Na#onal  Treasury  Ci#es’  Support  Program  (CSP)  Technical  Assistance  Workshop  

7-­‐9  March  2016    

The  Development  Process  (Francois  Viruly  and  Rob  McGaffin)  

The  Interrela;onship  between  the  different  sectors  of  the  Property  Market  

Development  Cost   Capital  Values  

DEVELOPMENT  MARKET  

Supply  of  Space   Demand  for  Space  

Vacancies  

USER  MARKET  

INVESTMENT  MARKET  

-­‐Building  Cost  

-­‐Land  Cost    

Capitalisa;on  of  Rentals    

Rentals  

Feasibility    

Capital  Values    

THE  INTERACTION  BETWEEN  MARKETS  

-­‐Monetary  Policy  

-­‐  Interest  Rate  

-­‐Macro  Economics  

-­‐  Environment  

-­‐Business  Cycle  

The  Development  Process  can  be  assessed  and  understood  through  different  lenses  :  

 Produc#on  approach  –  looks  at  the  economic  and  poli;cal  forces  and  logic  of  property  development    Agency/Behavioural  approach  –  looks  at  the  decisions  and  incen;ves  of  the  individual  actors  that  develop  property    Ins#tu#onal  approach  –  looks  at  the  prac;ces,  procedures  and  networks  of  ins;tu;ons  that  develop  property    Sequen#al  (project  cycle)  approach  –  looks  at  the  stages  and  steps  involved  in  the  development  of  property    All  are  important  in  understanding  property  development!  

 (Guy  &  Henneberry,  2002)  

     

Project  Iden;fica;on  

Project  Selec;on  

Concept  Development   Prefeasibility   Feasibility   Detail  Design   Tendering  &  

Contrac;ng   Construc;on  Land  Release  and  Hand-­‐

over  

Opera;on/Management  

Incep;on   Prepara;on   Implementa;on   Management  

Project  Phase  

PROJECT

 PHA

SING  

2015/02/13   McGaffin   4  

The  Sequen#al  Approach    

The  Project  Cycle    

Adapted  from  “Elements  of  the  Project  Cycle”  (Aiello  and  McGaffin,  2015)  and  

Carn  et  al  (20  

Pre-­‐Project     Project  Iden;fica;on   Project  Selec;on   Project  

Priori;sa;on  Concept  

Development   Pre-­‐feasibility   Feasibility  

Pre-­‐Project   Prepara;on  

Implementa;on   Opera;ons  

2015/02/13   McGaffin   5  

Incep;on  

Detailed  Design   Tender  &  Contract   Construc;on   Hand-­‐over   Commissioning   Opera;on   Maintenance  &  

Repairs  De-­‐

Commissioning  

Pre-­‐Project     Project  Iden;fica;on  

Project  Priori;sa;on   Project  Selec;on   Concept  

Development   Pre-­‐feasibility   Feasibility  

2015/02/13   McGaffin   6  

Project  Iden#fica#on:    •  Iden;fica;on  and  

descrip;on  of  projects  in  terms  of:  •  Type  •  Scale  •  Loca;on  •  Phase  •  Dependencies  so  that  they  can  be  compared  and  assessed  whether  they  will  address  the  needs  iden;fied.    

 

Pre-­‐Project:    •  Iden;fica;on  and  

agreement  of  key  objec;ves  to  be  achieved  (Project  impacts):  •  Fiscal    •  Economic  development  

•  Spa;al  restructuring  

•  Service  delivery  •  Development  of  a  

strategy  and  programme  to  achieve  above  objec;ves  

       

Project  Priori#sa#on:    •  Priori;sa;on  of  

projects  in  terms  of  project  impacts  (Fiscal  etc.)  

•  Priori;sa;on  of  projects  in  terms  of  project  process  and  technicali;es:  •  Economic  and  poli;cal  viability  

•  State  of  readiness  (land,  rights,  infrastructure  etc.)  

•  Resources  required  

•  Key  dependencies  

Project  Selec#on:    •  Selec;on  in  terms  

of  priori;sa;on  and  resource  availability  

       

Concept  Development:    •  Assessment  of  

demand:  •  Market  analysis  (supply/demand  for  par;cular  property  type)  

•  Marketability  (ability  of  specific  project  to  compete  for  this  demand)  

•  The  key  development  principles  

•  The  nature  and  scale  of  the  key  structuring  elements  

•  The  es;mated  yield  in  terms  of  types  &  quan;;es  of  land  uses  

Pre-­‐feasibility:    Technical:  •  Scoping  physical  

and  legal  issues  Social:  •  Scoping  of  

stakeholders  involved  and  related  issues  

Financial:  •  Scoping  of  total  

costs  and  returns  and  possible  funding  op;ons  

Ins#tu#onal:  •  Iden;fica;on  of  

delivery  models      

Feasibility:    Technical:  •  Layout  plans,    

detailed  drawings,  elemental  es;mates,  statutory  approvals  

Social:  •  Stakeholder  

agreement  Financial:  •  Take-­‐up  &  return  

assessment  &  funding  applica;on  

Ins;tu;onal:  •  Structuring  and  

establishment  of  the  delivery  vehicle  

Detailed  Design   Tender  &  Contract   Construc;on   Hand-­‐over   Commissioning   Opera;on   Maintenance  &  

