Development is an extremely complex subject but in an effort to explain the basics Lawrence Chadwick, managing director of Property Consultancy which provides real estate and development advice, hosted the most recent webinar in the series from Bayfield Training.
In the webinar, an Introduction to Development, Chadwick, who has more than 30 years’ experience in direct property development and is a former development director for Grosvenor, explained how all elements of development have to be considered in a project. “Development is not just the building – the physical part – there is a pre-development and post-development phase which is as important or more important than the actual building development which can be quite formulaic,” he explained.
What is development?
He said development was the most entrepreneurial form of real estate investment with the potential for the biggest profits but also the largest loss and it requires the broadest of skills. He said it also required vision and nerve to pick the right time for maximum opportunity.
New development can impact the value of existing real estate, both positively and negatively, he said. It can also act as a catalyst for further development, Chadwick explained. For the purpose of the Webinar he divided development into three phases – economic, physical and legal.
Focusing on the economic, Chadwick said that development should always be driven by optimum profit maximisation within the private sector. Development is nearly always driven by a site looking for a use or a use looking for a site. However in the public sector the catalyst for development is often more about need – such as housing, social or infrastructure.
It is important for development to understand the make up of Value and its ingredient parts, by using the valuers triangle of Capital Value = Rent/Yield. Yield = Rent/Capital Value and Rent = Capital Value x Yield.
Once this is understood the use of the Residual Development Appraisal method is core to all commercial appraisals, he said. “They all follow the same assumption despite the complexity. That is Profit = Value at Completion – Total Development Costs (which include Development Costs plus Land Costs),”.
Chadwick differentiated between Market Value and Worth, the former being an arrived at estimation of the price that would be achieved if sold in the market using the residual method. Whilst Worth meanwhile is the price that works for a person or organisation. He said that Value and Worth had to be looked at separately,. “Value being set by the market and Worth to that of the developer,”.
How does development come about?
He outlined the many stages of the development process in an event sequence model – from initiation (the initial idea or opportunity), through to evaluation, acquisition, design and costing, permissions, commitment and implementation through to the final stage of letting, managing or disposing of the development. However he warned the model should not be used as a tick box method and not all development followed this sequential route citing examples.
Who is involved in development and why?
Explaining who is involved in development Chadwick referenced Goodchild and Munton’s three dimensional model of roles within the development process. That looks at the Status, Aims and Roles, of agencies involved in the development process. He explained, “This is a useful reference tool that includes many of the agencies within the development process all of which need to be managed or taken account of.