Real Estate Development. Definition, Process and Management

Contents

PREFACE

1. UNIT ONE
1.1. INTRODUCTION
1.2. Definition and nature of real estate development
1.3. Groundup development versus redevelopment(renovation) development in real estate project
1.4. Real estate demand and supply factors
1.4.1. Demand
1.4.2. The Supply concepts
1.4.3. Demand side of factors
1.4.4. Supply side factors in real estate
1.5. Importance of real estate on countries economic growth
1.6. Factors Influencing Real Estate Sector (Determinant of real estate)

UNIT TWO
2.2. Actors in Real Estate development process
2.3. Stakeholders in Real estate developers process

UNIT THREE
3. REAL ESTATE DEVELOPMENT PROCESS
3.3. Real Estate Development Process
3.3.1.1. The property development
3.3.1.2. Development sit appraisal
3.3.1.3. Development Valuation
3.3.1.4. Development Finance
3.3.1.5. Marketing for real estate development

UNIT FOUR
4. REAL ESTATE DEVELOPMENT MANAGEMENT
4.1. INTRODUCTION
4.5. Roles and responsibility of real estate managers:
4.7. Measuring of return on real estate development
4.7.1. Methods of measuring of rate return
4.8. The Idea of Real Estate development/investment/
4.8.1. Real estate Investment value and Time
4.8.2. Real estate Investment Value and No monetary Effects
4.8.3. Incremental real estate investment value
4.8. ANALYSIS ADVANTAGES AND DISADVANTAGES IN REAL ESTATE INVESTMENT/DEVELOPMENT
4.9.1. Advantages to Investing in Real Estate industry
4.9.2. Disadvantages to Investing in Real Estate industry
4.9. RISKS IN REAL ESTATE DEVELOPMENT
4.10. Fees and taxes(costs) in real estate development
4.11.1. Real estate development project cost:
4.11.2. Production/development Period cost

UNIT FIVE
5. ENVIRONMENTAL ISSUE IN REAL ESTATE DEVELOPMENT
5.1. INTRODUCTION
5.2.1. Fundamental principles of sustainable building design/construction
5.1.2. Six Fundamental Principles of Sustainable Building Design in real estate development project)
5.2. Nature and practice of real estate development in Ethiopia
5.2.1. Historical Development of Real Estate Developing Companies in Ethiopia
5.3. The practice of Polices, Strategies and laws in real estate development (investment)
5.3.1. Real Estate Investment Laws and Practices
5.3.2. Polices and Strategies in real estate development
5.4. Opportunities and threats in real estate development practice
5.4.1. Key Objectives of the Real estate Development project
5.4.2. Opportunities in real estate development
5.4.4. Threats or Challenges in implementing the real estate development program

PREFACE

This module/textbook/ is offered as a basic knowledge module for Land & Real Property Valuation under graduate program students in the Dire Dawa University. It comprises an aggregate of selected topics with the aim of enabling learners gain fundamental knowledge in areas related to real estate development, real estate development valuation and sit appraisal ,real estate development management system, various actors in real estate development, measuring rate return in real estate investment , real estate investment decision, real estate investment risk measurement, In addition the module deals with the nature and practice, police and strategy of real estate development in Ethiopia.

The study of real estate development is importance to every individual. In recent years, the field of real estate investments has seen a variety of new opportunities and philosophies. The real estate investment has been very “hot” since 2000 and gives every indication of remaining so throughout at least the middle of the decade. As a result of government tax and monetary policies, real estate development valuation provides excellent riskreturn opportunities that enable many individuals to build a secure foundation for their wealth. In addition, most highincome individuals are over invested in the stock market. The portfolio of these individuals would benefit from diversification into commercial real estate. Unlike equity securities, commercial real estate often generates a substantial and predictable cash flow over time. The compounding effect of this cash flow can significantly enhance the performance of most investment portfolios.

Real estate investment is game for the entrepreneur and one, which will test skill of prediction and decision making. It is games where amateurs create a tremendous amount of confusion and professional make significant blunders. It is a business where products created can generate regular ongoing cash flows for the developer and investments over long period of time and also which works with the physical features land forms of our environment and can be created in lands, water or air. It is also a business which responds to the changes of the technology, social economies, demographic architecture, laws, entertainment and industry by reflecting these changes in planning process and forms.

The market for commercial real estate is differentiated by both size and type. Investing in a condo, second residence, or even a small office building is well within the reach of middleincome investors. Opportunities also exist for much larger investments. The point is that commercial real estate provides opportunities for both the small and large investor.

Different types of real estate investment also abound, ranging from singlefamily rental properties to industrial parks. These investments vary by the function they serve, the required skill and experience of the potential investor, and the characteristics of their cash flow. A given investor might not have the proclivity and experience to invest in a selfstorage or athletic facility but would definitely have the attributes necessary to invest in a motel or restaurant location. The great thing about commercial real estate is that whatever the capabilities of the investor, there is a commercial property out there that is right for them.

Some investors participate in investment programs to accumulate money for the sake of accumulation and have no special need or goal. They derive satisfaction from the experience of successful investing. Some view real estate investment as a means of providing a fund for their children’s college education, supplementary retirement income, or fulfilling other financially related needs. Others view Real estate development, or property development, is a business process, encompassing activities that range from the renovation and release of existing buildings to the purchase of raw land and the sale of developed land or parcels to others.

Throughout this module about five major chapters are constituted and the module will help students to grasp knowledge, skills and attitude.in order to help students gain the required knowledge, skill and attitude domains. The first chapter is designed to expose students to the nature of real estate development, Definition and Nature of real estate development, GroundUp Development versus Redevelopment real estate development, Real estate demand and supply factors, Role of real estate in economic development and Determinants/main factors/ of real estate development In the second chapter actors/stakeholders in real estate development Public and private investors in real estate Real estate developers and partners in Financial Institutions. The intention of the unit is to help students develop the basic knowledge of the real estate investment stakeholder’s participation in real property development in particular.

The third chapter deals on the real estate development process, Real estate development appraisal/valuation, Real estate development finance, Real estate marketing. The intention of the unit is to help students develop the basic knowledge of real estate development process, valuation and appraisal, the steps real estate development process e.t.c.

