The Real Estate Development Process

(The RED Process) Urban Planning & Real Estate

Development, 3rd Edition, J. Ratcliffe

NICK ALWYNSON M. TANDAYAG

CIVIL ENGINEER | URBAN PLANNER | ENVIRONMENTAL PLANNER
The Real Estate Development Process
(The RED Process)

10 Sustainability and property development | P1 – 2 |p299

11 The real estate development process | P1 – 16 |p329
12 Development site appraisal | P1 – 32 |p359
13 Development valuation |P2 - 5 |p390
14 Property development finance |P2 – 25 |p430
15 Marketing for development |
 Sustainability in the property lifecycle
Site | Design | Construct | Occupation | Investment |Refurbish/Redev
[4] Occupation [5] Investment
Obsolescence Risk
Considered tenant aspiration
4 Envi Components of Projects
Green lease reliable to protect E
Green Specs
5 3 Effective Envi & BMS in place

6 2 Green building [2] Design [3] Construct

Maximized natural resources (NR)
1
Minimized negative use of NR
Enhanced Ecological resources
Water Purity and energy
[1] Site
Proximity
Accessibility
Impact to greenfield brownfield
Amenities lost or gained
Waste generation of project
Water courses affected?
Consider Neighbours
[6] Refurbish / Redev
Re-use
Decontamination needed?
 Demand of Sustainable Vicious Cycle

Development Virtuous Cycle

Owners/End User
We demand & Occupy
First Wave because they are
cheaper to run and
Public Sector improve well-being
We would like to have
(National & Local) sustainable buildings but
there are very few
Private Sector available
We invest We would Designers / Cont
invest in but We design &
Second Wave because
occupiers
there’s no We can build
const
demand buildings but
Owner-occupiers want, better developers do because
returns not ask for it that’s what
society needs
Investors
Thirdwave We would ask, but
investors wont
Speculative
Developers We develop because they
are easier to sell, achieve
higher prices, resistant to
obsolescence

Developers

| Sustainability in the property lifecycle [The Vicious Cycle of Blame] | Virtuous Cycle
The regulatory environment
for sustainability

Sustainability and Sustainability and Building

Development Control
Control
The Checklist: (Building Research
Establishment B&R 2002 Building Regulations
Climate Change Thermal Efficiency
Community
Future Proofing
Place Making
Consequential Improvement
Buildings
Ecology Energy-efficient terms
Resources Energy Performance of
Buildings Regulations
Business

| The regulatory environment for sustainability

The Real Estate Development Process
(The RED Process)

10 Sustainability and property development | P1 – 2 |p299

11 The real estate development process | P1 – 16 |p329
12 Development site appraisal | P1 – 32 |p359
13 Development valuation |P2 - 5 |p390
14 Property development finance |P2 – 25 |p430
15 Marketing for development |
Real Estate Development Process
Development Process | [1] Property Development: Steps to Success
| [2] Participants in the Development Process

[1] Property Development: Steps to Success

| [a] Concept and Initial Consideration
| [b] Site Appraisal & Feasibility Study
| [c] Detailed Design & Evaluation
| [d] Contract & Construction
| [e] Marketing, Management, & Disposal

[2] Participants in the Development Process

Development Process |Property Development: Steps to Success
Concept & Initial [1] Objectives & Ideas
Consideration for 1 [2] Basic Strategy
Dev’t Organization [3] Market Research & Suitable Site

[1] Refined Appraisal: Market Trends & Physical Constraints

Site Appraisal & [2] Development Consultation: Planning & Statutory Agencies
Feasibility Study 2 [3] Responses from other parties
[4] Finance & Funding terms

