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Res 301 Lecture Notes Week 6 and Week 9
Res 301 Lecture Notes Week 6 and Week 9
Res 301 Lecture Notes Week 6 and Week 9
UNIVERSITY OF BOTSWANA
FACULTY OF ENGINEERING AND TECHNOLOGY
Department of Architecture and Planning
RES 301 ESTATE MARKETING AND AGENCY LECTURE NOTES WEEEK 6 AND 9
The real estate market functions under the forces of demand and supply factors. It is therefore
subject to economic forces and market condition. Real estate is an economic good and the
demand for it is dependent on the services it offers to users in the marketplace. The price it can
command at any point in time is subject to the relationship between supply and demand at the
point in time. Demand for real estate is sensitive to changes in price in the property market. An
important trait of the demand curve is the sensitivity of the quantity demanded to price changes.
This is because real estate prices are dependent on the law of supply and demand. When there is
increase in the demand for real estate and there is scarcity of supply, prices will shoot up thus
creating a sellers’ market. The reverse will happen when excess supply creates a shift in the
market; prices will fall. Unlike non-durable consumption goods such as orange and bread, it is
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not easy to balance demand and supply for real estate. Bringing more properties into the market
either for sale or lease (space & asset market) takes time, considerable work effort and planning.
In consequence, it is not always possible to increase supply in time to meet consumer demand. A
good understanding of this basic economic principle can help market participants to know the
most appropriate time to buy or sell their properties.
Economists use demand to refer to the relationship between market price and the quantity of
goods and services that will be bought per time period, over the entire range of possible prices.
The main indicators of demand are population, employment, income, change in taste and
preferences, technology, existence of substitute properties etc. Only effective demand is of
relevance to real estate pricing. In other words, potential users of real estate space or assets
should not only exist but they must also have the purchasing power to acquire (through leasing or
outright purchase) the desired piece of real estate over time including associated services.
Demand is a reflection of the needs, material desires, purchasing power and preferences of
consumers. Demand analysis involves the evaluation of market data collected or gathered in the
city, region, neighbourhood or site analysis in the effort to estimate the effective demand for a
specific real estate project, focusing on identifying the potential users of a subject property which
include renters, buyers, clientele or customers it could possibly attract.
The objective of demand analysis is the determination of the quantum of the particular space or
asset unit (including associated services) that the market will absorb over time and the price at
which it will be absorbed in the space known as absorption schedule.
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An examination of real estate asset demand implies that the appraiser or analyst must begin from
a specific property focusing on how various economic and demographic trends in the area will
affect its value. The relevant question for the appraiser is to what extent do area, city and
neighbourhood trends affect the anticipated benefits from the subject property which will also
reflect on its value? Those trends reflect the dynamics of demand and supply forces. This
analysis puts into consideration all the elements of real estate productivity – physical, legal,
design/amenity and location.
Because real estate demand is derived from the demand for the product or service it provides, the
analysis is modelled to estimate demand for:
I. Retail space: This will focus on the determination of demand for retail services by potential
customers in the market area.
II. Office space: This will attempt to identify and quantify business activities in the area that are
in occupation of office space with due consideration for their space and staff requirements
III. Residential space: The demand for residential and most retail space is based on the projected
growth rate of income, employment level and population.
IV. Industrial space: This is determined by the estimation of the demand for industrial products
manufactured in the area in conjunction with industry’s related demand for employees.
V. Recreational space: The question is asked on the ability of the recreation use or facility to
attract local residents and vacationers.
The productivity attributes of a specific property will determine its utility and the market
segment it will appeal to. The questions arising from this are:
1. What is the level of demand for the various attributes of the property and who are the
potential users (market segment) of the property?
2. Which market segment will be attracted by these productivity attributes of the specific
property type?
3. What population of the market can pay for these attributes of the specific property?
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4. How much are they willing to pay for these attributes of the property?
5. How large will the market be in future periods and what proportion can be attracted to the
site?
6. What is the level of competition for the specific site/property in the market area?
7. Can the demand for the property be sustained under prevailing economic conditions?
Productivity analysis of real estate is important in carrying demand analysis because knowledge
of the productive attributes of real estate will show the market segment which it will appeal to.
