What does it take to proceed with property development projects in times of economic and global turmoil?
It takes truly informed and risk aware developers.
So what does a truly informed and risk aware property developer look like? Do you have a mirror? Is it you? If you are committed to property development then you must be able to look in the mirror and say “Yes, that is me!”
I am regularly asked what qualification is required to be a property developer. Whilst the answer is none in particular, anyone can be a property developer with the right knowledge, I have recently been answering the question with “an economics degree”.
As soon as I say this people’s eyebrows go up and their face contorts as they try to understand why I would say that. Most respond saying that they thought a building or architecture degree, an engineering or town planning degree or even simply having a building trade and license was needed.
Whilst all of these qualifications are certainly valid, the critical aspect of being a property developer is understanding the “big picture” and not focusing on detail. Everything they proposed is detail related. The study of economics is not.
The critical aspects of property development relate to the economic conditions that prevail at the time that a development occurs. If there is conflict overseas a property developer must understand what is driving that conflict and the repercussions it will have on the global economy and their own country’s economy.
In a property developer’s home country, if there is low or high inflation, interest rate fluctuations, high or low levels of government debt, high or low levels of unemployment, a pandemic, a global financial crisis, a credit crunch or a substantial or reduced immigration programme, a property developer must know what this means for their business.
Property developers invest money today and may not receive a return on their investment for a number of years. To do this they must have their own crystal ball and form their own view on what it all means.
But having a crystal ball isn’t the only requirement. A property developer must also understand demographics, and the simplicity of supply and demand. Property developers meet a market’s need. They provide the relevant development in the right location. There’s no point developing massive multi-bedroom apartments with high quality finishes and having a huge price tag if the market only needs cost effective housing for single people.
By doing sound, quality research, by understanding basic economic theory and by identifying risk, mitigating it and managing it throughout a project, a property developer can develop projects regardless of an economic cycle.
Economic cycles tend to change quickly. Property developers who focus on the big picture are able to see the changes and make sound business decisions based upon what they believe will occur. This may mean that a project is placed on hold for a time, it may mean that the project is accelerated, it may also mean that revenue may change and/or construction costs vary from the original budget. Demand for the proposed development may change (i.e. you may be focused on delivering 3 bedroom apartments however the local population changes due to a known influence and now 2 bedroom apartments are more appropriate so you have to amend the design of your project). Finance may become easier or more difficult to obtain and insurance may become far more complex to secure. Perhaps a government agency is created to place additional burden on builders and developers to create quality projects.
If a property developer is looking at drawings, schedules of finishes, building contracts and focusing on the detail then they will not be able to “see” the big picture. Don’t get me wrong, the detail is critical to the successful delivery of a project but the property developer should not be doing this work, it could be outsourced to project management specialists.
If the property developer can focus upon the big picture, acquires development sites for the right terms and value and then creates the right product in the best possible location then even if the economic conditions change for the worse, the property developer has considered these factors before entering into their project. And because the property developer is only human, they provision for an appropriate level of profit and risk margin on all of their projects.