The fourth unit of the module deals with Real estate development management, Measurement of return on real estate developments, Risk in real estate development and costs in real estate development The fifth unit addresses the Environmental issues in real estate development, Nature and practice of real estate development in Ethiopia, Policies and strategies and Opportunities and threats.

Objectives of the Module/Textbook/

After the completion of this Textbook students are expected to:

- Understand the nature of real estate development
- Identify the actors/participants/ in the real estate development process
- Understand real estate development demand and supply factors
- Understanding real estate development process and development valuation
- Understanding real estate development and management aspects
- Measuring rate of return in real estate investment/development/
- Risks in real estate development
- Measuring rate of return in real estate development
- Understanding real estate development project cost
- Understanding the principle of environmental sound real estate development
- Understand the nature and practice of real estate development in Ethiopia
- Ethiopian Polices, laws and strategies in real estate development.
- Opportunities and threats

1. UNIT ONE

1.1. INTRODUCTION

The first chapter is designed to expose students to the nature of real estate development, Definition and Nature of real estate development, GroundUp Development versus Redevelopment real estate development, Real estate demand and supply factors, Real estate demand and supply factors

Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more generally) buildings or housing in general. Also: the business of real estate; the profession of buying, selling, or renting land, buildings, or housing.

Learning objectives

After completing the study of this unit, you will be able to:

- Understand the nature of real estate development
- Understand and identifying the concept of GroundUp Development and Renovation real estate development project
- Understand real estate development demand and supply factors

Brainstorming questions

Dear learner before reading the following section, takes a minutes and jot down what you know about Ground Up Development and Renovation real estate development project?

1.2. Definition and nature of real estate development

Real estate development, or property development, is a business process, encompassing activities that range from the renovation and release of existing buildings to the purchase of raw land and the sale of developed land or parcels to others.

Real estate development is the continual reconfiguration of the built environment to meet various needs of space of society. This means just finishing of physical construction of a building is only a single phase of development. It has to be reconfigured/ reorganized. Reconfiguration or rearrangement should be continued. Accordingly, roads, sewerage systems, houses, office buildings, factories etc should be built, managed and thereby required space should be generated for the various social needs and wants. Therefore, real estate development is not a simple matter even if it is adequately financed, all serviced are provided, all approvals are given and developed space is quickly sold Real estate development is an idea that comes to fruition and use the brick and mortar put in place by the development team (Stapleton, 1986).

At the end of a property development, a value is realized by providing usable space over the time with certain associated services needed so as consumers can enjoy the expected benefits of the building spaces. A real estate product that may be a new building or a redeveloped one is a result of the coordinated efforts of many allied professionals (Mike et. al., 1995).

The above definitions clearly indicate three important aspects relating to the real estate development such as;

- It needs a range of input.
- It produces a valuable property.
- It is a process which needs a coordinated/conscious effort.

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In this process; land, labor, capital, management, entrepreneurship etc are usually needed in order to transfer an idea into a reality.

Land: a plot of land, physical materials/transportation of materials /necessary infrastructure services/ sewerage system and proper accessibility etc can be considered under the land in broader sense.

Labor: required skilled labor, unskilled labor, services of professionals and none professionals etc can be considered as the labor in general.

Management: overall management: human recourse management, financial management, marketing management, production management, information management, time management etc.

Entrepreneurship: One, who bears the risk, creates an idea and struggle to realize the idea. Anyone who is supposed to be responsible for legality, insurance, approvals, tests, and experiments etc.

Capital: all sources of finance, media of acquiring all the above inputs. This may be by means of own money/savings, different sources of loan, equity capital, donation of funds or material or land or services and so on.

The highlighted terms of the above second definition show the expected results of the real estate development. The definition guides developer for correct actions towards correct results. Using a range of inputs, developer is supposed to produce a valuable property. The value of the property is the outcome generated by the users’ satisfaction.

The third concept above argues that realizing the expected result (i.e. the value of the property produced by the satisfaction of users) is only possible through the coordinated/conscious efforts of many professionals.

1.2.1. Nature of real estate development

Real estate development or property development is a business process that invests on the improvement of property and rent or sale the improved or developed property(buildings) for purchaser or tenants. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction, although many developers also manage the construction process. it is a business process or entrepreneur idea that a process of buying or leasing the vacant land and made investment or improved lands or properties and finally sailing or renting for others.

Developers usually take the greatest risk in the creation or renovation of real estate and receive the greatest rewards. Typically, developers purchase a tract of land, determine the marketing of the property, develop the building program and design, obtain the necessary public approval and financing, build the structures, and rent out, manage, and ultimately sell it.

Sometimes property developers will only undertake part of the process. For example, some developers source a property and get the plans and permits approved before selling the property with the plans and permits to a builder at a premium price. Alternatively, a developer that is also a builder may purchase a property with the plans and permits in place so that they do not have the risk of failing to obtain planning approval and can start construction on the development immediately.

Is the Need of real estate development a constant? Why?

It seems that the real estate development is not a constant function of friction instead a continuing function. Because:

-Increasing population requires more and more needs and wants. This is about the quantities of property. This is a continuous need within an individual family or organizational level or in a city or a country as well as globally.
- Fast moving technical development changes the customer/users satisfaction. This is about the quality of properties.
- Increasing of individuals’ movements. Migrants have some particular needs and wants temporary occupation, travelling, leisure, food, recreation etc.
- Size of property is very large in terms of different aspects of the property such a physical size, amount of recourses, involvement of different stockholders etc. therefore, project size tends to be larger and larger.

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1.3. Groundup development versus redevelopment(renovation) development in real estate project

When considering real estate development, there are two main paths(two types of real estate development approach) a developer can take either groundup construction projects or renovation/redevelopment projects. Both have advantages and drawbacks, and it’s worth assessing the local real estate market and analyzing which approach best meets the needs of that market.

1.3.1. Groundup development

Groundup development is the construction of a real estate asset completely starting from scratch/site clearance up to complex building. Ground project entails constructing a building completely from raw materials – which means producing new walls and foundations, footings, etc., in a brandnew location. The starting point is either raw, undeveloped land or the complete teardown of any existing structure.

Ground up development is the ways leasing or purchasing undeveloped vacant land and construct new buildings on it and also the process of developing or constructing on the vacant land through constructing new building with the new design and plan. This is one of two general types of real estate construction projects.

