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KEY ROLE OF

QUANTITY SURVEYORS

DEVELOPMENT ECONOMICS
NOTES LECTURE 12 : ECONOMIC VIABILITY
Prior To Embarking On Any Development Project.

FEASIBILITY STUDY.

Lending
Institutions
(Financier)

Property
Developer

Property Feasibility Studies

Desired Return
on Investment

SURE
BASED CRITERIAS

VIABLE

Performed at Different Stages of Land & Property Development


In Order To Analyze & Determine Whether The Project
Is Financially& Environmentally
Worth Developing

MARKETABLE

FUNDABLE

Studies of the Financial Viability of property-based projects

May also evaluate the Environmental And Social Impacts

Viewed from the Perspective Of The Project Developer

May determine Market Value

Ability to Payback
Loan and provide
adequate security

Attract Purchaser
Provide the Confidence

Projects

Key Features Basic Structure


Usually applied when Property Has Development Potential,
this is a hypothetical development study.

Commercial
Project

Housing
Retail
Office
Industrial

Social Project

Schools
Bus
Stations
Airports
Hospitals
Parks

Study structure is based on:


Land + Improvements + Profit Margin = Value
2

Study Requires Forecasts (Market, Industry, etc)

Return On
Investment

Evaluation
Methods

Profit
Maximisation

Economic
Study

Benefit
Maximisation

Cost Benefit
Analysis
Treshold
Analsysis

Forecasts must be Based On Market Analysis.


STEP 1

UNDERTAKE STUDY

Performed at many stages of development .


To analyze and determine whether the project is
financially and environmentally worth developing.
STEP 2

FIRST FEASIBILITY STUDY

Developer will conduct his first feasibility study after he has


tied up the contract through a purchase and sale
agreement or an option to buy. The study researches
whether there is a demand for the proposed development
project and present and future competition.
STEP 3
ESTABLISH DEMAND
Most feasibility studies take
into consideration needs
legal issues, technical issues,
financial and economic
concerns and benefits and
community needs.

If the demand projection indicates a higher


demand than what is currently available, then the
developer assumes the project will be successful
and should proceed with the development.
STEP 4
IMPLEMENT DECISION
Once the developer has decided to move forward with
the project, his consultants will draw preliminary plans
and specifications for the development.
STEP 5
PLANNING COMPLIANCE
Include the layout of the project, buildings, utilities, and
other site work. Planning compliance crucial to the
development process and reviewed and analyzed in the
very beginning of the development process.
STEP 6

PLANNING COMPLIANCE

Cost estimate for the project is prepared.


Developer take the cost projections and create a cash
flow analysis of the project which is part of a much
more detailed feasibility study created at this time.
STEP 7
ADDRESS ISSUES
STEP 8
SEEK FUNDING
The developer will then obtain a development mortgage loan
Once the developer has decided to move forward
financing commitment once the initial plans and
with the project, his consultants will draw preliminary
specifications are completed and a fairly accurate cost for the
plans and specifications for the development.
project has been estimated.

Public Bodies do Feasibility Studies but their focus


is on Cost And Social Issues:

A technique to ensure:

BASED CRITERIAS
Consider
Cost Effectiveness

Minimising
Construction &
Operating Cost

Any large urban development plan requires the expenditure of a considerable


amount of public money

Focus On
Cost Alternatives

Useful Tool is Cost Benefit Analysis

1. That the overall benefits of the plan adopted exceed the overall costs to
the Community.
2. Whether there are alternative plans, the most worthwhile is selected.
CBA is technique which seeks to bring greater objectivity into decision-making.

It does this by identifying all the relevant benefits and cost of a particular
scheme (project) and quantifying them in money terms so that each can be
aggregated and then compared
CBA is a practical way of assessing the desirability (Feasibility) of projects
RM Sum of the benefits (Project)
less
Where it is important to take a long view (looking at the impacts in the near future and further)
RM Sum of the cost (Projects)
And a wide view (allowing for effects on many persons, industries, environment and region etc)
RM Surplus (Deficit)
i.e. it implies the enumeration and evaluation of all the relevant costs and benefits.
Social Cost-Benefit Analysis (CBA)

CBA technique involves placing monetary values on all the various


attributes and defects of a plan, including those items which do not
normally have prices attached to them
e.g COST OF URBAN TRANSPORT
RM (Development Cost)
RM (Travel time savings)
RM( Changes in accident rates PRICE?
RM (Noise nuisance)
RM (Air pollution
Conceptually CBA involves consideration of all aspects of a plan as they
affect the urban community
COST BENEFIT ANALYSIS (EXAMPLE)
Proposal Development of a City Airport
Benefits:

1. List all relevant items


2. Value the expected benefits & cost
3. Discount the future flow of benefits and costs in order
to obtain their capitalised present value
4. Appraise the project by setting of aggregate benefits
against aggregate costs.
EVALUATION OF COMMERCIAL PROJECT

ISSUE : Do We Proceed Or Not On A Particular Project?