[1] Appointment Basis & the Professional Team

Detailed Design & [2] Project Brief: Stages, functions, & responsibility boundaries
Evaluation 3 [3] Preliminary Detailed Drawings: Planning approval & budget forecast
[4] Submit planning application: nego with authorities & other parties
[5] Effect scheme changes & secure final approval
[1] Construction Procurement Strategy
Contract & [2] Project Mgt Structure
Construction 4 [3] Appraisal System for building period
[4] Completion Monitoring before commissioning
[5] Contractual Affairs supervisions
[1] Best Kick-off Point of Marketing Campaign, how & by whom
Marketing, [2] Lease or Sale?
Management & 5 [3] Maintain Safety & Security of the building
Disposal [4] Management & Maintenance Program
[5] Monitor the performance of retained agents
[6] Reorganize the financial arrangements
 Participants in the Development Process
Three (3) Major Groups Two (2) Functional Classifications

Property Dev’t

Development
Individual space users Companies

Agencies
Collective space users Financial Institutions
Future users Construction Firms
Space
Consumer Public Sector Agencies
Large Landowners

Space-time to money-time The Developer

Assemblers of: Project Manager
Space Capital |Material Construction Manager

Development
Production The Architect
Engineers

Team
Quantity Surveyor
Tangible & Intangible systems Builder/Contractor
for individual users: Real Estate Agent
Road network The Valuer
Sewers The Solicitor
Public Utilities
Other Specialists
Infra Services
 Participants in the Development Process
Development
Agencies

Property Dev’t Financial Construction Large

Companies Institutions Firms Agencies Landowners
Large & small More prudent High-risk RDA’s / LGU's Estates of
companies in proposals landed families
Sensitive Degree of
City, Regional, Long term Margins involvement
National, returns, high varies on
across financial Profitability on locality High Set of
Segments confidence both devt & Standards in
construction building design
Profit & mgt
Maximization

| Two Functional Classifications: [1] Development Agencies

 Participants in the Development Process
Development
Team

Project Builder |
Manager Contractor

Construction Real Estate

Manager Agent

The The The

Architect
Developer Valuer

The The
Engineers Solicitor

Quantity Other
Surveyor Specialists

| Two Functional Classifications: [2] Development Team

Relationships of
Development Team
Members
 Functions of Developments Team Members
Development
Team
[1] Strategic Policy Role: Promoter,
The Negotiator, Financial sourcing
[2] Entrepreneurial
Developer [3] Employer
[1] Correlating, Integrating, & Mgt
Project [2] For Client’s Satisfaction
Manager [3] Organizational, Admin, Relations
[4] In house executive of Developer
[1] Building related-stages of devt
Construction
[2] Construction Activity Mgt
Manager [3] Design & Construction Coord
[1] Contracted at Procurement Stage
Builder |
[2] Construction / Implementation
Contractor
| Two Functional Classifications: [2] Development Team
Devt Function:
Motivation & Leadership |
Selection of Devt Team|
Funding Policy | Pre-letting
objectives | Quality Reqmts |
Who does what? | Programme
Project Management is the
“Overall planning, control,
and coordination of the
project from inception to
completion, aimed at
meeting client’s
requirements in order that
the project will be completed
on time within authorized
cost and to the required
quality standards”
 Functions of Developments Team Members
Development
Team

[1] Design Team Leader

The [2] Major Elements in Devt Process Technical Consultants &
Architect [3] The RIBA Plan of Work Engineers Involved in the
[Royal Institute of British Arch] Project:
Architectural Design
[1] Works with Architect Structural Engineer
The [2] Structurally Sound Plan Geotechnical Engineer
Engineers [3] Adequate Systems
Mechanical Engineer
[4] Code Compliant
Electrical Engineer
Plumbing & Sanitary
Quantity [1] Cost Analysis & Cost Control Environmental Consultant
[2] “Building Economist” Quantity Surveyor
Surveyor
[3] Value Engineering, Life Cycle Cost

