1. The Economics of Development: Integrating Land Economics and Portfolio Analytics European Real Estate Society Stockholm, Sweden June 2009 Terry V. Grissom Ph.D.* James N. Berry Professor.* Jasmine L.C. Lim Ph.D.* *School of the Built Environment University of Ulster, Jordanstown

2. The Economics of Development Development decisions/strategies are highly associated if not dependent on development valuation analysis This valuation approach is directly linked to the constructs of distributive theory requiring a consideration of value differences and potential profits that arise from differing land uses associated with alternative project proposals Distributive theory requires an analysis of the return or compensation for each of the factors of production that define economic production, growth and development This requires that consideration of the differences in returns to the varying levels of distributive factors of labour, capital, land and entrepreneurship and their associated risk exposures that may arise under proposed alternative developments possible on any given site. This approach combines the options approach to development with the traditional production/manufacturing process

3. The Economics of Development This integrated approach to development: option and production fits one scenario of capital theory defining capital as: –The “product of production” and as investment (economic measures of time) See Ahmed (1990) This allows labour and capital (real and financial) as development inputs and allows the distributive measures of land and profit (residuals) as the dependent (determined) measures along with the total returns measure of performance as defined by risk and uncertainty variables in the context of the Fama-French Three factor model (1992).

4. Applicability of the Three Factor Model to Property Development Variables –Leverage –Capital cost as spread between construction loan cost less LIBOR –Capital size variable where size is the log of the equity cost of development –Proxy for development performance which the ratio of equity cost of development is divided by the gross development value which is equivalent to the Fama French book equity to market equity ratio# # This is a proxy which could include entrepreneurial effort, enterprise, innovation, coordination and strategic management

5. 3 Factor Fama-French Model for Single Use Development 3 Factor Fama-French Model for Mixed Use Development The Economics of Development

6. 3 Factor Fama-French Model extended to multiple Mixed Use Development

7. The Economics of Development Equating development especially mixed use development to a portfolio of uses subject to risk associated with alternative combination of use strategies is an extension of the option approach adopted by real estate, financial and urban economists. See Grenadier (1995,1996), Williams (1991, 1993), Capozza and Henley (1989) and Geltner and Miller (2001). This focus on development as a strategic choice of alternatives also allows the use of data development from the development valuation reports employed by practitioners, lenders and others considering proposed development. This data in turn is a function of the random market and project specific data available in any given market. Use of the development valuation reports for given sites and proposed projects offers an empirical approach that is similar to the simulation derived from developing an array of alternative portfolios based on different weightings of securities and general economic data. See data extraction form

8. Return and Risk Factors and Data Development Matrix

9. The Economics of Development A sample application of the model considering project yields, land value residuals, and profit as a percentage of proposed project development valuation are depicted in the tables that follow:

10. Base/ HBU Use Additional Use R2R2 α β Coeff t- Stat Leverage β Coeff t- Stat Log Size (cost) β Coeff t-Stat Log BEME β Coeff t-Stat Office Retail Residential Hotel 56.6 38.5 56.6 97.8 -0.7900 -1.288 0.0912 1.520 -0.7907 -1.288 -0.1697 -6.505 -0.1133 -0.4033 -0.1331 -0.8260 -0.1133 -0.4033 0.0146 0.0650 0.0078 2.1040 -0.0015 0.4432 0.0078 2.1041 0.0132 -7.6961 -0.0165 -1.9920 -0.0006 -0.0941 -0.0165 -1.9922 0.0081 1.3507 Resi- dential Office Retail Residential Hotel 21.7 47.8 16.7 37.3 -0.1614 -0.2608 0.0341 1.1290 0.0220 0.2639 0.0845 0.5520 0.1903 0.5560 -0.1075 -0.8583 0.1020 2.9980 0.9945 0.9070 0.0038 1.1732 0.0018 1.0168 0.0017 0.3547 -0.0037 - 0.3598 -0.0014 0.7726 0.0013 0.2489 -0.0064 -0.4164 -0.0376 -0.6902 Office Resident Mix Office/ Retail 14.9 48.0 0.0542 0.4990 0.0327 0.8884 0.0647 0.1975 -0.1009 - 0.6503 -0.00016 - 0.2737 0.0018 0.8082 -0.0105 -0.7982 Off: -0.000094 -0.1142 Ret: 0.00145 -0.2259 Statistics and Variable Coefficients Yield (Total Return) per Project for Proposed Use Mix