We must therefore carry out productivity analysis and identify the appropriate segment as a clue
to demand for the specific real estate. Segmentation of real estate market implies a separation of
the market into meaningful user groups in sync with the property’s attributes. This implies
identifying different user groups attracted to the property’s physical, legal, locational,
environmental (design amenity) attributes. This will minimize unnecessary property void. A
good analysis (using spreadsheet) will help analysts in comparing the productive attributes of
competitive properties.
In similar vein, banks, hospitals, schools, households, service centres, recreational facilities,
government ministries, departments and agencies cannot carry out their functions without real
estate. A household needs physical space to have and commute to work, market, school, church,
etc. and the legal right to occupy a living unit and surrounding areas (environment) that enable
the occupants to live in good health, safety and comfort, making a necessity for the household’s
existence and successful operation.
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Because of the productivity of real estate, there is always a need by people or institutions to buy
and sell it. Real estate has value and is traded in the market. Productivity is therefore the
underlying theory of property value; the more the productivity, the more the value and vice
versa. The productivity of real estate is also the foundation or driving force of various property-
related businesses and profession. These include developers, valuers, architects, quantity
surveyors, builders, engineers, etc. They exist to create new real estate resources and to enhance
market efficiency and property-related operations. If real estate were not productive, none of
these professions would exist.
In an active property market, the analysis of real estate’s physical, legal, locational and
environmental characteristics helps in defining the specific products and services it offers. This
helps in identifying the most likely users of the property in comparison to other similar
properties in the market. Productivity analysis does not only describe the site and improvements,
the property rights, physical location and environmental dimensions of the property, it also
addresses the capacity of the property or group of properties to accommodate specific activities
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to satisfy market needs and expectations. Productivity analysis allows the analyst to compare and
contrast related and non-related attributes of competing assets, particularly durable goods and
real property. The various rights and responsibilities in real estate can be formed or combined in
different ways to serve human needs. The legal characteristic, without doubt, is an important
determinant of the ability of real estate to meet human and organizational needs and hence
productivity.
The physical attributes of sites include: texture qualities of soil, chemical, mineral, soil terrain,
flora and fauna on the site. These features determine the specific use or uses a particular site can
be put to – agriculture, mining or building construction. Site improvements and man-made
structures are part of physical attributes which may alter the usefulness or utility of a site. In
some cases, a site might have been levelled or graded, served by storm and sanitary sewers,
provided with driveways and walkways and landscaped. These are called or termed on-site
improvements or infrastructure. Off-site improvements include tarred roads, paved walkways,
streetlights, drainage, sewer lines and public parks. These improvements represent the
expenditure of capital or investment to create and preserve value of the entire site in a particular
neighbourhood or area. This makes the difference between developed and underdeveloped land.
For a farm site, the analysis will focus on drainage, percolation, size, fertility and shape. For an
office development, the analysis concentrate on the terrain, size, shape and suburban
characteristics. It is true that we can build on all sites but building on a specific site may be cost-
prohibitive due to the nature of the terrain. For marshy land, land with a high water, rocky site
etc., a lot of cost will be incurred to make it suitable for property development.
Physical attributes can be divided into two: natural and man-made attributes. The characteristics
can either positively or negatively influence development on land. An investor or owner user of
real estate should always evaluate the improvements to determine the capacity to sustain their
intended function. This could include the evaluation of architectural styles, quality and type of
construction, distribution of space, condition and adequacy of building systems e.g. elevators,
cooling/heating, electrical and plumbing works. These will be evaluated in the context of their
attractiveness, quality and condition of both onsite and offsite improvements. Both types of
improvements influence the cost of development and inconsequence the supply of properties
comparable to any subject site. Offsite improvements are mostly installed by developers,
government departments like utility companies and can be paid for through various means such
as incorporation into lot policies.
In addition to the above, it is important to ensure that the layout of the site and location of
various activities in the property are linked to the shape of the parcel, as the physical and
locational characteristics of the improvement cannot be separately considered. The shape of site
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or parcel of land has much influence on its flexibility and adaptability to alternative uses and, in
effect, its market appeal over time.