Benefits of groundup development

Given the choice between the two, real estate renovation will almost always be the lowercost option. It will also generally take less time, not just to build the structure, but also to obtain all the permits.

Even so, any number of reasons can lead to a rational decision to pick groundup development such as:

- Groundup construction gives you unlimited flexibility.
- A groundup construction project allows for building customization so that a building can better meet the needs of its purpose. If the business need and demand may expand, then the ground up development can give the opportunity to expand new building with new design to afford the new business demand. However, it can be difficult and require a longer waiting period in order to obtain the necessary permits to construct a new building from the ground up.
- Another benefit to commercial building construction is you can build out your new building in phases. As your business grows more, so can your building but it is more time consume compare to renovation/redevelopment construction project.

It’s important when approaching any sort of development project but especially for a groundup project, to have an idea of what a development project will look like

1.3.2. Renovation Projects

Renovation/redevelopment, in which contractors have been rebuilt some of the structure’s components but leaves some or most structural elements intact. Renovation project doesn’t start from scratch, though. Instead, some of a building’s components are demolished and rebuilt, while structural elements are left intact Redevelopment/renovation: is a process of developing and updating or rebuild the existing building or property, meaning that by demolishing (50%) some part of existing old building structures and redevelop that existing building or property with highly depend of the pervious development or building permit and plan regulation ,so no need to kill time in order to get plan and permit,

Advantage of renovation project

The great advantageous of this development ways is free from building permit expense and process.

Renovation projects often prove to be a more costeffective option, since much of the structural work is probably already completed before the project. Building permits tend to be easier to access for renovation projects when compared to groundup construction projects. In addition, by renovating an existing building, a project can frequently get access to desirable locations that would be unavailable to new groundup construction projects.

Disadvantage of renovation project

The big disadvantage regarding renovation projects is that they necessarily come with reduced flexibility in the construction of the building because the development operation highly depends on the pervious existing building plan and permit.

General contractors need to work within the existing renovation framework, and that can sometimes result in a building that is less than perfect for the desired purpose. Still, renovation is the clear winner in terms of budget, since a renovation usually costs less money than a groundup construction.

Updated building codes could require an overhaul of many of a building’s existing components in order to bring them up to the current code, which can easily add unforeseen costs to a renovation project’s bottom line. Renovating an existing building can also put limits on further expansions to the buildings, as well, whether due to location or incompatibility of elements.

1.4. Real estate demand and supply factors

1.4.1. Demand

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Demand is a function of two factors: the desire for a particular good or service, and the ability to pay for it. The higher either one of these factors goes, the greater the demand for the good or service.

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Desire

The point is that when desire for homeownership increases, the demand curve shifts to the right as more people are willing to buy at any given price, or the same number of folks are willing to pay more for the same property. (Either view is an accurate depiction.)

Ability to Pay

We’ve only covered the desire factor, and the demand curve is equally influenced by the aggregate ability to pay for real estate. The ability to pay for real estate is driven by three factors: Assets (what you have for a down payment or the assets that change to money through mortgage), Income (how much you can afford to pay each month), and the availability and cost of financing

1.4.2. The Supply concepts

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Supply is a fundamental economic concept that describe the total amount of specific good or service that is available to consumer. Supply can relate to the amount available at a specific price or the amount available across a range of price if displayed on a graph.

In real estate influenced by the prices of real estate at a given time…the major things that change the supply curve is that price of good and service that determine the motivation to supply the goods or services.

Editor’s note: This image was removed due to copyright reasons.

1.4.3. Demand side of factors

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1. Affordability

Rising incomes mean that people are able to afford to spend more on housing. During periods of economic growth, demand for houses tends to rise. Also, demand for housing tends to be a luxury good. So a rise in income causes a bigger % rise in demand.

2 . Confidence

Demand for houses depends on consumer confidence. In particular, it depends on people’s confidence about the future of the economy and housing market. If people expect prices to rise, demand will rise so people can gain from rising wealth.

3. Interest Rates

Interest rates play a big factor in determining the cost of mortgage interest repayments. If the bank can change or increase interest rate, the affordability of housing becomes decline at the same time the demand on real estate house decreases because the purchaser can’t afford the interest rate on their housing mortgage repayment. This is a major factor in determining the affordability of housing. If the Mortgage payments take a high % of people’s personal disposable income, the house purchaser have losing their ability to buy the house, so indirectly decrease the demand for real estate house. If you have a £150,000 mortgage a 0.5% change in base rates will change your monthly payments by about £60 a month. Therefore, even small changes in interest rates can deter people from buying.

When interest rates reached high, the demand for housing collapsed, causing a large fall in demand for housing. The relatively low interest rates encouraged more to buy a house.

However, even though interest rates were very low, demand also remained low. This isbecause; other factors are reducing demand for housing – like the recession and prospect of rising unemployment.

4. Population

A very important factors, it is not just the number of people but demographic changes. E.g. growing number of single people living alone has led to increasing demand for houses.

The demand for housing doesn’t just depend on the population but also the average size of a household. Certain social and demographic factors are causing a rise in the number of households (faster than the population increase). These demographic changes include issues such as: age of people leaving home

- Increased life expectancy, leading to more single old people
- Divorce rates, – increasing number of singleparent families.

5. Mortgage availability

Mortgage is based on the household’s income generated or assets, taking credit from bank with the agreement of monthly mortgage repayment for specific time for the purpose of buying house.

Another factor that determines the effective demand for houses is the willingness of banks to lend mortgages. If banks give mortgages with bigger income multiples, then the effective demand for houses is greater. The willingness of banks to lend mortgage finance can vary depending on the strength of the interbank lending sector. The Credit crisis of 2008 has seen a sharp rise in the cost of interbank lending and a fall in availability of mortgage finance. Many mortgage products have been withdrawn, making it more difficult for wouldbe homeowners to get on the property ladder.

6. Economic growth and real incomes

Rising incomes enable people to afford bigger mortgages and encourages demand for housing. In boom times, demand for housing grows rapidly suggesting demand for houses is incomeelastic.in general, if the economy is growing at the same the income of the people also increase, so the demand for house also increase because they have ability to afford the house price.