| Two Functional Classifications: [2] Development Team

 Functions of Developments Team Members
Development
Team
[1] Finder of suitable sites
Real Estate
[2] Source of local inputs in dev’t
[3] Liaise with local authorities Agent
[4] Implement marketing strategy
 Development Process
requires more [1] Estimates likely value of lands
knowledge on wide The
[3] C2mpensation, taxation, funding
aspect of the letting, sale & asset valuation Valuer
development stages
[1] Legal Adviser, Negotiator, Advocate The
 Methods & models of [2] Reviews formal documentation Solicitor
real estate dev’t are
constantly changing [1] Specialist Consultants Other
[2] Advisor on specific aspect of dev’t Specialists
 Grown up knowledge in
[3] Propose alternatives & work around
sustainable
development Most Common Specialists:
Accountant | Environmental Planner | Landscape Architect | Interior Design |
Facilities Manager | Environmental Consultant | Quantity Surveyor

| Two Functional Classifications: [2] Development Team

The Real Estate Development Process
(The RED Process)

10 Sustainability and property development | P1 – 2 |p299

11 The real estate development process | P1 – 16 |p329
12 Development site appraisal | P1 – 32 |p359
13 Development valuation |P2 - 5 |p390
14 Property development finance |P2 – 25 |p430
15 Marketing for development |
Development Site Appraisal: Principal Factors in Appraisal

[1] Planning Documentation

[2] Planning Application
[3] Consultants with other bodies
[4] Planning Obligations & Gains

Planning [1] General Market Conditions

Policy & [2] Demand for Development
practice
[3] Supply of Development
Economic
Climate
for Dev’t
Site
Survey &
[1] Legal Considerations Analysis
[2] Physical Considerations
[3] Functional Conditions
Principal Factors in Appraisal
[1] Planning Policy & Practice
Planning
Policy &
practice
[3] Other [4] Planning
[1] Planning Bodies Obligations
Documentation [2] Planning
consultation & Gains
Application

 LGU  Rationale*:
 Time  Regional (1) Planned devt
 Dev’t Plans  Authorities Authority (2) Devt Impact &
 Guidelines Attitude on  Local Mitigation
 Regulatory Dev’t Transport (3) Profit to
Requirements  Planning  Utility Agency Community (tax)
History of Site  Environment, *T&C Planning Act 1990
 Properties, Health &
Politics & Safety Agency
Policy
Principal Factors in Appraisal
[2] Economic Climate for Development
Economic
Climate
for Dev’t

Anticipated Supply
Catchment Area
Overall economic climate Existing & Planned Supply
Population
Business Cycles Competition
Employment
Urban Structure Theories Land Availability
Labour Supply
Economic Needs Planning Register
Rents & Values
Local Markets Neighbouring Markets
Vacancy Rate
Market Delineation Absorption & Capture Rates
Informal enquiries
Informal Enquiries
Other Factors
Other Factors

Market Demand for Supply of

Conditions Dev’t Dev’t
Principal Factors in Appraisal
[3] Site Survey and Analysis
Site
Survey &
Analysis

[1] Legal [2] Physical [3] Functional

Considerations Considerations Conditions
• Ownership • Site Measurement • Site Measurement
• Land Assembly • Ground Conditions • Ground Conditions
• Boundaries & • Topography • Topography
Obligations • Archaeological • Archaeological Remains
• Covenants Remains • Building Surveys
• Planning Permission • Building Surveys
• Planning Preservation
• Environmental
Protection of Site
Development Site Appraisal: Principal Factors in Appraisal

[1] Planning Documentation

Planning [2] Planning Application
Policy &
practice
[3] Consultants with other bodies
[4] Planning Obligations & Gains

Economic [1] General Market Conditions

Climate [2] Demand for Development
for Dev’t
[3] Supply of Development

Site [1] Legal Considerations

Survey & [2] Physical Considerations
Analysis [3] Functional Conditions
The Real Estate Development Process
(The RED Process)

10 Sustainability and property development | P1 – 2 |p299

11 The real estate development process | P1 – 16 |p329
12 Development site appraisal | P1 – 32 |p359
13 Development valuation |P2 - 5 |p390
14 Property development finance |P2 – 25 |p430
15 Marketing for development |
Development Valuation:
Purposes, Process, Component Variables | Methods

