CHAPTER ONE Development and Construction Economics Mukerem Development and Construction Economics Economy • A sector that includes the manufacturing, distribution, and consumption of products and services. Development and Construction Economics Economy • The system of trade and industry by which the wealth of a country is made and used. • Use and management of scarce resources. Development and Construction Economics Economics • The study of how people choose to use their scarce resources in an attempt to satisfy their unlimited wants. • Concerned with the production, consumption, and transfer of wealth Development and Construction Economics Two types Economics Microeconomics - The study of the decisions of individual people and businesses (firms) and the interaction of those decisions in markets. (one person ,family, industry .. ) Macroeconomics - The study of the economy as a whole. Examines and explains the behavior of economic aggregatestotal consumption, total production, total employment. Development and Construction Economics Industry • An industry is a part of the economy that produces goods, services, or raw resources that are closely tied to one another. • One may cite the wood industry or the insurance industry as examples. Development and Construction Economics Different Industries Property development Industry - Comprises all the organizations, interests and persons connected with the business of buying land and buildings and then making improvements to them so that their selling price exceeds the price paid for them. Development and Construction Economics Different Industries Construction industry - Comprises all the organizations and persons concerned with the process by which building works are procured, altered, repaired, maintained and demolished. Development and Construction Economics Development and Construction Economics Uses economic theory, concepts, and analytical techniques, explores various subjects related to the Construction and maintenance of the built environment by businesses, industries, and projects. Development and Construction Economics Development and Construction Economics • When it comes to growth in the economy, the building sector is crucial. • The commercial workplaces, infrastructure, residences, schools, hospitals, and other facilities that supply the services on which society depends are created, built, and maintained through construction. • The economic prosperity of a nation increases when the building industry becomes more innovative and efficient. Development and Construction Economics Nature of construction products - Final product is large, and expensive and built over a large area of land - Made especially to the requirements of the individual customer - Product is normally manufactured on the client’s premises (static nature of the product) Development and Construction Economics The importance of Development & construction industries - Provide shelter - Provide infrastructures such as roads, ports, airports, dams, powerhouses, etc. - Provide commercial and business buildings such as offices, factories, shops, etc. - Provide a variety of other facilities such as hospitals, schools, recreational facilities, etc Development and Construction Economics Characteristics of the construction industry • The physical and complex nature of the product • Includes a complex mixture of different materials, skills and trades • Impacts the environment by producing these structures and buildings Development and Construction Economics Development cycle in the construction industry Development and Construction Economics Development cycle in the construction industry Development and Construction Economics Development Parties in the construction industry CHAPTER TWO Development Demand and Supply Mukerem Development Demand Two main forces of market Demand- Want, have the ability to pay, definite plan to buy it. Supply- Willingness and ability of potential sellers to produce and sell a product or service. Development Demand Types of Demand -Market demand - the total quantity of a good or service demanded by all potential buyers in a market at each price level - Effective Demand - demand backed by the ability to make a purchase. Development Demand Factors affecting demand • Income (works differently for Normal goods & Inferior goods) • Prices of other goods/ related products (Substitutes and Complements) • • • • Expectations Preferences Population Government policies/legislation Development Supply Factors affecting Supply Development Supply Factors affecting Supply Price: service is the amount to be paid, in order to get the product or Cost: the aggregate monetary value of the inputs used in the production of the goods or delivery of services Value: individual. the utility or worth of the product or service for an Development Supply Factors affecting Supply • • • • • Cost of production (including availability of resources) Prices of alternative products the firm could produce Production capacity (including production conditions) Expectations Government regulations (e.g. Subsidies & Taxes) CHAPTER THREE Land for Development Mukerem Land for Development 1. Brownfield Refers to previously used land or areas of industrial or commercial facilities that are to be upgraded. Brownfield Development Benefits: • Lower total costs: with the existing infrastructure in place, cost of upgrading is usually lower than starting from scratch (vary from project to project) and occupancy can happen much faster • Quick turnaround time: because of the existing infrastructure, planning