Establish
Feasibility/Economic Viability Of The Project
Need to a certain
Condition Of The Market

RM (Reduce travel time)


RM (Increase in business travelers)
RM (Increase in urban tourism)
RM (Increase in employment)
RM (Increase in MICE Events)
RM (Increase in freight business)
RM (Others)

Development Value
Development Expenditure
Development Profit

RM (Lost of land for option)


RM (Noise pollution)
RM (Air pollution)
RM (Traffic congestion)
RM (Safety risks)
RM (Others)
RM Benefits (Cost)
Returns on Investment
1

Dev. Profit

Total revenue less total cost including interest

Dev. Margin

Profit divided by total development costs, may


including selling costs

IRR

The discount rate where the NPV = 0

NPV

The cash flow stream discounted to present value

Land Market
value

NPV result, less Development costs, provided all


inputs are market related

PROJECT EVALUATION
MARKET STUDY
PROPERTY VALUATION
DEVELOPMENT COSTING
INVESTMENT ANALYSIS

Return Of Investment

QS

Deduct (Cost)

Net

THE APPROACH : How different parties gain or lose

MAKING
DECISION

PROCEED OR
DO NOT IMPLEMENT
OR OTHER OPTIONS

EXAMPLE
Development of a Housing, Commercial, Industry Project
DEVELOPMENT REVENUE:
RM (Sales)
RM (Rental Income)
RM (Sales and rental income)
RM (Others)

DEVELOPMENT VALUE

DEVELOPMENT COST :
RM (Cost of land)
RM (Associated with development approval)
RM (Consultancy)
DEVELOPMENT EXPENDITURE
RM (Construction)
RM (Development Financing)
RM (Legal , Marketing and management)
RM (Others)
DEVELOPMENT PROFIT

Net RM Gross Profit (Gross Loss)

Cash Flow Models:


Examine the Cash Flow And Returns Over The Lifespan of the project, using sequential periods
Should be used when Projects Extends Over Several Years
Will produce a more accurate result provided inputs are Well Researched
Must correctly Reflect Timing And Stages Of Project
Unless the Cash Inflows And Outflows Are Placed The Correct Periods, the exercise is useless.

LECTURE 12 : PROJECT ECONOMIC VIABILITY BASED ON CASH FLOW ANALYSIS


ASSETS

UNIT

QTY

COST

AMOUNT

DEVELOPMENT PERIOD
1

II

EXPENDITURE

Land

Units

100

150,000

15,000,000

Ac

10

100,000

1,000,000

Conversion

250,000

Planning

150,000
Total land Cost

1,400,000

Infrastructure
Earthwork

Ac

10

30,000

300,000

Utilities

Ac

10

50,000

500,000

Building

Units

100

80,000

8,000,000

Total Construction Cost


4

Consultancy

10

Management

Mth

30

III
UNIT

QTY

8,800,000
800,000

Financing

ASSETS

REVENUE
SS Terrace Hse

20,000

720,000

Say

150,000

Total Development Cost

12,870,000

Gross Development Profit

2,130,000

PRICE

TOTAL

DEVELOPMENT PERIOD

Residential

Q1

Q2

Q3

Q4

Q10

REVENUE
SS Terrace Hse

Units

ASSETS
II

EXPENDITURE

Land

100

150,000

1,500,000

1,500,000

2,250,000

1,000,000

Conversion

250,000

Planning

150,000

Infrastructure
Earthwork

300,000

Utilities

500,000

Building

8,000,000
8,800,000

Consultancy

800,000

Management

720,000

Financing

150,000

QUARTER

AMOUNT

1,400,000
2

15,000,000

Signing of S&P Agreement

10%

1,500,000

Earthwork

10%

1,500,000

Structural Work

15%

2,250,000

15%

2,250,000

..

10%

1,500,000

15%

2,250,000

10%

1,500,000

..

10%

1,500,000

Vacant Possession

5%

750,000

Total

12,870,000

Financing Required

Highest Gap between Accumulative


Revenue and Cost Curve

Cost of Fund

Financial Charges on Cash Deficit

100%

ACCUMULATIVE CURVE
OVER DEVELOPMENT
PERIOD

36 Months

12,000,000