CHAPTER 1
An overview of property development

As the global population continues to increase, so does the demand for food and shelter. Our survival depends directly on how we use and manage our land and resources. As humans have evolved, so have our uses of land—for agriculture and shelter, but also for recreation, shopping, education, transport, business activities and entertainment. In our homes we live, eat and sleep; commercial buildings provide space for social and business interaction, and retail centres for selling of goods and services. As our communities expand, the demand for all these facilities increase, and this is where property developers are needed. The population of Australia, currently around 23 million, is projected to rise to 40 million by 2060; much more housing and facilities will have to be provided to accommodate this growth.

In simple terms, property development can be described as providing solutions to the demands for real estate in our society by designing, financing and constructing facilities that satisfy this demand. It is a profession that requires meticulous and thorough research together with a firm understanding of the property industry, and current and future market conditions. Some consider property development a skill, but in reality it is the analytical process of aligning the current and projected market with the associated risks and financial rewards in relation to a specific development project. Successful developers understand these fundamentals and are therefore able to sustain their reputation in a highly volatile industry in which others have failed through bad strategies or timing or simple greed.

The role of a property developer

A property developer is a disciplined professional with an entrepreneurial flair who specialises in creating new developments and successfully marketing and selling them. Depending on the type and scale of the development, some developers work with partners in order to share the risk and workload. Developers come from a wide variety of backgrounds. Some work for companies that undertake large-scale developments while others work on their own, focusing on smaller residential projects. Some hold university degrees in commerce or have a background as a real estate agent, property valuer, builder, engineer or architect. It is regrettable that only a few universities offer degrees in property development, as property developers are people who ultimately control our urban fabric, influencing the social outcome of communities.

Property development is a risky business with many challenges, but at the same time it can be very exciting and financially rewarding. Before taking on a project, developers need to assess a wide variety of potential sites to determine which will be financially feasible and marketable. A seasoned or visionary developer can look at a vacant site and conceive a potential opportunity or analyse an older building and envisage its transformation for an alternative use. In either case, the developer will embark on the development only if the demand exists. Experience in the property market is important: a developer must understand the market well in order to establish whether or not a project will be viable. Developers also need a business network and contacts in local government who can assist them in accomplishing projects. These contacts may range from people in the planning department who can provide recommendations to help push a project through to councillors who can assist in promoting their projects or real estate agents who can source potential development sites.

A reputable property developer is the leader and visionary of a develop­ment team. He or she needs to work with architects, engineers, contractors, politicians, real estate agents and numerous other professionals to see a project through from inception to completion. Developers have to select good teams, organise them well and manage them effectively, meeting the needs of the project and the team members while maintaining control of the overall development. They can select a particular area of specialty, such as land subdivision, residential apartments, low-income housing, commercial offices, retail shopping centres or hotels. They may choose to work in a specific geographical location or across a wider region where their skills gives them an edge over local developers.

Types of property developers

There are many different types of developments in the property industry, and by the same token there are many different types of property developers. They can be part-time investors or full-time professionals. Whatever category they fall into, the underlying development principles and strategies remain the same. Listed below are definitions of some typical developers.

Part-time developers

This group consists of novice developers, investors who hold a full-time job, or small syndicates of friends or business associates. These developers often aim to hold onto the development as a long-term investment. They may purchase a single lot and build a small residential building or a small shopping centre, or they may buy an existing building and then add value through renovation and by negotiating new leases with existing or new tenants. Most will pursue a long-term investment but a small percentage will seek to sell at a profit. Their developments are characterised by a frequent number of transactions, a small number of holdings, low equity, the importance placed on long-term capital gain and a positive rental income.

Full-time professionals

This group consists mainly of individuals or partners who have decided to pursue property development as a career. They may be accountants, quantity surveyors, construction managers, project managers, builders, architects, engineers, real estate agents or other individuals whose first few developments were financially rewarding. These developers are normally highly geared and well aware of the latest financial instruments. They seek to maximise taxation benefits and capital gains from their developments. The majority of this group focus on small to medium projects, from strata residential buildings to smaller commercial retail developments. They concentrate their efforts in locations with good infrastructure, including convenient access to transport.

Corporations

This group includes property development companies and major financial institutions. They could be privately owned corporations, public companies listed on the stock exchange, large insurance groups, superannuation funds or trade unions. Generally, these groups develop larger commercial properties such as regional shopping centres with a view to generating profits for their shareholders through long-term capital gain and good cash flow through positive rental income. These corporations generally have a number of qualified professionals who seek new developments and manage the project from inception to completion. Thereafter the property management division will take over and ensure the smooth running of the building.

Government/institutional

This category consists mainly of state governments, at times assisted by the federal government. Types of developments include government offices, hospitals, police stations, industrial land subdivisions and other public institutions. In some state-run programs they may involve the private sector and either seek a joint venture or tender a developable portion of land to private developers.

Fee developers

Fee developers are professionals with both qualifications and experience who will contract with an owner of land to develop their property for a fee. These developers are experienced in all phases of commercial or residential development. They are familiar with all aspects of developments including finance and feasibility studies. They understand the risks involved and how to mitigate them. These developers may also be part of an investment syndicate, and while they maintain a shareholding they are paid a fee to manage the development process. Fees charged for their professional service can range from 3 to 5 per cent, depending on the complexity of the project. First-time developers and time-poor investors should consider employing such professionals.

Residential versus commercial developments

Before you decide to embark on a career in property development, it is important to a gain a good understanding of the difference between residential and commercial property development. Residential is a lot easier to understand and to start out with, while commercial requires more experience and is associated with greater returns and higher risks.

The key difference between residential and commercial developments is the assessment of their value as an asset in dollar terms. With residential, the value is based mainly on supply and demand, whereas the value of commercial properties is based on the income stream or annual rent of the property known as the ‘annual yield' from the property. This means that no matter how architecturally attractive the commercial building may be or how much it cost to build, its value will ultimately depend on the leases and the net income stream the building produces. Other differences between these assets are described later and summarised in table 1.1.

Table 1.1: residential versus commercial developments

Residential

Commercial

Market research localised

Market research based on macro or regional level

Valuation based on...