7. Cost of renting

If the cost of renting rises, then households will make greater efforts to try and buy housing as buying a house through mortgage becomes relatively cheaper. If the housing rent expensive, the people motivated to buy their own house in order to save them from highcost rent suffering.

1.4.4. Supply side factors in real estate

1. price

If the price of houses increases, then there is an increase in supply of houses. Because seller can then sell houses at higher rates thus, making more profit.

2. Cost of a building a house

If the cost of building house increase, then there is a net decrease in supply of houses. as this would mean a large initial investment for the builder.

3.Government regulation

If government regulation is inclined (motivating to build or to sell the house) towards building/selling of houses then there is a net increase in supply of houses. This would mean lower cost from the perspectives of a builder/selling of houses. If the government have suitable rule and regulation regarding on real estate development, the supply of housing increase, so it is depending on the policy and regulation performance.

1.5. Importance of real estate on countries economic growth

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Real estate is an enabler of economic activity. By offering the space for businesses to operate it effectively provides the business infrastructure without which an advanced economy could not operate. Furthermore, highquality, modern and innovative buildings contribute to maintaining the country’s reputation as an international trade hub and attract skills and capital from the rest of the world, creating further opportunities.

- Real estate is a source of employment in all sorts of areas; not only for architects, builders and engineers, but also for legal and financial advisors, surveyors, facilities managers and all those that provide for the construction industry.
- Real estate plays a vital role in the provision and development of infrastructure because the real estate developed in one’s area that motivated to the expansion of social and economic infrastructure such as school, hospital tube extension and so on.
- Real estate development is very important for the economic growth that trough revenue collection from tax, vat and also from building permit and planning process, this situation have direct impact of the growth of economy.
- Real Estate is important to solve the scarcity of standard housing especially in urban area this indirectly contributes for the development of the social and economic growth of the country.
- Real estate represents an attractive asset class for institutional investors such as pension funds, insurance companies and sovereign wealth funds and also maximize investment opportunity from all over the world, this has direct impact on economic growth. Not only does this maximize investment opportunities and returns for pensioners and savers from around the world, it also makes large urban regeneration projects possible

It is important that governments do not take these investors for granted. Frequent and significant changes to the tax and regulatory environment might affect the profitability of such investments and send investors the wrong message, driving them away. Instead, the government should focus on how it can help real estate to flourish and allow the benefits that the industry provides to the economy to be felt as widely as possible.

Real estate can probably not claim to be the magic wand of economic growth, but it is certainly a lever for growth that could be pulled harder.

1.6. Factors Influencing Real Estate Sector (Determinant of real estate)

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The market of real estate sector keeps on fluctuating which comprises with population, migration, customer behavior and new policies by government/real Estate Company. For instance, there are certain factors which are the reasons for the frequent fluctuation of the productivity in a real estate company.

Here are 5 Factors listed below are more than that eventually affect the real estate sector development in terms of many ways such as the productivity, availability, and quality of real estate sector s are affected by the following five factors:

1. Demography

Real estate can be influenced by the demography which is composition of a population consisting of income, migration patterns and population growth. If there is demographic change of urban adult resident, the demand for housing will increase, so the real estate developers can generate more market and economy. These demographic changes are the first and foremost to analyze in order to gain the consistency of growth of a real estate company. Often, it has been seen that this factor is overlooked by most of the companies. But, it can be bring a vast change towards the better productivity and huge revenue.

The Population ages can shift and change that lead to more buyers in some areas and fewer buyers in others. This isn’t something that typically happens on a national scale, rather on a regional or local one. Brokerages and agents should therefore stay on top of the demographic trends in their own areas in order to fuel growth. For example, if the demography seems to be shifting towards young urbanites who want to buy condos, the brokerage should develop some expertise and credibility in that area.

2. The economy

One of the most essential key factors is the overall economy of a country that fundamentally on the real estate market. The economy of a country measures the ability of one particular customer to invest in a property. Generally, the economy can be determined by the factors like GDP, income growth and unemployment.

3. Government Policy

The frequent of property policy by government affects real estate sector in the context of property policy released by government. Real estate companies are most dependent on the government policies to increase and decrease their current price. Amendments like tax credits, subsidies and deduction are the few of the factors which are responsible to influence the real estate market.

If the government set up suitable property police for the real estate development, the real estate industry will accelerate to grow and boom.

4. Interest Rates/financial accessibility/

Interest rates provided by a real estate company and other financial institution can bring a vast change in its demand. If a real estate company is constantly changing its interest rates over a property, then, this can influence the ability of a customer to buy a property. If the financial institutions and developers can increase the interest rate, the customer’s ability to buy become decrease, this situation have direct impact on real estate development and market. The constant conversion in the interest rates only makes the rigid situation and ultimately it hinders the growth in the real estate market.

5. Amenities

This factor can have a minor influence for the real estate business but sometimes creates a huge effect on its market price demand and availability. When the property is in good condition with a better infrastructure and modern amenities, the value of the property gets increases. But, the same is not offered by the company, it influences the whole real market with less demand and requirements.

6. Market Trends

The biggest thing that must be considered before you jump into the conclusion, real estate investors must aware and handle about the market trend of the locality before they decide to invest. If there is a good market trend and demand, the real estate investment become successful, so the market trend information is the most determinant for the development of real estate project. You have the option to get in touch with the local property consultants to get some tips for better investment choice.

The expert real estate consultants love sharing their success stories and tips with others who are new to the investment industry, helping them to make better decisions about real estate investment.

Although the real estate industry has been in a slump, there is hope for real estate businesses in the future. We’ve seen moderate growth as we’ve begun to recover from the 2008 recession, and continued moderate growth is predicted over the next few years, with four key factors either driving or in other ways affecting that growth.

7. Location can drive the real estate economy

Location is the most important determinates of real estate value. Location is the major factors for the development of real estate because neighborhood quality is more important than the size of the house.

The perceived quality of location is also determined in part by access to public transportation, the quality of the schools, etc. Many cities are actively pursuing improvement of their “built environments” in order to make their neighborhoods more appealing. At the end of the chapter a very short summery of the overall topic is required. In addition, in most cases it is recommended that chapters need to have exercises that can measure student’s comprehension level.

