Presentation on theme: "Chapter 8 Market Research Property Development (6th Edition)"— Presentation transcript:
1 Chapter 8 Market Research Property Development (6th Edition) Publisher: RoutledgeAuthors: Professor R.G. Reed and Dr S. Sims
2 8.1 INTRODUCTIONThe importance of sound market research is often under-estimated in the property development process.A possible reason could be a lack of formal training undertaken by most property developers who may have evolved into their role mainly via industry experience. Another possible reason is that when a property developer has previously operated in a rising market (i.e. demand exceeds supply), the impact from failing to carry adequate market research may be hidden by higher prices.Conducting thorough market research has the potential to make or break a successful property development. Market research itself is a specific discipline and its importance cannot be under-estimated in the property development process.There are varying approaches to undertaking market research. Research analysts can provide invaluable insights about the fundamental demand and supply factors, as well as the relevance of underlying market conditions, at any given time throughout the development process.
3 8.2 UNDERTAKING MARKET RESEARCH There are two relevant types of research:(a) Based on a relatively broad market viewpoint without a specific individual property as the primary focus of the study.(b) Based on the perspective of the actual real estate market in which a given property competes.With most forms of research (see Figure 8.1) the focus can range from specific research (a) to broad research (b) where the decision for the property developers will be based on what levels of research are relevant to the project at hand.Figure 8.2 highlights the relationship between the overall aggregate real estate market and the sub-sectors within, based on classification via different land uses. This replicates the operation of the market where each land use has a set of unique characteristics.Using the simplified model in Figure 8.3 it is possible to enter four different locations (y-axis) and four different land uses (x-axis), resulting in 16 different sectors.
4 Figure 8.1 Market Research Approach from Broad to Specific Decreasing breadth of market researchRelevance via land use or location (or both)(a) Research is relevant to only one property(b) Research is relevant to a large number of properties
5 Figure 8.2 Relationship between Market Research Areas Entire real estate marketReal estate sub-markets, e.g. commercialReal estate sub- sub-markets, e.g. high-rise residential, low-rise residential)
6 Figure 8.3 Cross Tabulation – Land Use by Geographical Location Real estate submarket (by location)Real estate submarket (by land use)City centreInner-citySuburbsCity fringeResidentialCommercial - officeCommercial - retailIndustrial
7 8.3 SOURCING REAL ESTATE INFORMATION Areas where market research can help include questions about:1. How variables and decisions on the local economy affect value.2. How the property development is affected by trends (e.g. demographic trends by varying cohorts) in the market.3. The level of risk associated with a development at a particular point in time in the future.There has always been a need to forecast the future which is designed to reduce risk.Some decisions (e.g. which government will be in power in five years) are practically impossible to estimate with a high degree of accuracy so there will always be a certain exposure to risk.At times the research may indicate a proposed development is not a viable proposition to commence in the current economic climate and should be delayed until the market recovers or demand returns.All real estate developers entering the market need to be conversant with the full range of research services available, if only to become sophisticated purchasers of them when required.
8 8.4 TYPES OF RESEARCH 8.4.1 Information There are generally two different types of information:1. Real estate market information including data about transactions in the real estate market.2. Supporting information including demographic characteristics, status of the local economy and other related statistics.8.4.2 Strategic and Site-Specific AnalysisStrategic analysis is conducted either by a company’s own research team or commissioned from external consultants. It typically examines questions which are long term in nature and rarely relate to individual development projects.Site-specific analysis is employed where a developer or investor needs answers to questions about an individual scheme. These questions might include, for example, whether the developer’s predictions about an under-supply scenario are correct, whether to refurbish an existing property or whether an investor should fund a particular scheme.
9 8.4 TYPES OF RESEARCH 8.4.3 Forecasting Forecasting involves predicting future market conditions with direct reference to the level of rents, yields, capital values and returns. This is also designed to reduce direct and indirect exposure to risk.Forecasts are typically available for the office, retail and industrial sectors as well as the investment market at national, regional and, increasingly, a local level.Forecasts are used for two principal purposes: (a) to provide an indication of the likely future operating environment through forecasts of the real estate market as an aggregate, and (b) forecasts are sometimes employed in site-specific studies to provide rental projections for the local market in which a real estate development will be undertaken.The models used and associated formulae for forecasting are closely guarded secrets but the aim is to minimise the number of assumptions as much as possible.
10 8.4 TYPES OF RESEARCH 8.4.4 Portfolio Analysis Portfolio analysis was originally developed for the other capital markets in the 1950s and has only recently been applied to property. It recognises that investment in property is only part of a broader investment portfolio.Portfolio analysis is used to analyse the comparative return and risk performance of:1. Property as a whole against other competing investment types, e.g. equities, cash at bank.2. An individual property type against the other land uses (office, retail, industrial).The analysis identifies the optimal combination of property types (or asset class) which will provide the maximum return for any given level of risk and therefore the optimal mix within a portfolio.
11 8.5 THE IMPACT OF RESEARCH 8.4.4 Portfolio Analysis The reliance on property research has increased rapidly and subsequently it has become an important part of the development and investment process.It could be argued that the growth and availability of property information and research over the past decade, especially information freely available instantly over the internet, has increased speculative decisions and interpretations.If used correctly, research can potentially reduce uncertainty but not eliminate risk completely.As real estate developers seek to undertake successful developments in the next cyclical upturn in a market which operates in a relatively uncertain economic climate, the use of research will undoubtedly continue to expand.The real estate developer should never lose sight of the all-important final consumers of property – the occupiers – where decisions are made by humans rather than mathematical numbers.
12 Chapter 8 Market Research Property Development (6th Edition) Publisher: RoutledgeAuthors: Professor R.G. Reed and Dr S. Sims
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