Quality and condition: A building roof cover and members, floors, doors and windows,
elevators, cooling and heating systems, electrical and plumbing networks, etc., can be evaluated
in the context of their quality or condition. This is to determine the quality of the facilities,
attractiveness of the structure and functionality efficiency of the asset or real estate. These are
dependent on consumers’ demand tastes and preferences which are equally liable to change with
time and market dynamics. The standard of building facilities defines the marketability attribute
of the specific real estate as quality appeals to different market segments
Functionality: Building facilities and elements are configured to provide the required services
and functions which they are to perform. A new building may not functional because it is fitted
with obsolete facilities and constructed with obsolete designs which are out of sync with current
consumer tastes and preferences. New buildings should have the most appropriate and modern
design, materials and equipment. An old office headquarters building of an insurance company
was converted to a 64 room hotel due to the dynamics of highest and best use in the location. The
investment appraiser/analyst insisted that the hotel must include a conference hall and meeting
rooms to achieve complementarity of use. He also insisted that the redevelopment must be fitted
with modern facilities such as elevators, swimming pools, gyms etc., for it to effectively compete
with similar hotels in the area and to enhance absorption and market penetration. His advice was
implemented and this was highly reflected in the hotel’s performance. A retail mall or office
complex with insufficient car parks will not have a good demand as the one with an adequate
parking lot because this will enhance the functionality of the development.
The functionality layout of the facilities on a site or parcel of land is a major determinant of its
marketability. The positioning of parking areas and structure cannot be separated or excluded in
any decision in respect of easy ingress and egress from the site. The marketability of an
improvement is also enhanced by the degree of inconvenience or friction in accessing a site. This
includes the extent of its linkage to the immediate environment.
Location is about the most important factor affecting the productivity of real estate because the
location of a specific property links it with market demand, setting it apart from the competition.
Real estate location characteristics are the determinant of the type of land uses most expected in
the area.
The locational characteristics of real estate include the time-distance relationship between the
property and common destinations of typical users. Time –distance relationship is known as
linkages and the sum total of all its linkages compared with sum of linkages is the determinant of
whether a property location is desirable or not. The concept of location and nature of linkages are
important for two reasons:
Determinants of location growth comprise static and dynamic features. Static features relate to
linkages and land use associations. Linkages refer to the movement of people, goods and
services, or communication to and from the property site, while common linkages include roads
and utilities. Land use association deals with the current type of development in the area and how
various land uses relate or support each other.
The role of location in the productivity of real estate is unique. Location is unique to and inherent
to the nature of real estate as no other good or service which can be transported or moved from
place to place and their value is not particularly affected by their specific physical location.
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The locational analysis of real estate productivity is a study of a site in search of use or market. A
good location can be a determinant of the desirable of residential real estate and the success or
failure of a commercial development.
Identification of the activities of an area may require a simple survey and analysis of existing
land uses or a major economic base analysis. These activities which can be likened to a magnet
with a pull effect, as earlier indicated, include employers, institutions, services, recreational
facilities, shopping malls or other natural and manmade features like rivers and urban
infrastructure. Some activities like shopping centres, universities, etc., could generate other
activities that enhance the urban economy and attract people to a particular location. The primary
activities are critical in defining the foundation of a specific neighbourhood and constitute the
basis of the economy of the area under consideration, as a good understanding of an area is the
foundation for economic base analysis.
Location analysis in the context of the above is fundamental to real estate investment decision
and appraisal. Location is the main determinant of land value. It encompasses the activities that
take place in a specific location and the existing features that generate value. The association of a
specific site to these features and activities drives its desirability, utility and value.
In countries where freehold and fee simple interests exist, owners have a wide range of things
they can do on real estate. The same applies to those with leases of between 60 and 99 years in a
West African country like Nigeria. They can create inferior interests like leases and subleases
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from superior interests. Leasehold gives the owner the right to use for a specified period. The
longer the lease the more the owner can do with the realty and the more tax policies on property
can influence the productivity of real estate either positively or negatively.
Zoning ordinances tend to prevent or minimize the impact of negative externalities, and in
consequence, maximize productivity or properties in a specific area or neighbourhood. Zoning
standards vary from area to area and by property type. In other words, they vary both spatially
and by property type. Regulations and enforcement can also propel the productivity of properties
and in some cases drive away development to other areas with more friendly regulatory policies.
