BPE 34603 PROPERTY DEVELOPMENT

Prepared by:

Mr. Mat Tawi Yaacob & Dr. Azlina Md. Yassin

Department of Real Estate Management, Faculty of Management Technology & Business, University Tun Hussein Onn Malaysia.

LECTURE 3 PRICE & PROPERTY DEVELOPMENT CYCLES

Property Pricing determined by:

1. States Market 2. Countrys Economy 3. Actual Cost level 4. Marketing Cycle

1. States Market

Demand

Supply

2. Countrys Economy

Economic Growth
Purchasing Power Level of Income

3. Actual Cost level

Cost + 20% (profit) = Price [Cost + x% (profit) + tax] = Price [Cost + x% (profit) + tax] subsidy = Price

4. Marketing Cycle

Stock Purchase Price

Wholesellers Price

Market Price

Retailers Price

PRICE FOR PROPERTY

What does it refer to ?

% profit from cost Reflects/reflected by Market Value

Price
Other Factors Based upon Offer Price/ Market testing

Costs determined by:

1. Land costs
2. Construction/Material Costs (Bricks, wood, sand, iron etc.) 3. Infrastructures & Utilities (roads, electricity, water, telephone, lifts, escalators etc.)

4. Professional (fees) Costs (based on needs of Prop. Dev.) 5. Preliminary Costs (site & legal) 6. Preliminary Costs (site) 7. Contingencies

8. Interest On Loan
9. Project Management Fees Etc.

4. Professional (fees) Costs (based on needs of Prop. Dev.

Architect C&S/ M&E Engineer Land Surveyor Quantity surveyor

Lawyer Marketing Agent Town Planner Valuer Interior designer etc.

5. Preliminary Costs (site & legal)

Premium Subdivision Preliminary Survey costs Planning costs Devt. & Building Plan Fees Etc.

6. Preliminary Costs (site)

Site clearance Building demolition Levelling of site Dev. & Building Plan Fees Etc.

Basic + Labour + Incidental = Absolute Costs Cost Cost Cost

Then, what is
1. Sunken Cost ? 2. Cost allocation ?

Cost Price
Cost Price refers to a list of Prices Offered as Price for Development Cost Consists of: 1. Tender Price
2. Estimation Cost from QS (BQ) 3. Estimation Cost from QS (Detailed list)

Open Tender Close Tender Turnkey etc.

MEANING OF PROFIT & LOSS IN DEVELOPMENT

To a layman:
Profit or Loss = Sales Price - Cost Professional Opinion

Profit & Loss

A combination of various factors

PROFIT & LOSS IS A COMBINATION OF:

Overall Sales Value less Overall Cost Time Factor Additional Related Costs Changes in current Interest Rate (Base Lending Rate + Fixed Rate) Cash Flow Taxation

Price Equilibrium

Total surplus

Price Equilibrium

PRICE EQUILIBRIUM INFLUENCED BY:

Market Price

Past, Present, Future Obtaining Past & Present market prices data will expedite determination of future price.

Directly Related with

Demand Supply Purchasing Power Level of Income Future Investment

Market Influence
Determinant to the success of a property development. Directly related with: Offer Price Demand Factors: Prop. Types Needed Groups of people No. of people existing, birth rate, migration

Market Influence

Supply Factors
Property Types Offered existing stock completed, current construction stock, stock being planned Size/magnitude of property stock existing development eg. housing estates, being constructed, being planned

Market Influence

Design Factors
Very influential in certain property types, particularly medium and high costs Implication of design - external and internal features of buildings - internal layout of buildings

Market Influence

Size of Land Size of Building

Layout of Development
Quality of Construction Materials
- type of bricks, floor finishes,
type of doors/windows, quality of wood, electrical points, pipings etc.

