 316–17
and recycling 323, 329
and re-use 305
sustainability measures 203–4
sustainability rating tools 324–5
sustainability reporting 311–12
sustainable buildings 27, 36, 313, 314, 317, 321
sustainable features 14, 315
and water 320–1
SWOT analysis 254, 343
syndicated project loans 155–6
syndicate: of banks 136
private 26
syndicated project loans 155–6

Tata Group 336

television marketing 280
tenant covenant 134
tenant occupation see leaseholds/leases
tenant’s guide 287
three dimensional modelling/design software 142, 287
transport 59–60
access 17, 44, 45, 47, 84, 130, 166
 carbon emissions 316
low carbon forms of 62
networks 17
noise 47
public transport 202, 203, 284, 287, 289, 322
public transport links 48, 62
public transport use 76, 316
railway line infrastructure 47, 317
risks 342
Tree Preservation Orders (TPOs) 194
triple bottom line (TBL) accounting 307
Twitter 273

unique selling points (USPs) 281, 317

United Nations: Bruntland Commission/Report 185
Our Common Future report 305
REDD Programme 313
World Commission on Environment and Development 305
unitisation of property investment 159–60
unit trusts 125, 136, 159
property (PUTs) 160
unsecured loan stock 158–9
urban regeneration 24, 29, 48, 332
government agencies for 74–5

valuation surveyors 31
viability analysis 10, 11
volatile organic compounds (VOCs) 313
Von Thunen, J.H. 7

waste management 65, 315, 319

water 195, 209, 262, 284, 299, 311, 314, 318, 320–1
Watergardens: The Marketplace (case study) 258–62
WCED (World Commission on Environment and Development) 305
well-being 306
World Commission on Environment and Development (WCED) 305

year’s purchase (YP) 90, 148

zoning: land 46, 47, 316, 317, 323

for retail rent 89