The Purposes The Process Component Variables

Rental Inves’t Gross Leasable

[1] likely value of [1] Software-based Income Yield Bldg Size Area
land to estimate [2] Consultants
margins & cost [3] Experience & Const. Cost of Land Required
Fees
[2] profit assessment professional Gr Cost Finance Cost Profit

[3] estimate rental judgement Dev’t Const. Disposal Void Continge

income [4] long hand first Period Period Cost Period ncy Sum
[4] establish cost before using
ceiling for technology
construction METHODS
*Capital Profit [Val- *Valuation is not a
Residual Discounted Risk &
[1]

[2]

[3]
Cost] science but some call it
*Yield [Income / Cost,%] “black art”
Method Cash flow Uncertainty
*Period of loan to repay
Analysis
Development Valuation:
The Residual Method
1
Gross Development Value – (Cost + Profit) = Residual Value
Problem 1:Q | page 393 |A | page 394 [Table 13.1]
Component Variables
E1

Density Development
Economic Design
Estimation of Rental Value
Selection of Capitalization Rate
Building Costs
Professional Fees
Problem 2:Q | page 393 |A | page 395 [Table 13.2]
Finance for Development
E2 Promotion & Marketing
Contingency
Land Acquisition
Developer’s Profit
Impact of time
Taxation and Allowances
Residual Method is not precise enough in reflecting incidence of time and
money payments during the period of development
 Development Valuation:
The Residual Method A2 A
A1

Left: Answer to Example 1: Table 13.1

Right: Answer to Example 2: Table 13.2

Gross Development Value – (Cost + Profit) = Residual Value

 Development Valuation:
Discounted Cash flow Analysis
1
 Cash flow based Phased Residual Valuation
E3
 Best applied to phased devt’s

 Interest rates are allowed to

vary during the project
period
 More accurate picture of
potential cash exposure
 NPV and IRR as
supplementary investment
criteria

 Three (3) methods cash flows

can be valued during dev’t:
Phased Residual Valuation
NPV DCF analysis
IRR DCF analysis
Problem 3:Q | page 412 |A | page 413 [Table 13.3]

Cumulative value of work carried out in the project on a regular basis

 Development Valuation:
Discounted Cash flow Analysis
2
 Cash flow based
NPV Discounted Cash flow Analysis
 Best applied to phased devt’s
 Discounting of all inflows and outflows
 Interest rates are allowed to
 NPV = SUM of discounted inflows & outflows
vary during the project
 (+) NPV indicates potentially profitable
period
 (-) NPV indicates likely loss
 More accurate picture of  Used to determine capital value of the project and
potential cash exposure its feasibility. Mostly used.

 NPV and IRR as

supplementary investment
criteria
 Three (3) methods cash flows
can be valued during dev’t:
Phased Residual Valuation
NPV DCF analysis
IRR DCF analysis
IRR Discounted Cash flow Analysis
 Estimates the profitability of potential investment
 IRR is the discount rate when applied to inflows
and outflows produce a NPV of zero (0).
 Normally in % per annum
 Profitable project with IRR >> than cost of capital
 Used to compare viability of one project to another

Please refer to pages 412 to 420 for related problem and solution
 Development Valuation:
Discounted Cash flow Analysis
A

A3

Answer to Example 3: Table 13.3

Cumulative value of work carried out in the project on a regular basis

 Development Valuation:
Risk & Uncertainty| Movements in variables used in appraisal
Sensitivity Analysis | Altering variables
in turn in an informal & realistic way to
test profitability on movement of
1
Probability Distribution|
Strategy that projects or
estimates probable future

