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17thPACIFICRIMREALESTATESOCIETYCONFERENCEPAPERJanuary2011,GoldCoast,Australia

THEDEMISEOFTHEPROPERTYDEVELOPERSAREVIEWOFTHESYSTEMICINFLUENCESONTHESUNSHINECOAST1

ByStevenBoydStevenBoydisalectureratTheUniversityoftheSunshineCoastemail:

sboyd@usc.edu.auAbstractThe development industry, in particular on the Sunshine Coast, appears to haveexperiencedadisproportionateshareof misfortune inthewakeoftheGlobalFinancialCrisis(GFC)withaconsiderablyhighlevelofinsolvencyinlocaldevelopmentgroupsandasubstantialfallindevelopmentactivity.Thefall indevelopmentactivity isevidencedbythe lackofphysicalconstructionactivityand development industry research. Recent reports pertaining to the quantity ofendorsedresidentialallotmentsreflectthelowestquantumofapprovalsineight(8)yearswhichcontraststheregionshighcurrentandproposedpopulationgrowth.DuringtheGFCpropertymarketshavebeenimpacted,whichmaypartiallyexplainthefallof developers and the development activity, however, the leading market indicators(Gross Realisation and Construction Costs) for the Sunshine Coast have painted amildadversepicture,notbecomingthepropertydevelopmentindustryfailures.Thispaperexaminesa basketofSunshineCoastpropertydevelopersand identifiestherespective status of their business practices followed by quantitative research todeterminea baselineprofitabilitytrendfordevelopments intheregion. Thetrendsetsthesceneforacomparisonofhowpropertydeveloperfailureshaveoccurredrelativetotheenvisagedprofitdeclinesduringasethistoricaltimehorizon.In conclusion, there are broad ranging recommendations including a discussion onregulation of the development industry aswell as suggestions regarding teaching andeducation.Theappropriatenessofendorsingthepropertydeveloperasanentrepreneuralsoarosepresentinganavenueforfurtherresearch.KeywordsPropertydevelopers,constructioncost,marketinfluences,grossrealisations,profitability.

1Theexpandedversionof thispaperwaspresentedasadissertationsubmitted to theQueenslandUniversityofTechnology,FacultyofBuiltEnvironment&Engineering,inpartialfulfillmentoftherequirementforaMasterofPropertyEconomics.

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1. IntroductionandIndustryBackground

Introduction

Property development is an ancient practice defined as the process by whichimprovementsaremadetolandforoccupationorresale.Apropertydeveloper,onewhoregularlyundertakestheprocessofdevelopment,cantakemanyformsbeinganentityorpersondrivenbyasetofobjectivestoproduceanenduringassetwhichcontributestoourbuiltenvironment.The finished asset, or product of the development process, is subject to numerousrestrictivecontrolsandregulationsthroughlocalcodesandnationalstandards.Evenasacompleted product the assetmay be subject to occupation constraints or preferredintended uses imposed by relevant certifiers or regulated by local authorities throughplanninginstruments.Incontrasttothepotentiallyerroneousregulatorycontrolsimposedonbuiltproducttheprocessofdevelopment, inparticular thepre constructiondecision stages, is relativelyfreeofcontrols.Therelativelackofdecisioncontrolsandpotentialforhighreturnshavecreated a national property industry conducive to entrepreneurial and pioneeringactivities.On Queenslands Sunshine Coast the local development market may be regarded aspioneeringwithfew longtermactivedevelopersandnobusinesseswithQualityAssuredmanagementpractices. The largerandmorerecogniseddevelopmentcompaniesonthecoastsuchas,ReedPropertyGroup, JuniperDevelopmentGroupandRGD (RonGrabbeDevelopments),shareabusinessstructurewiththekeydecisionmakersnameformingthecompanystitle.Thereportinglinesofthelocalbusinessarerelativelyshallowandthereno Australian or Bendigo Stock Exchange listed development businesses withheadquartersontheSunshineCoast.There are extensive development controls, pertaining to product type, form and use,enforced through the Sunshine Coast Council (previously three (3) regions beingCaloundra City, Maroochy Shire and Noosa Shire), the Queensland Government andAustralian (Federal)planningauthoritieshowever theeconomicviabilityanddecision todevelopmentareprincipallyinthecontroloftherespectivedeveloperswiththefinancier,ifapplicable,providingacursory levelofcontrol. WiththeexceptionofproductcontrolthepracticeofadeveloperontheSunshineCoastisalmostentirelyunregulatedandmayberegardedasconducivetouncontrolledpioneeringandentrepreneurialactivities.Harvey (2004) andCostello and Preller (2010) support thenotionof the risk acceptingentrepreneurialpropertydeveloperwithCostelloandPrellerextendingthediscussiontodefinethedevelopmentindustryaspioneering,concludingthatacademicinstitutionsandthe industryshouldensurethatcontentcoveringthescienceand importantprinciplesofentrepreneurshipbeincludedinappropriatetrainingcourses.Inlightoftheperceivedpoorperformanceoftheinternationaldevelopmentindustry,andthedisproportionateshareofmisfortuneinthewakeoftheGlobalFinancialCrisis(GFC)thequestionofwhethertheroleofthepropertydeveloper,asdescribedbyHarveyandendorsedbyCostelloandPreller, isappropriate. Given that thepropertydevelopmentindustry isregardedassynonymouswithriskanduncertainty,thenecessityforstringentrisk management practices and applied experience would appear evident. Such acoordinatedandexperiencedapproachforriskmanagement,however,mayberegardedascontradictorytothepracticeofpioneeringentrepreneurs.ThequestionisparticularlyrelevanttotheSunshineCoastregiongiventhedominanceofindustrywithrespecttoGrossRegionalProductandemployment.