Summary

Real estate development or property development is a business process that invests on the improvement of property and rent or sale the improved or developed property (buildings) for purchaser or tenants. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property . Real estate development is different from construction , although many developers also manage the construction process. it is a business process or entrepreneur idea, that a process of buying or leasing the vacant land and made investment or improved lands or properties, finally sailing or renting for others.

When considering real estate development, there are two main paths (two types of real estate development approach) a developer can take either groundup construction projects or renovation/redevelopment projects. Both have advantages and drawbacks, and it’s worth assessing the local real estate market and analyzing which approach best meets the needs of that market.

The market of real estate sector keeps on fluctuating which comprises with population, migration, customer behavior and new policies by government/real Estate Company. For instance, there are certain factors which are the reasons for the frequent fluctuation of the productivity in a real estate company.

Real estate is an enabler of economic activity. By offering the space for businesses to operate it effectively provides the business infrastructure without which an advanced economy could not operate. Furthermore, highquality, modern and innovative buildings contribute to maintaining the country’s reputation as an international trade hub and attract skills and capital from the rest of the world, creating further opportunities

Exercises

Part one: True/False

1. Real estate development or property development is a business process that invests on the improvement of property and then rent or sale the improved or developed property
2. Renovation projects often prove to be a more costeffective option.
3. If a real estate company is constantly increasing its interest rates over a property, then, this can increase the ability of a customer to buy a propert
4. If there is demographic change of urban adult resident, the demand for housing will increase, so the real estate developers can generate more market and economy
5. If the cost of building house increase, then there is a net increase in supply of houses.

Part two: Multiple choices

1. Which of the following factor affects real estate development?

A. Population composition
B. Property policy
C. Interest rate of financial institution
D. All of the above

2.Which of the following is a Supply side factor in real estate?

A. Price
B. Affordability
C. Confidence
D. Interest rate

3.which one of the following is not demand side factors affecting real estate development

A. Affordability
B. Confidence
C. Price
D. demography

4.which one of the following is supply side factors affecting real estate development?

A. Mortgage availability
B. population
C. economic growth and real income
D. cost of building

5. Which of the following is not activity of real estate development process?

A. Finding a piece of land for investment.
B. Determining the marketing value of the property.
C. Purchasing developed property and selling it.
D. Obtaining the necessarily public approval and financing for the development

6 A groundup construction development project allows for building customization that meet the needs of its purpose.

A. renovation development
B. groundup development
C. A&C
D. all

Part three: Fill in the blank space

1. is the construction of a real estate asset completely starting from scratch/site clearance up to complex build?
2. is the continual reconfiguration of the built environment to meet various needs of space of society.
3. in which contractors have been rebuilt some of the structure’s components but leaves some or most structural elements intact.

Part four: Discussion

1. Real estate development is not a simple matter even if it is adequately financed. Do you agree? Why?
2. Identify properties and their uses and users in your vicinity a decade ago and compare the situation at present and the past in the same region. Predict the future possible changes of the same property?

References

AhemdNaneeshe(2009), Pwc real estate 2020:building future surging demand for real estate.

Miles, M., E.Malizia, M.Weiss, G.Berens, G.Travis 1991. Real estate development:

principles and process. Washington DC: Urban Land Institute.

Graaskamp, J. 1981. Fundamentals of real estate development. Washington DC: Urban Land Institute.

Cadman, D &Austini, L (1981), Property Development. E & F.N. Spon Ltd. U.S.A,

Ling, D. C., & Archer, W. R. (2005). Real Estate Principles: A Value Approach. New York:

Lind H. (2005). Value concepts, value information and cycles on the real estate market: A comment on Crosby, French and Oughton (2000). [Academic paper]. Journal of Property investment &Finance, 23, No.2, 141147.

UNIT TWO

2. ACTORS IN REAL ESTATE DEVELOPMENT

2.1. INTRODUCTION

This unit covers the general discussions about the participants and stakeholders in real estate development. Different professional bodies in the real estate development project like valuers, engineers and other related bodies have contributed to the development real estate’s project will be explained in this unit, so the intention of the unit is to help students develop the basic knowledge of the real estate investment stakeholder’s participation in real estate development in particular.

The property development process involves the constant interaction of various agencies, groups and individuals. Given the allpervasive nature of property in the lives of everyone, few, if any, are exempt from participating in the development process in one way or another.

Learning objectives

After completion of this chapter the students will have an understanding of:

- Actors/stakeholders in real estate development,
- Public and private stakeholders in real estate Real estate developers
- Partners in Financial Institutions.

Brainstorming Questions

Dear learner! Please discuss and explain the major stakeholders in real estate development project? Share your locality experience about real estate developers and their stakeholders’ activity?

2.2. Actors in Real Estate development process

There are various groups involved in the real estate sector. These groups have their own roles in the real estate industry. However; they should collaborate with each other to help the real estate sector grow and utilize its full potential in solving the housing problem. The different units involved in the real estate sector development are discussed below:

A. Public sector: The direct development activity undertaken by public sector agencies varies enormously according to their nature and function. Local authorities provide by far the most diverse range of development experience, with some council pursuing an extremely adventurous approach towards commercial schemes, particularly in the light industrial sector, in locations where small nursery factories have not been provided by the private sector. Others have attempted to engage in central area shop and office schemes, but with very mixed results. Residential development has quite naturally played a traditional role in municipal development programs, but of somewhat less significance over recent years under a conservative government. In general terms, the degree of involvement in different forms of development naturally varies between authorities according to their geographical location, persisting problems, potential opportunities, landownership, financial resources and political complexion. Probably the main differences between public and private sector development are the degree of accountability that attaches to the former and the extent to which community consultation and participation takes place. Local authorities must demonstrate the highest levels of probity and disclosure in their activity. They also have differing objectives in that such aims as the provision of shelter, the generation of employment, environmental protection and the supply of services outweigh the overriding profitmaximizing goal of the private sector.

Real estate development is a highly regularized process. Taxes, labor laws, land and property laws, public infrastructures, some financial operations, planning and zoning regulation, building permits and land supply etc. are mainly handled by the state sector. Requirements relating to these matters are supposed to be fulfilled according to regulations and public policies. Hence, the role of the public sector in real estate development process in virtually significant.

Moreover, in some areas, public sector is the sole developer and the main partner. For instance, real estate’s relating to the community and economic development goals of a country such as schools, hospitals, service properties (public properties) etc are mainly developed by the state sector.