- +
variables | Extinguishment of Profit | values Subjecting individual
Percentage change components to a
Rent percentage change and
Extinguishment Percentage assessing the extent to
of Profit| Degree Change| which the level of profit is
Yield at which an Subjecting affected.
independent individual
+ factor moves can
Building extinguish the
components to a
percentage
Simulation| Development
of Probability distribution
Costs profit; Profit = 0 change and using computer to pick up
- assessing the variables at random to the
probability ascribed to
extent to which
the level of profit them. Result is normally a
Time is affected. geographical representation

”The reliability of any development valuation depends entirely upon two (2) things –
the quality of appraisal information and the manner in which it is used”
Development Valuation:
Risk & Uncertainty| Movements in variables used in appraisal
2

- + Rent

Yield

+ Building
Costs
-
Time
Example 6: Sensitivity
Extinguishment of Profit
The Real Estate Development Process
(The RED Process)

10 Sustainability and property development | P1 – 2 |p299

11 The real estate development process | P1 – 16 |p329
12 Development site appraisal | P1 – 32 |p359
13 Development valuation |P2 - 5 |p390
14 Property development finance |P2 – 25 |p430
15 Marketing for development |
 Property Development Finance
Sources of
Sources of
Development
Development
Finance Finance
Types Insurance Companies
of Finance and pension funds

Criteria Banks
for Funding
Trust and bonds
Choice
of Funds
Internal Finance
The financial
agreement Construction Industry

Trends and Property Companies

Prospects
Government
 Property Development Finance
Sources of
Development
Types of Finance Criteria for Funding
Finance

Types
of Finance Development Finance  Past Performance
 Company Accounts
Criteria Mortgages  The Project
for Funding  Amount
Sale and Forward sale  Loan Periods
Choice  Interest Rates
of Funds General Funding Facility  Yield
The financial
 Rental Cower
Term Loans
agreement  General Funding Facility
Joint Ventures and partnerships
 Open-ended arrangements
Trends and  Sensitivity
Prospects Venture or private capital  Tax
 Costs
 Property Development Finance
Sources of
Development
Choice of Funds
Finance
 Institutional Lending Assessment of
Types Basic Elements of
of Finance
 Bank Lending
 Factors that condition Funding
Criteria the climate of lending:  Availability
for Funding Range of possible source of
Location finance, methods, & approach
Choice Presentation  Economy
of Funds Interest rates and fluctuation,
Speculation
equity, incentives and penalties,
The financial Collateral cost of borrowing
agreement Valuation  Practicability
Currency Integrates elements of Availability
Trends and Refinancing & Economy into a feasibility that
Prospects Loan Workouts may affect the viability of project

”It is essential to establish the correct financial base for the project, and for the
developer to balance their aims with the aspirations of the lending agency, whose
risk and reward criteria will determine the scope of negotiation between parties”
 Property Development Finance
Sources of The Financial
Development Agreement
Finance

Types  Funder’s Objectives |Selection Criteria |Third Party negotiations |Legal

Agreements of Developer with Local Authorities | Indemnity Policies |
of Finance Taxation | Purchase price of Project

Criteria  Developer’s Objectives |Smooth funding | Speedy response by

funder|Minimum interference of funder’s consultants | Smooth letting
for Funding arrangements

Choice  The Offer Letter | The Parties | Intent | Amounts | Interest | Payment |
of Funds Development Description | Income sharing | Building contract |insurance &
warranties

The financial  Contractual 3 Main Funder’s Remedies in the

agreement Agreement| Agreement:
Include details 1. Power to assign benefits to another
Trends and from cover letter | developer
Prospects Terms, Procedures, 2. Power to complete the development
Parties, and Date 3. Reimbursement, if third party
definition agreement
 Property Development Finance
Sources of
Development Trends
Finance and Prospects
Specialized
Types Funding for Environmental markets in higher
Regeneration of Aspect’s role in
of Finance risk management
old building appraisal
stock
Criteria
for Funding Higher
Project
Choice Standards
of Funds

The financial More

agreement Innovative
products
Trends and Globalization of
Prospects Finance Markets
will continue
Reappraisal
of concept
of value
The Real Estate Development Process
(The RED Process)