Some writers are of the view that building plot ration affects the productivity of a property. This
view can be challenged on the ground that for the highest and best use of a site, that use must be
legally permissible. Highest and best use does not promote lawlessness and illegality in property
development.
Planning regulation can restrict the succession of one land use with the other even when
economic forces or change in regulation permits such change in use. For example, a site that was
earlier designed as an event centre and built s such could be redeveloped into a retail shop due to
market dynamics and a shift in regulatory policies. However, if the standard is that for every 50
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square metres of an event centre there will be one parking space, for a retail shop, the
requirement is one parking space for every 30 square meters. For this inadequacy, the event
centre may not be converted to a retail store unless the standard is watered down or changed,
which will equally detract productivity due to insufficient parking lot in the event centre in the
context of retail store parking lot standards.
Rent control laws in some cases of residential property in specific areas can also affect the
productivity of real estate for many reasons. The controlled rent may be insufficient to meet all
outgoings including maintenance which will lead to deterioration of facilities in the affected
buildings in addition to creating market for the properties in the affected submarkets. Property
related taxes can also deter development and move new developments to more friendly states. In
effect, the state and local government taxes can trigger off different levels of productivity for
industrial developments in different jurisdictions. For industrial developments, a reduction in
property related tax burden will increase firm’s productivity sufficiency to induce firms to locate
in one community in place of another.
IV Environmental attributes
The productivity of a property is strongly related to its surroundings. These include the
immediate neighbourhood or district, the community or region. These can either positively or
negatively affect the productivity of the properties relative to properties in other areas. Property
productivity is affected by physical, social and psychological environment. The physical
environment comprises natural and manmade features. Natural features include topography,
vegetation and ground cover, the atmosphere (climate), the condition of the surface and subsoil,
water bodies and any other natural feature within the neighbourhood. The built environment is
the major factor affecting the physical character of many neighbourhoods. The environment can
be analysed in the context of the age and size of the structures in the area, the density of the
development and occupancy and the degree of maintenance. Others include infrastructure and
the general attractiveness of the area.
The economic characteristics include the economic power (income level of residents or business
firms) and the value of properties. Social aspects deal with residents’ occupation, their
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educational levels, and religious, ethnic and racial characteristics. It is a reflection of the
resident’s value system based on a common heritage, culture and experience while the
psychological environment deals with how individuals or households in a specific
neighbourhood respond to the group’s value system and what induces them to choose, promote,
safeguard and prefer a particular neighbourhood in contrast to others. Very often, the
psychological environment is considered in the context of residential locations, but it has been
identified that prestige and status are also relevant to the location of office and retail facilities.
This arises because specific categories of business will identify with specific locations to blend
with the ternd as the psychological environment of a business activity is most times defined by
its address.
The prestige that is associated with retail or commercial areas can be more fragile compared to
that of residential areas because of the additional factors that can influence or affect commercial
neighbourhoods. These include competition from alternative sites and the dynamics of consumer
behavior and preferences.
At community level, the productivity of a property is subject to the available facilities, malls,
schools, recreational centres. Others include the tax structure, political organisation and
administrative structure of the area. All these will culminate in good quality of life in the area
and the enhancement of property productivity and value as the availability of urban services and
facilities is necessary for enhancing property value in any community.
The political organisation and administrative structure refer to the type of government in the area
under co nsideration and the administrative efficiency. According to Fanning (2005), the prestige
assoictaed with specific areas or neighbourhoods often affects or rubs off on nearby properties.
As a result, many residential and retail facilities locate themselves as near as possible to
traditionally prestigious districts , as the rub off effect determines the direction of urban land use
pattern and a good understanding of this (prestige) is useful in predicting and duration of growth.
The effect of man-made or artificial environments on the productivity of real estate including
economic, social and psychological environment has been discussed. Natural features like
topography can influence development potential and may often direct nature and the pattern of
land use. Other factors include atmosphere and microclimate which can be influenced by the
presence of trees and shades, wind direction, soil composition and capacity to support structures,
vegetation, natural scenery and water body. These can individually or in combination with others
enhance and, in some cases, inhibit the productivity of real estate.