PRICE ALLOCATION

Different Prices allocated for:

Intermediate Lots End Lots Corner Lots

Price allocation: Policies

1. Bumiputra plots 2. Non-Bumiputra plots 3. Price for Bumiputra plots

Depending on respective State policies. Impacts demand and supply, and hence, PRICE.

Price allocation: Test Market Concept

Frequently done by developer, to gauge current demand level, and outdo competitors

Done in Market Forecasts In-depth study done and implemented through phasing of sales, taking into account of suitable time frames Linked to sales time frame and completion of a particular phase

Eg.
Phase 1 100 units

No. of Sales Period (6 months) ____ ? %

Phase 2

100 units

Period (6 months)

? % ____

Price is raised to a reasonable level, for profit optimisation and floatation of increase in building costs

Price allocation: Closed Sales

Allocation of development units to certain parties Eg. 100 units of houses 40 units offered on contract to a certain party 60 units offered to the public

Price allocation: Loan Facilities

Banks and financial institutions provide the main support in Property Development Important determinants of PRICE

Loan Margin (%) Interest Rate Duration of Loan Loan Facilities

PROPERTY DEVELOPMENT CYCLES

Price

Amplitude

Duration

Time

Property Development Cycles

PricewaterhouseCoopers Peak 9 8 Expansion 7 10 Contraction 11

12

1
Recession 2 3 Bottom 4

5 Recovery

Decision Rules for Market Positions

Indicators Supply Recession Declining, nil Recovery Minor Expansion Beginning to increase Contraction Increasing greater than demand

Demand

Declining

Beginning to increase Decreasing to balanced rate No growth

Strong, greater Positive but than new slowing supply Declining to low Positive growth Increase to balanced rate Positive growth but slowing

Vacancy Rents

Increasing to high Falling

Capitalization Rate
Investors Value Impacts

Increasing
No transaction Income declining with increasing cap. rates

Stable at high rates

Bottom fishers Income improves with high cap. rates

Starting to decline
Interested Income improving with decreasing cap. rates

Declining as capital grow

Interested Income stable or declining with stable or increasing cap. rates

Rent As A Surplus
Theory Of Economic Rent
Rent is paid: When potential users of land consider revenue-earning potential exceeds all factor costs including sufficient profits.

When competition exists between users for possession of the land.

Rent As A Surplus
Theory Of Economic Rent
What determines amount of rent? The amount of rent is determined by the surplus expected from using the land for its most profitable use.
What causes rental value to change? The rental value of land changes over time due to changes in the surplus of the revenue over the cost of using the land.

Rent And Price

To a Valuer : The capital value (or price) of land or property is generally related to the income (or rent) it produces or could produce. The buyer of a revenue-producing property investment (eg. tenanted office block) is paying a capital sum today (price) in return for the right to receive a stream of future income (rent).

What We Mean By Yield

Yield on property is defined as Initial Return ie. the income an investor receives on the money he lays out to buy a property. INCOME x 100 PRICE PAID

Investors expectations growth in Rental Income and Capital Value ie. Total Return or Overall Return.

Value of property is expressed in terms of its yield, ie. initial rent X Years Purchase (YP) or 100 YIELD Prime Yield at which the highest quality property would be valued.
If rental growth increases, yield on which property will be valued will drop. YP rises, and value rises. (Which phase?) If rental remains but there is shortage of investments, value of investments rise and yields drop. (Which phase?)

ACTIVITY
What Are Property Cycles?

What Causes These Cycles?

Will The Cycles Recover?

Linked materials

COST

Direct Costs

Indirect Costs

Overhead Costs

COST

1. Direct costs are those that can be related to the production, such as the cost of labor and material that remains as part of the permanent facility (e.g. concrete, formwork, steel bars). 2. Indirect costs include labor, material and expenses that are incurred but cannot be readily apportioned to a particular part of a project and are normally applied as a percentage of direct costs (e.g. supervision, temporary access road, licenses, permits, safety tools).