Public sector agencies are institutions that are responsible to deliver important services like water, electrical and telephone to real estate developers. Usually developers are responsible for such activities. They contact these agencies before completion of the project and transfer a unit well equipped with all the important facility.

B. Private sectors: Private sector has different goals. It expects maximum return from investments may be in terms of development fee, profits, long term equity, capital gain, personal satisfaction and professional enhancement and so on. Welfare is not among the private sector objectives. Though any development ultimately contributes to the social wellbeing, private sector development is always stimulated by the profit motive. If the investor cannot maximize the expected profit, the investment will not be made. And since the government cannot fulfill all individuals’ and firms’ real estate needs, private sector involvement is essential.

C. Corporate occupiers: Everyone needs real estate. And it is critical to the smooth running of many businesses. We advise corporate clients on all their property portfolio needs — from major acquisitions and strategic head office relocations to surplus property and litigation claims. Corporate occupiers play the role of connectivity, accessibility and overall infrastructure quality such as telecommunication, internal road, bank service and other essential infrastructure. They improve physical and social infrastructure that enhance the attractiveness of the property. Akey challenge for developers is to build properties at competitive price, in area that are attractive to consumer.

D. Financing bodies: these are institutions like the bank and insurance mainly related to the overall financing of a real estate project. Banks give credit service to developers and encourage them to pursue their tasks without any worries for finance. Banks may require collateral equivalent in value to the amount of money requested. But in real estate development cases the collateral required to secure a huge sum of money needed for such immense projects, is minimal. The real estate developer mostly have not get long term loan from financial initiations because developers project need large money without having enough collateral value property to guaranty this requested credit ,so by this case and even by fearing risks ,the financial institution have no interest to give credit for developers. In order to solve these chronic financial problems, Governments must set up national real estate financing fund institute that allocate the credit and financial accessibility to developers with risk sharing.

There are different ways of real estate financing: governmental and commercial sources and institutions. As stake holders of real estate development the following institutions are the major partners for the real estate project financing but the name and structure of financial institutions are very different from country to country such as :

- Commercial banks

Due to changes in banking laws and policies, commercial banks are increasingly active in home financing. In acquiring mortgages on real estate, these institutions follow two main practices:

1. Some banks maintain active and wellorganized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans.
2. Banks acquire mortgages by simply purchasing them from mortgage bankers or dealers.

- Insurance companies

Investment risk insurance companies are another source of financial assistance. These companies lend(give credit) on real estate as one form of investment and adjust their portfolios from time to time to reflect changing economic conditions. Individuals seeking a loan from an insurance company can deal directly with a local branch office or with a local real estate broker who acts as loan correspondent for one or more insurance companies.

- Real estate investment trust fund

Real estate investment trusts (REITs), which began when the Real Estate Investment Trust Act became effective on January 1, 1961, are available. REITs, like savings and loan associations, are committed to real estate lending and can and do serve the national real estate market, although some specialization has occurred in their activities.

2.3. Stakeholders in Real estate developers process

A. The Government: the government prepares land lease polices, organizes different administrative units at various levels, and sometimes builds real estate properties etc. The government, as in the case of its role in other sectors, will have the upper hand. It establishes the legal frame work through which every stake holder carries out its tasks. The government has a great role through facilitating land allocation, legal framework and also assures security of tenure (give guaranties to protect from forced eviction).

B. Real estate developers (investors): real estate developers are companies, government agencies or individuals that are involved in transferring built up areas to consumers. The definition of real estate developer can encompass other dimensions as well based on the condition in the country. For instance, according to the Addis Ababa city administration directive on conditions of land request and authorization services defines real estate developers as one who builds houses which can accommodate 50 or more households through rental, transfer or sales. Real estate developers most of the time tender contract documents, follow up the construction from the inception to completion, and transfer built up areas to clients either through rental or sale. However; there are some real estate developers who will be involved in the design and construction of real estate properties themselves. This is a common case here in our country.

C. Customer/end user /:are end users of the areas developed by real estate developers. Customers buy or rent units from the developers and use them for their daytoday activities. There are a lot of stakeholders other than the major ones stated above. These include construction material manufacturers and suppliers, attorney, accountants, market researchers, real estate brokers, urban planners and environmental consultants.

The end user in other word named as the space consumer group , which includes “individual space users “attempting to rent or buy real estate space to house their specific needs; collective users generally pursuing their interests in real estate activity through the political systems that purchase open space, provide for public infrastructures, or regulate space production with pooled funds from taxation; and “future users” who are typically represented by proxy, either by developers who anticipate the need to change the use of a building in the future, or by the judiciary or special interest groups, who perceive some trusteeship of the land for future generations.

D. Project manager

Project management has been defined as: the overall planning, control and coordination of the project from inception to completion aimed at meeting a client’s requirements in order that the project will be completed on time within authorized cost and to the required quality standards. Likewise, the duty of the project manager acting on behalf of the client has been stated like as:

- Providing a cost effective and independent service correlating,
- Integrating and managing different disciplines and expertise to satisfy the objectives and
- Provisions of the project brief from inception to completion.

The service provided must be to the Client’s satisfaction, safeguard his interests at all times and, where possible, give consideration to the needs of the eventual user of the facility.

The construction manager might be an architect, a builder, an engineer, a building surveyor or a quantity surveyor, and extensive practical experience in the type of project being built is essential. The prime task is similar to that of the project manager, seeing that the building comes in to time, to cost and to specification. In doing so, the construction manager is often called upon to reconcile conflicts between other professional members of the team involved in the building process

E. Geotechnical engineer: usually responsible to the structural engineer. The geotechnical engineer is retained to perform initial tests of the bearing capacity of the soil, evaluate drainage conditions and generally assist in planning to fit the proposed project onto the site in an optimum manner, balancing physical effectiveness with building costs.

F. Mechanical and electrical engineer or building services engineer: Together, these engineering disciplines supply the lifeblood of a building. It is estimated that around 60 per cent of total building cost these days can be attributed to the provision of building services in commercial development projects. Such facilities as heating, water supply, lighting, air conditioning, communications, fire precautions and lift services must be carefully planned and coordinated.

