CHAPTER 3: ECONOMICS OF

BUILDING DEVELOPMENT

PART 1
 WARM-UP ACTIVITY

• If you have RM1,500,000 in hand, what kind of property you wish to invest in. Explain why and
also tell more detail about your plan.

“Dare to dream, dare to love, and dare to live.”

THE NATURE OF PROPERTY

• Property serves several purposes, such as a factor of production, a

corporate asset and as an investment.
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Illiquidity: it takes 3 months or more to sell and buy.

Inflexibility: necessary to purchase the whole.

Growth of debt finance and increase in bank lending to property sector.

 THE ESSENCE OF DEVELOPMENT

 Each development has a ‘market value’ that means a potential worth or earning power.
 Even civic buildings, hospitals, churches, universities and polytechnics have an
assessable value to the community.
 A private developer will frequently require a financial appraisal or feasibility study to
determine the likely capital expenditure and probable revenue in order to arrive at the
anticipated return on the money invested.
 The quantity surveyor is frequently called upon to make cost comparison of different
design proposals with varying capital, maintenance and running costs.
 The task of the quantity surveyor is to inform the developer which is the most
economical scheme after taking all these costs into account.
 Therefore, a quantity surveyor ought to have a general knowledge of values and a
detailed knowledge of building costs.
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 Ensuring development to maximum plot ratio.
 Planning the most economical use of available floor space.
 Implications and suitability of different methods of procuring the building contract.
 The speed of construction balanced against financial considerations, such as the cost of
bridging finance and loss of rent or interest.
 The effect of incurring extra capital costs including expensive finishing, balanced against
additional net rental value.
 The effect of incurring extra capital costs balanced against a consequent reduction in
future maintenance costs, including depreciation allowances.
 DEVELOPMENT PROPERTIES
The term ‘development properties’ refers to properties that a developer
invests capital to secure a greater and more profitable return than
previously received.
Typical examples of development are the development of agricultural or
accommodation land for residential purposes and the redevelopment of
central areas.
Central area premises will command much higher development values than
premises on the outskirts of a town, as they will produce much higher rents.
The most profitable permitted use will depend upon the policy of the local
planning authority and the nature of the planning proposals for the area.
The location will also influence the decision as to the type of design and standard
of finish, as a central location will justify a higher standard of design and finish
than a suburban site.
BUDGETING FOR PUBLIC AND PRIVATE
DEVELOPMENT
A) PUBLIC FINANCE

 Central government funds are obtained from two main sources: internal and external.
 Internal sources are mainly confined to nationalised industries where internal cash flows
provide a source of finance for the industry’s investment; external sources finance are
taxes and borrowing.
B) DEVELOPER’S RETURN
 The majority of building clients are seeking a financial return on the capital they invest in
building projects.

 There are some projects which are of a semi-commercial nature like local authority
housing, and others which are non-commercial such as schools and churches.

 The economic return approach will be difficult to be applied for projects which are of
non-commercial.

 From the quantity surveyor’s point of view, it is important that the developer shall
prescribe the upper limit of his budget for the project, in order that the quantity surveyor
may formulate a cost plan with the object of securing value for the money expended and
a realistic and advantageous distribution of costs throughout the various parts of the
building.
C) BUDGETING FOR COMMERCIAL PROPERTIES
 The majority of the financial houses recognized that property, particularly commercial
and industrial properties have good investment value and generally compares favorably
with other investment opportunities.
 Investors often require, as part of the consideration for lending, a share in the profits.
 This has resulted in the investor showing a very real concern in the situation, design and
profitability of the building.
C) BUDGETING FOR COMMERCIAL PROPERTIES
Therefore, projects must be:
a) Well-conceived and efficiently executed;
b) Built to designs which are attractive,
c) Satisfy the local planning authorities;
d) Meet the needs of occupant,
e) Profitable.
C) BUDGETING FOR COMMERCIAL PROPERTIES - OFFICES
Offices are common types of commercial development project where
developer needs to be assured of a reasonable excess of income over
expenditure.
The capital outlay will be for site and buildings and return is often in the
form of rents.
An expert financial appraisal has to be carried out to indicate the overall
supply/demand situation and rent levels for offices in the area.
C) BUDGETING FOR COMMERCIAL PROPERTIES - OFFICES
The appraisal includes consideration for the following aspects:
1. Growth of commerce in the area
2. Demand for all types of office space
3. Site characteristics
4. Transport facilities
5. Public utility services
6. Associated services such as banks and markets
C) BUDGETING FOR COMMERCIAL PROPERTIES - OFFICES
The rent level is affected by the quality of the accommodation, so the
standard of quality must be determined at an early stage.
The amount of space to be provided will depend on a number of factors,
such as:
a. Estimated demand
b. Site area
c. Planning restrictions
d. Rights of adjoining owners
D) BUDGETING FOR RESIDENTIAL PROPERTIES
The majority of house owners finance their house purchase by
borrowing from financial societies, for example, banks.
While the house builders can arrange 90-95% mortgages over
a 25 to 30 years term on their new houses, they need to be
aware of the financial standing and circumstances of the kind
of purchaser they aim to attract to arrive at a viable price
range.
E) BUDGETING FOR NON-COMMERCIAL PROPERTIES
School buildings are the largest group of non-commercial
buildings.
Generally, local authority schools do not receive incomes.
It is therefore necessary to use some other criteria to establish
cost standards and to ensure that local authorities receive
value for money.
E) BUDGETING FOR NON-COMMERCIAL PROPERTIES
A similar problem arises with the building of religious buildings, such as
churches.
The church authorities have ideas of the size and quality of building
required but the architect is rarely given a cost target.
The church authorities often experience considerable difficulty in raising
sufficient funds to meet the heavy cost of building new churches and of
maintaining and operating existing ones, and that’s why church projects
should be carefully cost planned and all necessary steps taken to ensure
that the client obtains the best possible value for his money.
E) BUDGETING FOR NON-COMMERCIAL PROPERTIES
 It is unfair to leave the cost matter entirely to the design team without any brief as to
costs.
 Past projects shall be analysed on the basis of common units of measure, such as
places in schools and seats in churches, as well as costing on the basis of per square
meter of floor area.
 Extensive cost records and analyses of past projects must be maintained to enable
realistic cost targets to be established from known costs set against known standards of
construction and quality.
 Nevertheless, adjustments to costs may be needed to allow for differences in building
design as well as site and market conditions, apart from the updating aspect.
 Apart from cost as being the factors to be considered in the design of a building project,
other factors such as appearance, quality, function, time and utility must also receive
adequate consideration.
THANK YOU