COST
3. Overhead costs are home office costs that are charged to a project on a predetermined basis. General overhead costs include home office facilities, insurance, executive management and other costs required to carry out the normal course of company business.

COST
Direct Cost Labour cost can be determined by obtaining the number of hours (man/day) spent on each part of the job by each worker. Full use of man-hour information cannot be made without knowing the quantity of work. For effective cost control, quantity report is used to measure the work done to determine the budgeted and actual quantities of work done and cost variance.

COST
Direct Cost (Labour cost)

The forecast quantity is normally estimated, taking into account any changes.
The difference between the forecast and the original estimate is compared and listed to record the variance and to let the project manager determine any corrective efforts to improve the cost baseline.

COST
Direct Cost- Material Costs
Material cost feedback is generated mainly through a purchase requisition control procedure. A good definitive estimate and a bill of materials will provide excellent control documents by which the material cost can be kept in check on a project.

To exercise control, it is essential that the project site maintain a record of purchases and delivered products.
If the quantity and cost of materials for an activity do not match its estimates and budget, the quantity surveyor or cost engineer must determine the reasons for the discrepancy and report to the project manager.

COST
Direct Cost Steel bars quantity of steel required for the project should be estimated (quantity taking-off exercise) by the QS and information given to the project supervisor incharge. Actual delivered and actual installed can be measured and these three data can be compared to determine any variance. Any negative variance in excess of 1.5% (allowance for wastage) is questionable and should be investigated. In smaller projects, due to the smaller quantities required and the size of the bars, the variance should be about 3%.

COST CONTROL
Direct Cost

Concrete similar procedure as steel bars, and normal wastage permitted is 3%.

COST CONTROL
Direct Cost Formwork (is slightly complicated) the QS must be capable to estimate the various timber type to be used, plywood, and scaffoldings and possibly steel moulds. In certain projects, organization may classify scaffolding as capital expenditure, of which a certain percentage cost will be applied for the project (normally 20% of total cost of purchase). If they are rented from third party suppliers, then the total rental cost will be applied.

COST CONTROL
Direct Cost

Equipment costs Equipment costs must be charged to work items based on hourly rate for each of the equipment required. Hours of operation can be accumulated from equipment time cards. Equipment idle time should be distributed to items of work and prorated to the distributed working time or captured in a separate idle time account.

COST CONTROL
Direct Cost

(Equipment costs)
Idling time should be distributed to specific activities. This may require a lot of effort and very often, a company may decide to aggregate into one account for all activities, or may provide specific sum in the initial budget for machinery and equipment utilization.

COST CONTROL
Indirect Cost Indirect costs for items such as supervision, temporary access road, licenses, permits, safety tools, are controlled by periodically comparing a report of actual expenditure with estimated costs. A prefix and agreed rate during the budgeting period, normally a percentage of the direct cost of work is added to the estimated costs.

COST CONTROL
Indirect Cost Indirect costs include costs of mobilization and demobilization, site staff, security guards, site cleaning and housekeeping, permits, license, bonds and insurances. Feedback on such costs is in the form of a monthly statement, comparing expenditure on these work items with provisions in the budget. In most construction contracts, there is always provision in the first bill of quantities for pricing preliminary and mobilization items. At such, some of this indirect cost can be apportioned as an activity within the budget provision.

COST CONTROL
Overhead Cost Salaries of field staff, home office staff, stationeries, utility bills, project vehicles, food and beverages for site office, and entertainment bills, are collected under overhead costs. Home office overheads will be taken at a percentage derived from the ratio between the overhead costs and normal business volume and are to be agreed upon between the project manager, finance manager, contract manager and the project sponsor.

COST CONTROL
Overhead Cost Periodically, the overhead cost is distributed over the total value of work done on the project. The feedback for control of overhead consists of a monthly statement comparing actual expenditure incurred on overhead items with the budgeted provision.

Price Equilibrium

Principles of Economics (N. Gregory Mankiw )