G. The valuation expert(valuer) Many development agencies supply valuation expertise from within their own organization. Where this is not the case, it is common for the estate agency firm retained also to provide valuation advice. Sometimes a separate consultant is employed. In essence, the valuer might be asked to estimate the likely value of land identified for a development project, the possible level of profit that might be derived from undertaking the scheme, or the capital value of the completed project.

There may be separate valuations that have to be conducted for such purposes as land assembly, compensation, taxation, and funding, letting, sale and asset valuation. The initial valuation will almost certainly have to be revised and updated during the development process, as the picture of probable income and actual expenditure becomes clearer.

H. The quantity surveyor: The quantity surveyor is basically charged with the task of cost analysis and cost control. It is advisable for the quantity surveyor (or building economist) to be included in the initial design deliberations and financial appraisal, particularly as the question of construction cost has become so critical over recent years. The original function of the quantity surveyor was mainly restricted to the preparation of bills of quantities and the variations of accounts. However, they have progressively become more involved in providing cost advice throughout the development process, but they remain principally concerned with supplying cost information through the feasibility, outline and detailed design stages, culminating in an agreed cost plan linked to an acceptable preparatory design.

I. The builder: The builder is not normally included as a full member of the professional team at the outset of the development process, but rather is viewed as a contracted agent at the procurement stage. However, some more enlightened property developers have found that early, prompt and sympathetic advice on the building aspects of construction and design, particularly such aspects as labor, site management and materials, can be extremely useful in respect of savings in both time and cost. The builder’s function in the development process can best be described as follows (Somers 1984):

Feasibility Understanding the developers’ overall timescale; preparing an outline network so that discussions relating to key dates can be meaningful at all principals’ meetings; and providing general assistance to the whole team on matters relating to site conditions and construction.

Outline proposal: Participate in site investigations and any surveys and schedules of dilapidations; produce initial method statements; liaise with the quantity surveyor on a range of cost information; supply examples of contracts and subcontracts; provide material samples; draw up alternative construction programs; and develop the project network and report progress.

Scheme design: Advise on design matters relating to trade sequencing and degree of difficulty; help in advising on the design details relating to weather proofing, which must be guaranteed; consider longterm delivery aspects; continue with cost information advice; interview specialist subcontractors; and update the project network to include the detailed design stage and report progress.

Detailed design: Prepare temporary support work designs; establish all special conditions to be included in subcontract documentation; prepare and agree the total budget for construction; detail all quality control and instruction procedures; update the project network to include construction activity and report progress; order longterm delivery items; advise local authorities, neighbors, local residents and unions of intentions; define the extent of all remaining details to be provided by the consultant teams and complete project network accordingly; and agree all work packages.

Construction period: Follow the basic tenets of building safety, within budget, on time and to specification; update the project network to include show areas, letting procedures and key dates together with handover arrangements and maintenance period work; and be in a position to report time and financial progress accurately at all times.

J. The solicitor: The services of a solicitor are unavoidable in the property development process, right from acquisition through the various stages of planning approval, contracts for construction, to eventual sale or leasing. How much legal work is involved in any particular project will naturally depend upon the complexity of the scheme and the number of parties concerned. It is also possible that specialist advice might have to be sought on certain matters. In simple terms, it has been said that the solicitor is well suited to undertake several roles: of advisor, especially in the complex area of planning law and construction contract law; negotiator, to explain, to persuade, to reach agreement and to discover for and between the various parties ; advocate at meetings, representations of all kinds and inquiries; coordinator, between all parties to the project and all those who can regulate or otherwise have an influence upon it; and draftsman, of all the relevant formal documentation.

K. Architects and consulting firms are those that convert the developer’s concepts into a design. Architects accomplish this in accordance to established rules and regulations. They should also adhere to the master plan in doing so. Architects after design may also getinvolved in consultation activities.

2.4. The Role of the Real Estate Developer

By nature, real estate is multidisciplinary. It is a range of components, aspects and processes. Therefore, developer’s role is inevitably a multiple role in nature. Developer has to respond and deals with many stakeholders. Followings are the main groups of stakeholders with whom the developer has to work. And the next diagram shows the way of interactions.

PUBLIC

Who: Regulators, Politicians, and Community?

What do they want: Sound development, valuable properties, efficient and effective space…?

USERS

Who: Tenants or owneroccupants, and other interest parties (indirect users)?

What do they want: Right space with right services at right price and at right time?

CAPITAL MARKET

What: Debt, equity and suitable means of finance

Want does financer want: Greatest possible financial return and its security.

THE DEVELOPMENT TEAM

Who: Inhouse and external professionals?

What do they want: Wellpaid jobs, useful experience and satisfaction of work, enhanced reputation, participation with good team members, job security and so on.

Look at the following diagram and learn the relationship among these partners and the multiplicity in developer’s role.

Summary

The property development process involves the constant interaction of various agencies, groups and individuals. Given the allpervasive nature of property in the lives of everyone, few, if any, are exempt from participating in the development process in one way or another

There are various groups involved in the real estate sector. These groups have their own roles in the real estate industry. However, they should collaborate with each other to help the real estate sector grow and utilize its full potential in solving the housing problem. The different units involved in the real estate sector development are discussed the following issues such as:

Public sector: The direct development activity undertaken by public sector agencies varies such private sectors : Private sector has different goals. It expects maximum return from investments may be in terms of development fee, profits, long term equity, capital gain, personal satisfaction and professional enhancement and so on. Welfare is not among the private sector objectives enormously according to their nature and function. Corporate occupiers: corporate occupiers play the role of connectivity, accessibility and overall infrastructure quality such as telecommunication, internal road, bank service and other essential infrastructure. Financing bodies : these are institutions like the bank and insurance mainly related to the overall financing of a real estate project. Banks give credit service to developers and encourage them to pursue their tasks without any worries for finance. Banks may require collateral equivalent in value to the amount of money requested. But in real estate development cases the collateral required to secure a huge sum of money needed for such immense projects, is minimal.

The valuation expert’s (valuer) role: Many development agencies supply valuation expertise from within their own organization. Where this is not the case, it is common for the estate agency firm retained also to provide valuation advice. Sometimes a separate consultant is employed. In essence, the valuer might be asked to estimate the likely value of land identified for a development project, the possible level of profit that might be derived from undertaking the scheme, or the capital value of the completed project.