10 Sustainability and property development | P1 – 2 |p299

11 The real estate development process | P1 – 16 |p329
12 Development site appraisal | P1 – 32 |p359
13 Development valuation |P2 - 5 |p390
14 Property development finance |P2 – 25 |p430
15 Marketing for development | P 45 – 62 | p 469
Marketing for Development

1. Marketing Role
2. Marketing Functions
3. Market Segmentation
4. Selling Techniques
5. The Developer’s viewpoint
[1] Marketing for Development: The Marketing Role
Marketing is the management function which organizes and directs all those
business activities involved in assessing and converting customer purchasing power
into effective demand for a specific production or service to the final customer or
user so as to achieve the profit target or other objectives of the company”
Agency Function

Property Owners
Areas of
Marketing Deals
Intelligence Knowing…
Competition Tenants

Suitable Sites Marketing Two agents, local & nat’l

Overall Concept Strategy Sole & Sole or from another

Sub
Rental Levels Inquiries Handling Joint
Local Authorities Conduct Nego
Potential Credentials
Principal agent
Occupiers Finance hiring another agent
Special Needs Final Sales Types of
Multiple Several Agents
Market Conditions Letting Fees Agencies Individually Instructed
Commission on successful agent

“If you have no information, you have no product to sell”

[2] Marketing for Development: The Marketing Function
Marketing Tools Marketing Research

Market research 1 • Up-to-date Market Knowledge

& information

2 • Overall Policy & Tactics

Advertising
3 • The Product

Promotion 4 • Primary & Secondary Data

5 • Marketing Research Process

Public
Relations
 [2] Marketing for Development: The Marketing Function
Marketing Strategy Methods of Selling

Private
Treaty

Public
Auction

Formal
Tender

Informal
Market | Message | Media | Measurement Tender
4Ms
[3] Marketing for Development: Market Segmentation

Shops Offices Industrial Residential

 Rental of  Locational &  Performance  Buying Attitudes

space / Rent Functional factors of bldg  Fit-out / Fully
 Clients for  Multi national - Construction Q furnished
Shops: clients - Eaves height  Model houses
- Investing  Savings - Floor loading  Mortgage
institution driven - Grid size availability for
- Retail  Operation  Location/ first time buyers
industry consolidation Accessibility  Other offering:
- Shopping  Expansion  Labor / Market - Other fees
public  Strict in  Materials & payment
 Shops must occupational  Distribution - Mortgage
conveniently & operating  2 other factors Protection Policy
accessible standards - Envi Quality - Free furnitures
 Pleasant  management - Specialist
atmosphere Service
 [4] Marketing for Development: Selling Techniques
Public Relations | Brochures and Particulars | Press Advertising | Direct Mailing |
Site Boards and Hoarding | Demonstration | Television and Radio | The Internet |
Incentives | Other Approaches
 [5] Marketing for Development: Developer’s viewpoint
“The overriding objective of all developers operating in the private
sector to ensure that the buildings they produce are marketable”
The choice The marketing Monitoring
of agent campaign marketing
If dissatisfied, reject
“One of the worst
National or Local? Regular
offences is the Always engage agent
Meetings
momentous first push,
Large or small? On-site,
heavy over exposure, Continuity of agents
Report as
and comparative
Firm or individual? genuine
inactivity thereafter. Set product expectation
evaluation
Plan it so that you have & extended services
Regular or infrequent? of progress
a series of nudges
rather than one Pay fees promptly
Generalist or
forgettable blast”
specialist? Corporate Marketing
-Butler 1982
Image of Client
On Telling Questions on Corporate Image:
How do we think we are perceived by the public?
How are we actually viewed by them? How would we wish to be thought of?
What image is most likely to assist us in achieving our objectives?
 The Real Estate Development Process
(The RED Process) by Ratcliffe

NICK ALWYNSON M. TANDAYAG

CIVIL ENGINEER | URBAN PLANNER | ENVIRONMENTAL PLANNER