Before going into details (of primary and secondary data), it is important to clarify and define
two important terms: estimate and forecast. An estimate is based on informed knowledge and
could refer to existing employment, population and demand level and could be used to update an
existing data like census figures or data from the office/ government establishment in charge of
statistics. In summary, an estimate is derived by updating an existing information or data.
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Forecast in this context refers to future population, employment and demand. Forecast looks at
future demand, population and employment. To make an informed judgment about the future, it
is important to examine trends. Forecast of population, households, income or employment is
fundamental to the determination of market area space absorption (MSA). It is important to
recognize patterns and trends, and how they have changed over time. .Forecasting requires the
application of informed judgment by experts. Major determinants of demand include population
growth, increase in employment, level of ageing and dilapidated developments requiring
replacement, level of emigration and immigration into the area, relocation propensity,
people/commercial organisations changing location from one area to a more desirable location of
a city and speculators who invest into various market segments with the expectations of selling
them at higher prices. This is also known as speculative demand.
households should be employed and have an income because the income level is what needs to
be achieved to enter the market as this will enable them to make mortgage repayment where
applicable.
It is important we understand the meaning or definition of retail store. The Urban Land Institute
(ULI) defined shopping centre as a group of commercial establishments planned, developed,
owned, and managed as a unit.
The most important demand variable in the analysis of retail goods and services is the number of
customers in the form of population in addition to their per capita income level. The demand for
retail goods and services increases in sync with increases in the purchasing power of the trade
area. The cause and effect relationship arising from the demand for retail goods to demand for
retail space is derived from the concept of derived demand common to real estate demand.
The main reason for a comprehensive demand analysis is to be sure that the market can absorb
increase in retail space arising from new development. Measuring the development market
potential is the first step in the determination of the feasibility and viability of the retail
development under consideration. The main aim of the development will be to match the
location, size, and composition of the centre with market needs and expectations. This pinnacle
of success in any development takes place when the developer can provide his target market with
a development type that not only meets their expectations. The central idea here is that once the
unexpected is provided, these new concepts become attributes the consumer becomes attached to
and cannot do without.
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Estimating demand for office space in a city can be a difficult task due to scarcity of data.
Projecting future demand can be an uncertain and often subjective exercise as appraisers should
always have in mind that short-term demand trend lives up to their name as short term. In this
regard, developers with the gift or ability to discern long terms trends in the market area are
better equipped to package developments that will stand the rest of time. It is important to start
by carrying out an excess and site analysis and delineation of the market area; a census or
statistical data with regard to the relationship between places of residence and places of work in
the context of travel time will be useful in defining the market area.
In some cases, market analysis determines the demand for office space in the market area by
multiplying the expected growth in the office employment by the estimated average space/per
square metre allocated to office employees. This simple approach can at times be more complex
than this. This approach is based on the fact that the need for additional office space is linked to
employment growth forecast because the user or consumer of office space is the office space
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worker. There is also need for a good and intelligent judgement of the amount of space required
by office workers (standards for this may vary from place to place and from time to time)
For a good analysis, we must move away from the general to the specific by identifying and
assessing sources of demand for the proposed office facility or project. This analysis entails the
systematic identification of both potential tenants and market niches that need to be satisfied in
terms of office.
Estimation of future demand for office space will entail the following process or steps:
1. Conducting an interview with estate agents and related real estate professionals,
particularly agency and real estate management consultants/surveyors, and business
organisations to find out the extent of their need for extra space/facilities and the
attributes expected in new buildings.
2. Trying to understand current demand patterns in the office space submarket through the
determination of leasing terms and conditions in competitive properties, in addition to
void or vacancy levels, lease terms and tenant category or class.
3. It is also important to determine the quality of service in the context of level of utility
expected by potential tenants or specific potential tenant class.
4. Determination of the absorption rate to draw a line between new and effective demand
and non-effective ones.
5. The competition which includes a study or an inventory of existing office space and their
attributes, trends in average floor space for workers, census of major office buildings
including the number of floors and floor area, facilities provided, rental trend in the
market area etc. The same will be carried out for older existing buildings.
demand include: legal, medical, dentistry, insurance, accounting, tax consultancy, estate
agency/brokering, services etc.
