Property Development

Property Development
What is Property Development

Property development is defined as
the “means of carrying out of
building, engineering, mining or
other operations in, on over or under
land, or, making of any material
change in the use of any buildings or
other land”.
Types of Property
Residential property Industrial property

Large residential schemes Heavy industrial plants
Flats/apartments (Condominium) Light industries
Houses Workshops/garages
Commercial property Agricultural property
Shops/Boutiques Plantation estates
Offices Small holdings
Cinemas Village gardens
Hotels /restaurant
Types of Developers
• The investor developer:
The intention with this kind of development is to retain ownership of the
project by the developer. Short-term bridging finance may be required for
construction and then a long-term loan, often from one of the institutional
sources.
• The merchant developer:

In this scenario the project is developed with the use of short-term funding
and, when complete, disposed of to an owner or occupier.
• Public sector developer:

It includes Urban Development Authority (UDA), National Housing
Development Authority (NHDA), Local Authorities, etc.,
Unique Characteristics of Property
Development
• Limited supply:
supply of property is limited both physically (by the finite supply of Land
available) and by artificial restrictions (such as planning controls)
• Property provides a hedge against inflation:

It provides the greatest protection against the falling value of money.
• Property is not a standardized investment:

No two properties can be identical in terms of location, structure, tenant
and lease. Property is an investment you can create for yourself by
acquiring land or rights to land, erecting buildings on it and finding the
tenants. Property is an investment that can often be improved by active
management.
Unique Characteristics of Property
Development (Cont.)
• Security of income:
The purchase of property as an investment has its objectives both capital
growth and the receipt of income.
• Long term investment:

A further attraction is its inherently long-term nature.
Factors Affecting Property Market
• Land
• Capital
• Motive
• Accessibility
• Space
Factors Considered in Property Development
• Type of development
• Physical factors
• Planning controls
• Legal consideration
• Locational aspects
• Government assistance
Property Development Process
“the process by which developers seek to
secure their social and economic
objectives by the improvement of land
and the construction or refurbishment of
buildings for occupation by themselves
or others”
Byrne (1999).
Property Development Process (Cont.)
• Acquisition:
This includes the acquisition of the land upon which the
development is to take place and obtaining of required
planning permissions.
• Production:
It comprises of the design and construction of buildings.
• Disposal:
This comprises of the disposal for both occupation and
investment.
Developer’s Budget
• Gross development value (GDV), equals to total of:
– Cost of Construction including land
– Fees
– Developer’s profit
– Cost of finance
Gross Development Value
• Estimate the total rental value
• Allowance must be made for non-usable floor area
• Deduct a reasonable allowance for outgoings
(maintenance, repairs, management etc.,)
• This gives the net income.
• Capitalized by multiplying with an appropriate Years’
Purchase (YP)
Gross Development Value - Examples
Example A
The rental value of an office block is estimated to be Rs.
7000 per m2. The total floor area is 10,000 m2 and the non-
lettable area represents 20%. What is the Gross
Development Value (GDV) if the YP is 8%?
Example B
A developer is considering purchasing a site for construction
of 40 two-storeyed houses. The selling price of a house is
Rs. 7.5 million. What is the Gross Development Value?
Cost of Construction (including land)
• Estimate the cost of construction

• Various methods available
– Analogous
– Parametric
– Bottom up
• Add cost of land
Fees
• Design, costing and supervision of construction (normally
10% of construction cost)
• Legal fees for:
– Purchase of site
– Preparation and agreement of leases or selling documents
– Stamp duty
• Agents fee on letting the property and advertising cost
• Land acquisition cost is normally assumed as 4% of the land
value
• Legal and agency fee for disposal generally amount to 2.5 –
3% of GDV (about 4-6 % of construction cost).
Developer’s Profit
• Developer’s return for:

– Skill
– Time
– Risk
• Generally 10-20% of GDV should be included.

Cost of Finance
• Cost of finance for:

– borrowings
– opportunity lost (loss of interest)
• Land is often purchased at least 12 months prior to starting the

work on site.
• Payments for construction is made at monthly intervals – basis

for cost of finance is usually total building cost for half a year.
Gross Development Value – Examples (Cont.)
Example A
If the office block will cost Rs. 60,000 per m2 to build, with an estimated
duration of 12 months, what is the maximum allowable land price?.
Assume following:
1. Professional fees for construction - 8%
2. Legal and agency fees including cost of ad.– 3% of GDV
3. Developer’s profit – 10% of GDV
4. Cost of finance – 14%
Gross Development Value – Examples (Cont.)
Example B
The cost of land inclusive of legal charges is Rs. 84

million. The developer requires a profit of 15% of the
GDV. Calculate the allowable building cost for a house.
Assume:
1. Legal, agents and advertising fee – 3% of GDV
2. Cost of finance – 14%
3. Professional fees for construction – 8%

Property Development

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Property Development

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Property Development

What is Property Development

Residential property Industrial property

• The merchant developer:

• Public sector developer:

• Property provides a hedge against inflation:

• Property is not a standardized investment:

• Long term investment:

– Cost of Construction including land

• Estimate the cost of construction

• Developer’s return for:

• Generally 10-20% of GDV should be included.

• Cost of finance for:

• Land is often purchased at least 12 months prior to starting the

• Payments for construction is made at monthly intervals – basis

The cost of land inclusive of legal charges is Rs. 84

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