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BPE 34603PROPERTY DEVELOPMENT

Prepared by:

Mr. Mat Tawi Yaacob & Dr. Azlina Md. YassinDepartment of Real Estate Management,

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

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LECTURE 3

PRICE & PROPERTY

DEVELOPMENT CYCLES

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Property Pricingdetermined by:

1. States Market

2. Countrys Economy

3. Actual Cost level

4. Marketing Cycle

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1. States Market

Demand Supply

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2. Countrys Economy

Economic Growth

Purchasing Power

Level of Income

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3. Actual Cost level

Cost + 20% (profit) = Price

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

[Cost + x% (profit) + tax] subsidy

= Price

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Stock PurchasePrice

WholesellersPrice

Market Price

4. Marketing Cycle

Retailers

Price

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PRICE FOR PROPERTY

Price

What does it refer to ?

Other Factors

% profit from costReflects/reflected by

Market Value

Based upon Offer Price/

Market testing

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Costsdetermined by:

2. Construction/Material Costs(Bricks, wood, sand, iron etc.)

1. Land costs

3. Infrastructures & Utilities(roads, electricity, water, telephone,

lifts, escalators etc.)

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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.

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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.

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5. Preliminary Costs

(site & legal)

Premium

Subdivision Preliminary Survey costs

Planning costs

Devt. & Building Plan Fees Etc.

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6. Preliminary Costs (site)

Site clearance

Building demolition

Levelling of site

Dev. & Building Plan Fees

Etc.

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Basic

Cost

Labour

CostIncidental

Costs+ + =Absolute

Cost

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Then, what is

1. Sunken Cost ?

2. Cost allocation ?

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Cost Price

1. Tender Price

Consists of:

Turnkey etc.

Close Tender

Open Tender

2. Estimation Costfrom QS (BQ)

3. Estimation Cost

from QS (Detailed list)

Cost Price refers to a list of Prices

Offered as Price for Development Cost

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MEANING OF PROFIT & LOSS IN

DEVELOPMENT

To a layman:

Profit or Loss = Sales Price - Cost

Professional Opinion

Profit &Loss

A combination of

various factors

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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

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Price Equilibrium

Total

surplus

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Price Equilibrium

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PRICE EQUILIBRIUM INFLUENCED BY:

Past, Present, Future

Obtaining Past & Present market prices

data will expedite determination of future

price.

Demand

Supply Purchasing Power

Level of Income

Future Investment

DirectlyRelated

with

1 Market Price

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Market Influence

Demand Factors:

Prop. Types Needed Groups of people

No. of people existing, birth

rate, migration

Determinant to the successof a property development.

Directly related with:

Offer Price

2

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Market Influence

Property Types

Offered existingstock completed,

current

construction stock,

stock being

planned

2

Supply Factors

Size/magnitude of

property stockexisting

development eg.

housing estates,

being constructed,

being planned

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Market Influence

Very influential in

certain propertytypes, particularly

medium and high

costs

2

Design Factors

Implication of

design

- external and

internal features of

buildings

- internal layout of

buildings

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Market Influence2

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.

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PRICE ALLOCATION

Different Prices allocated for:

Intermediate Lots

End Lots

Corner Lots

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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: Policies

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Price allocation: Test Market Concept

Done in Market Forecasts

In-depth study done and implemented

through phasing of sales, taking intoaccount of suitable time frames

Linked to sales time frame andcompletion of a particular phase

Frequently done by developer,

to gauge current demand level,

and outdo competitors

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Phase 1 100 units Period ____ %

(6 months)

Phase 2 100 units Period

(6 months) ____ %

?

?

Eg. No. of Sales

Price is raised to a reasonable level,

for profit optimisation and floatation

of increase in building costs

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Price allocation: Closed Sales

Allocation of development

units to certain parties

Eg. 100 units of houses

40 units offeredon contract to

a certain party

60 units offered

to the public

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Price allocation: Loan Facilities

Banks and financial institutionsprovide the main support in

Property Development

Important determinants of PRICE

Loan Margin (%)

Interest Rate Duration of Loan

Loan Facilities

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PROPERTY DEVELOPMENT CYCLES

Duration Time

Amplitude

Price

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Property Development Cycles

1

2

3

4

5

126

7

8

9

10

11

Recession

Bottom

Recovery

Expansion

Peak

Contraction

PricewaterhouseCoopers

Decision Rules for Market Positions

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Indicators Recession Recovery Expansion Contraction

Supply Declining, nil Minor Beginning to

increase

Increasing

greater than

demandDemand Declining Beginning to

increase

Strong, greater

than new

supply

Positive but

slowing

Vacancy Increasing to

high

Decreasing to

balanced rate

Declining to

low

Increase to

balanced rate

Rents Falling No growth Positive

growth

Positive

growth but

slowing

Capitalization

Rate

Increasing Stable at high

rates

Starting to

decline

Declining as

capital grow

Investors No transaction Bottom fishers Interested Interested

Value Impacts Income

declining with

increasing

cap. rates

Income

improves with

high cap. rates

Income

improving with

decreasing

cap. rates

Income stable

or declining

with stable or

increasing

cap. rates

Decision Rules for Market Positions

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Theory Of Economic Rent

Rentis paid:

When potential users of land considerrevenue-earning potential exceeds allfactor costs including sufficientprofits.

When competition exists betweenusers for possession of the land.

Rent As A Surplus

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Theory Of Economic RentWhat 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 timedue tochanges in the surplusof the

revenue over the cost of using the land.

Rent As A Surplus

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Rent And Price

To a Valuer :

Thecapital value(or price) of land orproperty is generally related to theincome

(or rent) it produces or could produce.

The buyer of a revenue-producing propertyinvestment (eg. tenanted office block) is

paying acapital sumtoday (price) in returnfor the right to receive a stream offutureincome (rent).

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Yieldon property is defined asInitialReturn ie. the income an investorreceives on the money he lays out to

buy a property.INCOME x 100

PRICE PAID

Investors expectations growth inRental IncomeandCapital Valueie.Total ReturnorOverall Return.

What We Mean By Yield

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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?)

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ACTIVITY

What Are Property Cycles?

What Causes These Cycles?

Will The Cycles Recover?

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Linked materials

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COST

Direct

Costs

Indirect

Costs

Overhead

Costs

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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, temporaryaccess road, licenses, permits, safety tools).

COST

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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

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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 andactual quantities of work done and cost variance.

COST

Direct Cost

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(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

COST

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Materialcost 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 ona 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- Material Costs

COST

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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 in-

charge.

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

Direct Cost

COST CONTROL

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Concrete similar procedure as steel bars, and normal

wastage permitted is 3%.

COST CONTROL

Direct Cost

COST CONTROL

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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

COST CONTROL

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Equipment costs

Equipment costs must be charged to work items based onhourly 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 workand prorated to the distributed working time or captured in a

separate idle time account.

COST CONTROL

Direct Cost

COST CONTROL

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(Equipment costs)

Idling time should be distributed to specific activities. Thismay 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

Direct Cost

COST CONTROL

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Indirect costs for items such assupervision, 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

COST CONTROL

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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 inthe 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

Indirect Cost

COST CONTROL

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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, contractmanager and the project sponsor.

COST CONTROL

Overhead Cost

COST CONTROL

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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 monthlystatement comparing actual expenditure incurred on

overhead items with the budgeted provision.

COST CONTROL

Overhead Cost

P i E ilib i

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Price Equilibrium

Principles of Economics (N. Gregory