debt obligation, which lead to a necessary restructuring of their portfolios.
In South Africa, institutional investors, without exception, are now insisting on a professional approach when being offered properties for purchase to avoid the pitfalls so common with wrong decisions concerning property investment. This attitude should be adopted by all developers to avoid the roller coaster ride they often experience, earning good profits on some projects interspersed with losses on other projects.
We are fortunate in South Africa to have good publications that assist with macro and micro economic decision-making. These include the Rode Report and the Stellenbosch University Bureau of Economic Research Report. Figure 1( on page 34) illustrates some of the controllable and uncontrollable economic factors to consider.
The steps in the investment process Fortune Magazine also sounded a warning against injudicious over-development of the property market, by reflecting vacancy rates averaging 18,8 percent in the U. S., whereas, in 1981, the average vacancy rate was 4,8 percent. Furthermore, in isolated cases, new office complexes had individual vacancy rates of between 50 and 100 percent. Investors and financiers would do well to heed the warning signs and do their homework properly with respect to market analysis.
Figure 2 is a diagrammatic representation by Professor Nic Maritz, from The Study Guide for Estate Agents, of the steps in the investment process:
A rational approach to Investment Analysis Of utmost importance to all investors in this process, according to Greer and Farrel, is that the investor is faced with an array of alternatives, which differ according to amount, timing and certainty of receipt and therefore, the determination of relative values of investment alternatives also differs.
Approaches of investors to investment analysis vary from being cautious and analytical, to‘ seat of the pants’/ gut feeling type management decisions. Furthermore, the investor, according to Mckeever in The Community Builder’ s Handbook,“ may be gifted with strong hunches and good horse sense, but he is better equipped when he has definite facts at hand”. According to Barrett and Blair( see How to Conduct and Analyze Real Estate Market and Feasibility Studies),“ the market study is perhaps the most important single element in the planning process” but is often neglected. While is often the most difficult element to conduct it is also the one element that should be dealt with most thoroughly, since property developments must be market driven.
What is required is a rational approach to investment analysis that incorporates a series of steps for the gathering and analysis of information and the taking of a decision on the basis of this analysis. The result is that the characteristics of an investment property are considered objectively and are related directly to an investor’ s needs.
The six key stages in the development process, according to Barrett and Blair, are comprised of the following:
Stage 1- Initial planning stage of the project embraces four phases:
• Phase 1: Formulation of the developer’ s objectives
• Phase 2: The conducting of a market analysis
• Phase 3: The preparation of a financial feasibility study
• Phase 4: Taking a decision on whether to continue with the project, shelve it until a later, or abort it completely
Stage 2 Acquiring the land Stage 3 Developing the land Stage 4 Constructing the building( s) Stage 5 Stage 6
AN OVERVIEW OF THE DEVELOPMENT PROCESS
Marketing and leasing space and / or units Setting up a property management and maintenance system.
What is of importance to note is that these stages could differ in sequence according to
• Whether the use is known and the site is to be determined as illustrated in Figure 3;
• Whether the site is known and the use is to be determined as illustrated in Figure 4;
• The type of development( i. e. township development as illustrated in Figure 6), or shopping centre development, where, according to Stevans, in his unpublished notes, An Overview of the Property Development Process, the tenant mix is of prime importance;
• And the magnitude of the project anticipated.
Furthermore, Phases 2 and 3, under Stage 1 above, could actually consist of four different studies as illustrated in Figure 5 below.
Stage 1- Initial Planning The initial planning stage will be initiated by an idea that the developer has on how to make money and, as mentioned above, will originate from two primary sources: an idea in search of a site( as per Figure 3) and a site in search of an idea( as per Figure 4). This is according to Wurtzebach and Miles, in their book, Modern Real Estate.
A third source suggested by Graaskamp is an investor looking for involvement in the two above options. This stage consists of
• The formulation of objectives
• The conducting of a market analysis
• The preparation of a financial feasibility study
• Taking a decision on whether to continue with the project, shelve it until a later, or abort it completely
It is categorised by Graaskamp as being part of the feasibility analysis as a whole and could vary time-wise according to the magnitude and complexity of the project. In addition, there is usually an overlap between the various stages and phases in the development process. < Insert Figure 3 > < Insert Figure 4 > < Insert Figure 5 >
www. reimag. co. za MARCH 2017 SA Real Estate Investor 33