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2A)
2A)
Economic does not grow in a straight line. Instead, economies fluctuate between
periods of strong growth and weak or negatvie growth, known as the economic growth or
business cycle. One widely held economic cycle theory is based on the relationship between
supply and demand, and economic activity.
First and foremost, the demand in the marketplace for property arises from all the
various activities that society pursues and the consequent need for properties in which to
pursue those activities. Property in itself has virtually no value, any value it possess is derived
from the usses to which it can be put. Thus, the demand is a reflection of the short-term and
long-term changes in the economy.
Mr. Alex has to undestand that the economic cycle is not moving in tandem with the
property cycle when business improves. The early reference on this statement include the
building cycles by Richard Barras (1994). As many property developments and investments
are closely linked to the economic and business frameworks, there is usually a relationship
between property cycles and business cycles. This relationship is as shown in Figure 1 below,
where there is a clear relationship between the property market, economy market and
financial markets.
If credit expansion accompanies the business cycle upswing, it can lead to a full-blown
economic boom. The banks may also fund a second wave of speculative development activity.
However, because of the long lead times in bringing forward new development, supply
remains fairly tight and values continue to rise.
By the time the development cycle reaches its peak, the business cycle has already
moved into a downstring, accompanied by a tightening of monetary policy to combat the
inflationary effects of the economic boom.
As the economy subsidies, the demand for property declines, rents and values fall as a
result and the vacancy stock increases in supply. As the economy moves into recession, the
fall in rents and values continues, property companies are hit by the credit squeeze,
bankruptcies increase and the development cycle is choked off.
The local economy
It should never be overlooked that risk and uncrtainty exist in the property
development process, no matter how thorough the research of the developer may be. Property
development involves a decision to commence a development for use at a future date that is
on completion of the development and the future being uncertain it is impossible to rid a
developement scheme of uncertainty. By here, uncertainty relates to factors which are
unpredictable and in respoect of which it is therefore not only difficult but perhaps impossible
for a developer to take precautions. For example, the fact that at some future date a war may
break out or a government may introduce new legislation which may affect the success of a
development may be completely unpredictable at the date of commencing a scheme.
A developer should seek to satisfy market demand by providing property suitable for
potential users and sited in appropriate locations. It should be developed at a cost which
enables the completed development to be let or sold at a price which is low enough to attract
suffiecient would-be users or customers to pay that sum for its use which in turn provides the
developer with an adequate net return to reward him or her for their labour, their skill and
their professional expertise, and to compensate them for the risks taken in undertaking the
development.