The consumer of extra office space is the worker. The study of the local demand for office space
is akin to the analysis for retail space demand vis –a-vis local market. Thus office services
comprise a certain proportion or percentage of the consumer’s income. When the appraiser
obtains data on the purchasing power of the consumers, the percentages can now be used in the
determination of local residents’ demand for the various professional services by local residents.
Calculation of office space demand will be easier if we have information on the expenditure
pattern of local residents on different categories of professional services.
Reliable and sustainable data is a major challenge for analysis in developing countries. There is
therefore an urgent need for these countries to step up their scope of data collection in line with
expanding socio-economic needs.
Demand for real estate is determined and responsive to socio economic dynamics in the property
market which also influence market value. The level of economic activities in an urban area
determines the vibrancy of the market. Real estate is fixed in location but economically flexible.
Real estate is used for the provision of spaces that house economic activities. This use is subject
to the dynamics of surrounding economic activities in the location as change in these activities
may change the use of real estate space in a particular location because they provide the support
system for that use.
It is true that real estate is fixed in nature but the support activities and consumers (people) that
influence its value are dynamic, so when they change or move out of the location, demand and
value will change. In other words, demand for real estate will move in the direction of economic
and urban growth.
It is true that employment and population are influencing factors for demand, so we cannot
exclude the place of location in our demand analysis. The importance is based on the activities
and people in that location. It is therefore not an absolute factor. When people migrate to another
area, they spread out in a predictable direction attracting real estate development activities
causing change in the urban structure which also affects property values. It is like a magnet; if
demand moves towards the subject property accompanies with an increase in population density
in the area, the value of the subject property will increase. For a better understanding of this
concept, a review of urban growth patterns will be useful. This includes the concentric zone
theory (Earnest Burgess, 1925), the wedge or radial sector theory (Homer Hoyt, 1939), the
multiple nuclear theory (1945), and the radial (axial) corridor theory (1903). Since the demand
and value of real estate is based on the perceived or expected benefits (utility), the consumers are
expecting from it over time, the analyst or appraiser needs to be conversant with the direction of
urban growth to determine when the population density and demand will increase. In this
context, it is essential to evaluate the proposed or likely development in urban infrastructure with
particular attention to urban transportation and utility linkage as the development of the latter
facilitates the integration of individual sites into the urban matrix. The theories of social ecology
of urban growth provide insight into the direction of urban growth.
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The concentric circle theory states that users sort themselves out within a single or specific city
centre in a concentric ring pattern The centre comprises commercial users, surrounded by
industrial users and then residential users in line with their income and more rings are create in
sync with city growth. This implies that new urban developments occur within the urban
periphery. Axial (radical corridor theory) states that the growth of the city starts from the city
centre and moves along transportation arteries while fill-in between major transportation routes
occurs later. It supports the sector theory and expands on it. The sector theory states that the
outward expansion of the city from its centre results from the growth of its sectors. For example
if the high income residential sector of a city was originally located in the north-east quadrant, it
follows that future high income households will locate in the northeast, resulting in an outward
expansion of the city to the northeast. This implies that residential developments for different
income groups tend to occur in select sectors of the urban area.
The multiple nuclear theory states that growth in cities results in development around key centres
or nuclei of economic activity. Examples include shopping centres, airports and universities and
not just as around a single centre. It is important to note that growth also occurs as new centres
are created. The summary of this is that certain land attributes attract other land uses.
None of these theories alone can provide all the answers needed. However, the appraiser will
need to consider all the models jointly to enable him interpret or provide an answer for the
growth or decline in real estate demand. It is possible that the effect of one or more of the
theories may be more pervasive on urban growth.
All these movements will affect the economic base of urban areas either positively or negatively
based on the theory or principle of floatation or shifts in land value which might lead to the
redistribution of land value in cities. Real estate demand and the rate at which land is absorbed
for use is determined by the rate of growth in the economic base of the area. In order to continue
to provide the goods and services they can export, there will be need to increase the labour force
of the area who will in turn demand for places to live and continue to work. There will also be
increase in demand for space for commercial and related activities.