permission (given the purpose of the site remains the same as previous establishment) is already in place and the upgrade can kick start straight away. Brownfield Development Drawbacks: • Development constraints: since it is based on prior establishments, brownfield developments will often require compromises, and are often faced with constraints (limits) • Operating difficulties: usually brownfield sites are located at inner-city and developers may encounter traffic congestion and noise when developing the sites • Environmental issues: many brownfield sites are already exposed to certain level of pollutions and it can be extremely costly for the developers to comply with "today's" environmental standards and clean up rules Green field Development 2. Green field It refers to undeveloped land in a city or rural area either used for agriculture, landscape design, or left to evolve naturally. It can be unfenced open fields, urban lots or restricted closed properties, kept off limits to the general public by a private or government entity. Green field Development Benefits: Maximum flexibility: greenfield sites are vacant, they will be able to provide maximum flexibility for the design and operation of any new developments Easy to comply with environmental standards (comparing to brown field) Green field Development Drawbacks: • Long turnaround time: planning permissions may take a very long time to be approved by relevant government agencies and hence delay the project development process • Huge cost involved in developing from scratch Sub-division Development 3. Sub-division Subdivision is a property investment strategy which divides up a single piece of land into smaller pieces or lots, which (buildings separately. on can be them) developed and sold Sub-division Development Benefits: • More rapid creation of profit: the investor is buying properties/lands at the wholesale price and selling two or more smaller properties/pieces of lands at a higher per sqm price • Capital growth: a properly managed and timed sub-division project can increase the capital value of the properties • Lower costs and benefits: often land is sold with approvals to build, but those building costs are put back onto the buyers Sub-division Development Drawbacks: • Higher risk involved: higher multiples of revenue also signals a higher multiples of losses if the project fails since costs can sometimes be high-priced and may vary from project to project • Potential surprise costs: if feasibility study were not performed with due carefulness, there will be a lack of contingency plan in place when potential surprise costs (eg land structure problem) occurs Industrial Development 4. Industrial Used for manufacturing and production Industrial Development Benefits: • Cheaper land & longer/better tenant • Construction costs maybe lower (open air factory vs high rise construction) Drawbacks: • Slow moving project , high infrastructure cost electricity , waste disposal , water • Might involve cleanup cost • often developer needs to find a client and build to suit their needs Residential Development 5. Residential Used for living purposes Residential Development Benefits: • Necessity: everyone needs a home and wants to own a home • A great inflation and deflation hedge: a good diversification • Easier to sell under normal market conditions Drawbacks: • Developing at the wrong time or in the wrong area will be very risky and costly. Commercial Development 6. Commercial • Buildings or land developed to generate a profit, either from capital gain and/or rental income Commercial Development Benefits: • Often higher income potential: higher rent per square foot than residential real estate or apartments • Stable cash flow: the continual tenant income • Lower vacancy risk: since commercial real estate is usually divided into smaller units for rental/lease purpose, the vacancy risk is spread over several units • Less competition: given the huge size of investments needed, it takes deeper pockets to invest in commercial real estate projects such as office buildings and shopping malls • Long-term capital appreciation Commercial Development Drawbacks: • Bigger initial investment, sites often bought years in advance of construction beginning. • Management issue: it is not a one-time deal. The developer needs to manage multiple leases, maintenance issues and public safety concerns. Repositioning Development 7. Repositioning and re-development • Repositioning and redevelopment projects can offer many advantages that new developments do not have. • Every project is different, but here are some of the positive aspects of using an existing structure and developing it into something new and better. Repositioning Development Benefits: • Existing building can save money on construction costs • Can be much faster to renovate/develop • Can have heritage and historical value and elements • Unique features and story • Community value add • Generate jobs • Increase land values of surrounding real estate • Increased sales price /sqm • Government support Repositioning Development Drawbacks: • Approvals can be difficult and time consuming • Structural upgrading can be very expensive • Some areas of the building may not be useable under desired floor plans • May need to add many elements to meet today’s building regulations which are much more strict than they were decades ago • Piping for heating/cooling/sewage can be very expensive to make work, both internally and also externally • Access/Entrance may conflict with new business model for the site End