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PaperStructure

This paper has been framed around the question of whether an entrepreneurial orpioneering approach shouldbeendorsedby,or applied to, an inherently risky industrysuchaspropertydevelopmentonQueenslandsSunshineCoast.The research presents an opportunity to further analyse the relationship betweenbaseline development profitability for a region, against the performance of therespectivedevelopers.Shouldthespecificdevelopersprofittrendbedisproportionatetothemarket trend, then other nonsystemic practicesmay be highlighted as potentialcontributingfactorsandmaycreateapathwayforfurtherresearch.The answer to the primary question and related research pertaining to whether apioneeringandentrepreneurialdevelopmentindustry,suchasthatontheSunshineCoast,with little regulation canoperate and remain solvent in an inherently riskymarkethasinitiallybeensoughtthroughareviewofliterature(Section2LiteratureReview).Fromthegaps,andperceivedconflicts in the current literature,additional researchhasbeenundertakeninfour(4)stagesbeing:1. AreviewofthestatusofthedevelopersontheSunshineCoast(DevelopersStatus

Review);2. Establishmentofthebaselineprofitabilityindex(DevelopmentProfitability);3. Calculationofthecorrelationbetweensystemicmarketmovementsandthestatus

oftherespectivedevelopers(DeveloperStatusvProfitability);and4. Aqualitative reviewof three (3)selecteddevelopers to identifyadversesystemic

andnonsystemicinfluences(DeveloperCaseStudies).TheresearchprocessandfindingsaredetailedinSection3ResearchDesignandSection4 Research Application & Findings. Section 5 Research Limitations discusses thelimitations relating to theprocesswhilst Section7 concludes the current researchwithobservationsandsuggestionspresentedforfurtherresearch.

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2. LiteratureReviewThis literature review describes the theoretical perspectives and previous researchfindings related to the demise of property developers, with a specific focus on theSunshineCoastregionofQueensland,Australia.Itsfunctionistolookatwhatothershavedoneinareasthataresimilartothesubjectareaofinvestigation.Thefoundationliteraturerelatingtothisresearchtopicmayberegardedasshallowwiththecurrentreviewofliteraturepresentingabroadgapbetweengenerictextsanddetailedtheoreticalworkswithlimitedpracticalapplication.Thereareaseriesofwellresearchedvaluation and project management texts which provide a cursory view of propertydevelopment practices. Additionally there are international journal articles, primarilyEuropean and North American, detailing sophisticated financial models and theoriesspecifictomicromarketdevelopmentfeasibility,butthesearticlesprovidelittlescopeforapplicationtopropertydevelopmentwithinQueensland.Thepracticalresearch into theAustralianpropertydevelopmentarena is incomplete. Asearchofbook storesorevenon the internet, includingYouTube2, revealeda seriesoftips, or opinion, based literature often over generalising the industry and respectivepropertymarkets. The tipsoropinionbased literaturemostly relates to smaller scaleresidentialdevelopmentandwealthcreationbutlackssubstantiveresearch.Professionalresearch,recordedinindustrymarketpublicationsandgovernmentauthorityreports, is relatively abundant in South EastQueensland. Aswith all research of thisnatureitisimportanttoconsiderbiasinthesepublicationsandtodelvedeeperthantheheadingsandopinionsof theauthors,however thereare consistent supporting themesandqualityrawstatisticalmaterialavailableandsomeoftheresearchisapplicabletotheresearchquestionathand.

PropertyDevelopmentOriginsandKnowledge

Property development is an ancient professionwith evidence of successful built formdelivery,suchastheEgyptandMayanpyramids,predatingmodernhistorybysome3000years. The StepPyramid thatoverlooked theancientcapitalofMemphis in theEgyptbroadlyresemblesitsoriginalformsome4,600yearslater(Friedman1995).Thepropertydevelopmentprofessionwitnessedlimitedacademicevolutionwhichmaybepartiallyattributabletothedominanceofgovernments,churchesandthemonarchies inearly property development and respective lack of necessity for public reporting. Inparticular,Dobie (2007)proposes that it took an atomicbombproject, theManhattanProject,backinWorldWar2,tocommencethemodernprojectmanagementmovementand collate a body of knowledge applicable to project and developmentmanagementpractices.Fromatraditionalpropertydevelopmentperspective it iswidelyregardedthatJamesA.Graaskamp,in1970,providedthefirstholisticframeworkforunderstan