Repairs  De-­‐

Commissioning  

Detailed  Design:    •  Approved  layout/  

working  drawings  •  Bill  of  Quan;;es  

Tender  &  Contract:    •  Compile  tender  

documenta;on  •  Adver;se  •  Adjudicate  •  Award  

Construc#on:    •  Site  

establishment  •  Construc;on  •  Prac;cal  

comple;on  •  Final  comple;on  

Handover:    •  Final  accounts  •  Occupa;onal  

cer;ficates  •  Open  township  

registers  •  Open  sec;onal  

;tle  registers  •  Issuing  of  ;tle  

deeds  

Opera#on/Management/De-­‐commissioning:    •  Equipage  &  staffing  •  Repairs,  maintenance  and  minor  improvements  •  Decommissioning  

   

 

Review  of  BEPP  projects  and  ULI  Panels  reveals  that  many  projects  are  stuck  in  1st  gear  because  of  a  poorly  executed  incep#on  phase:  

•  Poor  iden;fica;on  and  ar;cula;on  of  desired  impacts  and  objec;ves  •  Compe;ng  desired  impacts  and  objec;ves  •  No  mechanisms/processes  to  mediate  trade-­‐offs  

•  Objec;ves  should  be  met  through  a  programme  of  projects,  not  one  project  

•  Poor  concepts:  •  Poor  understanding  of  market  demand  •  No  agreement  amongst  role-­‐players  

•  Poor  understanding  of  roles  of  public  and  private  sectors  in  the  project  cycle  •  Who  is  best  placed  to  add  value  –  where  and  when?  

Cataly;c  Projects    (  BEPP)  

Cataly;c    Projects    

Intensified  Use    

Integrated    

Mixed  use    

Located  in  Integra;on  

zone    

Spa;al  game  changers     Posi;ve  

impact  on  spa;al    form    

Require  Infrastructure  Expenditure    

Blend  of  Finance    

TOD    (  VRC&MSE)  

City  of  Cape  Town    

Risk/Return  in  the  Project    

Conceptual plan

Infrastructure provision

Property Development

 

 

Land Only

RISK

Return

Par;cipants  in  the  Real  Estate  Investment  Process  

Mortgage Lender Sources Types Building society Short-term Banks Long-term Insurance Individual

Real Estate Investment 1.  Individual 2.  Company 3.  Partnership 4.  PUT 5.  Syndications 6.  Share block

Government 1.  Central 2.  Regional 3.  Local

Tenant 1.  Residential 2.  Commercial 3.  Industrial 4.  Special purpose 5.  Other

Real Estate Investment

Promissory note Restriction on lenders

Mortgage laws

Property rights

Mortgage document

Lease document

Debt service

Cash flow

Restrictions on use: taxation, eminent domain, police power

Leasehold Use of property

Income taxation

Landlord / tenant laws

Restriction on User

Income taxation

•  Pricing •  Genuine •  Speculative

•  Adverse publicity •  Lobbying •  Sensitive areas

•  Volative markets •  Rising markets •  Margin squeeze •  Controlled environment

•  Does it make sense? •  Is it pioneering? •  Does it have long-term durability?

•  Track record •  Financial strength •  Depth of management

•  Professional team •  Project manager •  Contractor •  On-time & within budget

•  Volatile environment •  Exchange rates •  Long lead times •  Action groups •  Elections •  Security

•  Tax needs •  Entity •  Rising fencing •  KISS

•  Impact of delays •  Phasing •  Attorneys

Sales

RISK

Conceptual

Environmental

Interest Rates

Conveyancing Structuring

Political

Delivery

Developer

TOWN    

PLANNING    

 

SERVICES  

 

BUILDING    

 

OCCUPATION    

Property    Rights    

 Tenure  

 Community  Rights/  

En;tlement      

 The  Property  Market  Delivers  One  Way  Or  The  Other…  

-­‐5,000  

0  

5,000  

10,000  

15,000  

20,000  

25,000  

30,000  

35,000  

40,000  

Bn    R

 

SARB  

Residen;al  

 Non  Residen;al  

Every  Twenty  Years  we  have  a    Major  Property  Construc;on  Boom…  

TIME  

Returns  &

 Sup

ply  

2000-­‐2002   2003-­‐2005   2006-­‐2008   2009-­‐2010   2011  -­‐  

Returns  &

 Sup

ply  

RECESSION      

RECOVERY      

MARKET  EXPANSION  

   

MARKET  CONTRACTION      

RECESSION      

The  Stages  of  the  South  African  Property  Cycle  

Some  thoughts  ;  •  Start  thinking  of  the  role  of  the  built  

environment  in  furthering  growth  and  development  .  

•   What  are  the  needs  of  small  businesses    -­‐  User  focussed  ?    

•  Remembering  the  role  of  transporta;on  –  value  crea;on  and  TOD  .  

•  Take  a  city  perspec;ve,  not  project  focus    •  Adapt  planning  .  •  Create  street  networks.  •  Harness  the  power  of  Retail.  •  Unlock  Complexity,      

References:    Appraisal  Ins;tute  (2008)  The  appraisal  of  real  estate.  13th  Edi;on.    Chicago:  Appraisal  ins;tute.      Guy,  S.  and  Henneberry,  J.  (2002)  Development  &  developers:  Perspec<ves  on  property.  Oxford:  Blackwell  Science  Ltd.        Miles,  M.,  Behrens,  G.  and  Weiss,  M.  (2000)  Real  estate  development:  Principles  and  processes.  Urban  Land  Ins;tute.