15 ECONOMICS OF BUILDING DEVELOPMENT

This chapter is concerned with the characteristics protection against inflation with greater security
of property and the basic criteria for development to the investor.
undertaken in both the public and private sectors, • Property companies carry a high level of debt
problems of land acquisition, financial consider- capital relative to equity or total capital (Isaac,
ations and sources of finance. An investigation is 1994).
made of matters contained in a developer's budget
and its practical application to various types of
development projects. Principal Concerns about Property as an
Investment Medium

NATURE OF PROPERTY • Illiquidity: normally takes three months or

more to sell and buy.
It seems desirable to start this chapter with a brief • Inflexibility: necessary to purchase the whole.
account of the main characteristics of property • Growth of debt finance and increase in bank
and its use as an investment medium, as these lending to property sector accompanied by
aspects are central to the building development more equity investment by institutions (al-
process. Property serves several purposes, for though this was changing in 1994). Isaac (1994)
instance it can be a factor of production, a cor- felt this could pose a threat to the property
porate asset or an investment. market.
• Valuation methodology and precision are
weakened by inflexible conventional methods,
Property Characteristics which entail substantial risk and are difficult to
apply to the more illiquid properties, such as
• Property market is fragmented and dispersed major shopping facilities and substantial office
while that of shares (equities) and other securi- buildings; the problems with Queens Moat
ties such as government stocks (gilts) are highly Houses valuation and other prominent disputes
centralised. confirm this.
• Real property has the distinguishing features of • Future of the property profession: the liber-
being heterogeneous, indivisible and has as- alisation of financial markets and increased
sociated management problems, which may importance of debt in property funding require
include collecting rent, dealing with repairs, new competencies from chartered surveyors,
lease renewals and other related matters. and the demands of the Financial Services Act
• Property is more difficult to value as there is no for those requiring information on finance and
centralised market price and it may be difficult funding will require different and greater com-
to ascertain a realistic value unless a comparable petence in financial expertise.
transaction has taken place recently. • Too much emphasis is placed on the short term
• Its main advantages are the relative durability approach to investment and performance which
of property, and it normally has an element of is inappropriate to property financing· where
I. H. Seeley, Building Economics
© I. H. Seeley 1996 403
404 Building Economics

long term strategy and returns are the key to outset in order to be able to appraise the viability
successful projects (Isaac, 1994). of the scheme. It is necessary for the developer to
know the nature and extent of the proposed
The RICS (1994) identified ways in which the development, its cost and the time required to
boom and bust cycles of the commercial property complete it. Indeed, the whole development pro-
market could be smoothed out. The RICS report cess is becoming more sophisticated. Schemes
should assist in creating a better understanding of need to be appraised from every aspect - aesthe-
property cycles and in developing forecasting tools tic, fiscal and social. The long and frequently
that could add stability to the markets. frustrating negotiations to assemble sites, obtain
planning permission, barter with local authorities
and secure finance, demand a truly professional
THE ESSENCE OF DEVELOPMENT approach.
Hence a developer usually wishes to know
Every development whether it be for a public whether the investment of capital in a project will
authority, industrialist or private investor, has a be justified by the return which he can expect to
'market value' - a potential worth or earning receive. It is therefore necessary to assess as
power. Even civic buildings, hospitals, churches accurately as possible the value of all the expected
and universities have an assessable value to the returns and benefits and to compare them with
community - a cost above which it is not reason- the estimated costs. One problem is to express all
able or feasible to build. Within certain limits of the benefits in monetary terms as there may well
aesthetics, function and performance, the most be some indirect and intangible benefits, such as
economic development is that which shows the more contented employees or greater prestige
greatest return to the community for the minimum value, which flow from a project. The quantity
capital invested. This does not imply that the surveyor is frequently called upon to make cost
cheapest is the best; often the opposite is the case. comparisons of different design proposals with
The art of phasing development to give an varying capital, maintenance and running costs.
early return which can be used to pay for the less The task of the quantity surveyor is to inform the
remunerative items is one of the objectives of a developer which is the most economical scheme
skilful developer. In this connection, an amalga- after taking all these costs into account.
mation of public and private agencies in develop- To this end general surveyors should have a
ment can be of great benefit to the community. It general knowledge of building costs in addition to
is also essential to integrate the planning of large a detailed knowledge of values, while quantity
scale redevelopment. For instance, the retention surveyors ought to have a general knowledge of
of an existing road layout even if only to provide a values as well as a detailed knowledge of building
pedestrian precinct or parking facilities can costs. There is an evident need for the quantity
economise in new construction, and the potential surveyor to be aware that the general practice
earning power of existing facilities should not be surveyor, in making his general financial appraisal,
overlooked. Time is also important in the planning has to consider the capital cost of the works, land
process; for maximum economy the time between purchase, compensation for extinguishment of
capital expenditure and completion of a project leases, bridging finance, long-term finance, rental
should be kept to a minimum. and capital values profitability, and maintenance
The private developer or industrialist will and other outgoings. The key factor in any suc-
require a financial appraisal or feasibility study to cessful project is generally believed to be the
determine the likely capital expenditure and pro- triangle of valuation surveyor, quantity surveyor
bable revenue in order to arrive at the anticipated and architect, although other professionals may
return on the money invested. Whether the pro- also be involved. The general practice surveyor
ject is to be financed by public or private funds, it will be primarily concerned with the broad
is important to know the cost implications at the economics of development, the architect with the