Exercise

Part one: True/False

1. Project manager control and coordinate project from inception to completion aimed at meeting a client’s requirements
2. Government is end users of the areas developed by real estate developers
3. Real estate developers are companies, government agencies or individuals that are involved in transferring built up areas to consumers

Part two: Multiple choose

1. is play the role of connectivity, accessibility and overall infrastructure quality such as telecommunication, internal road, bank service and other essential infrastructure A. space consumer group B. private sector C. corporate occupier D. all
2. actor is basically charged with the task of cost analysis and cost control in real estate development A. property valuer B. quantity surveyor C. accountant D. urban planner
3. The services of a solicitor are unavoidable in the property development process, right from acquisition through the various stages of planning approval, contracts for construction, to eventual sale or leasing A. quantity surveyor B. valuer expert C. solicitor D. urban planner
4. which of the following is not actors in real estate development activities? A. public sector B. private sector C. welfare sectors and NGO D. Financial institutions

Part three: Fill the blank space

1. has been defined as: the overall planning, control and coordination of the project from inception to completion aimed at meeting a client’s requirements in order that the project will be completed on time within authorized cost and to the required quality standards
2. Understanding the developers’ overall timescale; preparing an outline network so that discussions relating to key dates can be meaningful at all principals’ meetings; and providing general assistance to the whole team on matters relating to site conditions and construction.
3. is the profession that estimate the likely value of land identified for a development project, the possible level of profit that might be derived from undertaking the scheme, or the capital value of the completed project

Part four: Discuss and explain the following questions

1. What is meant by Real Estate Development?
2. Is the Real Estate Development a dynamic or constant? Why?
3. Who is the Real Estate developer?
4. Describe the State role in Real Estate Development.?
5. Who are the different stakeholders in a Real Estate Development project?
6. Critically analyses the evolution of the real estate sector of the country and identify the current and future challenges?
7. list at least three actors in real estate development project?

REFERENCES

Graaskamp, J. 1981. Fundamentals of real estate development. Washington DC: Urban Land Institute.

William B. Brueggeman, Jeffrey D. Fisher 2003. Real estate finance and investments: 14th ed. the McgrawHill/ Irwin series in finance, insurance. and real estate

World bank 2009; Housing Finance Policy in Emerging Markets; The International Bank for Reconstruction and Development/The World Bank

UNIT THREE

3. REAL ESTATE DEVELOPMENT PROCESS

3.1. Introduction

Real estate development is a multistep process that can be complicated, lengthy and risky. It can take years to bring a project from the initial planning stage through construction to final completion, and there are plenty of obstacles that can pop up along the way. Yet development projects also can be highly profitable investment opportunities. Development projects provide the opportunity to deliver a product that does not currently exist into a market, often providing the fresh new supply to satisfy pent up market demand. When executed well, this aspect of a development project can translate into a runaway success story, something that simply isn’t nearly as possible with an existing asset. Investors can more confidently assess some of the risks associated with construction by better understanding the “life cycle” of a development project.

Real Estate (immovable property) is also called “real property “land and anything permanently affixed to the land, such as buildings, fences and those things attached to the buildings such as light fixtures, plumbing and heating fixtures or other such as items that would be personal property is not attached. May refer to rights in real property as well as the property itself (land and real estate management)

Learning objectives

After completing the study of this unit, you will be able:

- To understand real estate development process
- To understand Real estate development valuation ,
- To identify real estate development site appraisal techniques
- To understand Real estate development finance
- To examine Real estate marketing

Brainstorm questions

Abbildung in dieser Leseprobe nicht enthalten

3.2. Real Estate Development

At its most basic, Real Estate Development is the business of facilitating the construction or reconstruction of buildings. This usually involves finding a piece of land, deciding what should be built on it, and then arranging and coordinating everything necessary to complete the project: financing, choosing and supervising the architect, contractor, sales or leasing agent, etc.

In most cases, the real estate developer is an entrepreneur, and takes significant financial risk to purchase the land and develop the property, only making money if at the end of the day the market values the finished property (by purchasing or renting it) for more than all the costs involved in developing it There is a sequence of steps to follow from the first conceive a need of a real estate in a mind to the time of completion of the physical construction and until commence of ongoing asset management diagram.

Abbildung in dieser Leseprobe nicht enthalten

Different phases in a real estate development project

The above three major phases can be realized by means of many phases. Each phase consists of some important activities. Following eight phases include all the activities under the above three major phases.

- Coming up with an idea. This idea may arise due to an issue/problem/a need or a want of individuals, firms or government.
- Refining the idea . By refining the initial idea it makes more realistic. The first idea is mostly very vague. And also the idea is probably a need. There may have different way to fulfil the need. By refining the idea, suitable actual need will be identified.
- Testing its feasibility . Test the feasibility is needed to realize the idea. Once the initial idea is refined, you will know the actual need. Then it is needed to know whether it is possible to realize within the practical constrains.
- Negotiating contracts with needed stakeholders of the project. Negotiations with professionals, public agencies, bankers, service providers etc.
- Making a commitment of stakeholders . Agreements are signed, loans are disbursed, permissions are given and work is officially begun.
- Constructing the project . Actions are taken place, materials are purchased and supplies, workers are in action at the site and supervision of work is done.
- Completing and opening It is physically appeared, services are provided, COC is obtained, and ready for occupation and functions.
- Managing the new property : continuation of uses and maximize the satisfaction of users. Ensuring uninterrupted functions of the property

This is a process, not a set of isolated activities. Therefore, each activity has relationships with the other activities. The success of an activity depends on the success of the other activities and vice versa.

As a whole, it seems that the real estate development project is highly straight forward.

Real estate development is a creative and extremely complex, partially logical and partially intuitive. It can’t be taught fully. Application of common sense, contingency approaches etc are more important.

At every stage, the developer should consider all the remaining stages of the development process. The impact of a single decision on the whole project is colossal. Specially, it should be remembered that in most cases mistakes of real estate cannot be revised or the cost of revision/ correction of a mistake is very high. For instance, if the decision of location is wrong, it cannot be corrected. If the design of the building is wrong, the alteration cost is very high, so the development process is in the nature of interdisciplinary.

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