11. Base/ HBU Use Additional Use R2R2 α β Coeff t-Stat Leverage β Coeff t-Stat Log Size (cost) β Coefft t-Stat Log BEME β Coeff t-Stat Office Retail Resident Hotel 84.7 94.9 84.7 99.7 -4.28E+09 -1.760 -1.04E+10 -3.520 -4.28E+09 -1.760 6.77E+08 1.240 -1.98E+10 -1.7870 -1.93E+09 -2.4124 -1.98E+10 -1.7870 1.32E+10 2.8378 2.67E+09 1.8183 6.05E+08 3.6112 2.67E+09 1.8183 -1.23E+09 - 2.5430 -1.51E+09 -4.7210 -2.10E+09 -6.3740 -1.51E+09 -4.7210 -3.07E+09 -24.470 Resi- dent Office Retail Residential Hotel 81.9 89.4 88.3 99.3 -8.37E+09 -4.212 -5.78E+09 -2.394 -5.43E+09 -2.601 -1.69E+09 -1.589 -1.51E+09 -0.1371 -5.43E+09 -0.5430 -4.51E+09 -0.5291 5.04E+09 0.6980 5.04E+08 4.7680 3.50E+08 2.4566 3.23E+09 2.6390 6709807 0.9681 -28084931 -0.4790 -5.67E+08 -1.2790 -6.91E+08 -1.9026 -2.56E+09 -7.1356 Statistics and Variable Coefficients for Residual Land Value Difference by Project Proposed Use Mix

12. Base/ HBU Use Additional Use R2R2 α β Coeff t-Stat Leverage β Coeff t-Stat Log Size (cost) β Coeff t-Stat Log BEME β Coeff t-Stat MixedOffice Retail Residential Hotel 95.5 87.8 88.1 99.8 -1.65E+10 -9.847 -7.00E+09 -2.412 -6.98E+09 -2.567 -3.72E+10 -3.186 -2.41E+09 -0.4490 -1.13E+08 -1.0920 -1.03E+10 -1.2520 -3.72E+10 -2.5078 9.05E+09 10.4809 3.96E+08 2.1827 3.91E+08 2.5920 1.21E+09 3.0840 -1.83E+09 -5.2260 -7.91E+08 -1.9027 - 8.39E+08 -2.5530 -7.11E+08 -0.6619 Statistics and Variable Coefficients for Residual Land Value Difference by Mixed Project and Additional Land Uses

13. Base/ HBU Use Addition al Use R2R2 α β Coeff t-Stat Leverage β Coeff t-Stat Log Size (cost) β Coeff t-Stat Log BEME β Coeff t-Stat Office Retail Resident Hotel 51.0 38.3 51.0 71.7 -0.2557 -1.2890 -0.3307 -0.7663 -0.2557 -1.2891 -0.5251 -0.1724 -0.4851 -0.5375 -0.4305 -0.3689 -0.4851 -0.5375 2.9422 1.1306 0.0269 2.2480 0.0382 1.2630 0.0269 2.2480 0.0093 0.4632 -0.0134 -0.5037 -0.0219 -0.4574 -0.0134 -0.5037 -0.0855 -1.2175 Resi- dent Office Retail Resident Hotel 09.4 31.3 21.4 76.1 -0.4010 -0.1997 -0.9320 -0.3730 -0.1110 -0.4551 0.3365 1.0390 0.6069 0.5470 0.2174 0.2100 0.5890 0.5912 4.0980 1.8670 0.0076 0.7128 0.0180 1.2250 0.1761 1.2370 -0.0165 - 0.7857 -0.0022 -0.3732 0.0589 1.2857 0.0447 1.0408 -0.1812 -1.6617 MIXMix48.10.0670 1.6049 0.7082 0.9038 1.38E-10 2.3366 0.11438 1.6560 Statistics and Variable Coefficients Profit (Residual as Percentage of Value) per Project for Proposed Use Mix

14. Conclusions Yield analysis from the proposed model is consistent with the findings of systematic investment portfolios using the Fama-French model (See Bond, Karoyli, Sanders 2004) This research is broader as applied to development in three perspectives: –in allowing the consideration of mixed uses not just the difference in alternative development scenarios as offered by option models –in allowing for the consideration of combination of uses (a mixed portfolio) as the use mix impact land values measures and profit as a residual calculation –in allowing for the incorporation of risk and uncertainty into traditional valuation and land economic measures of performance

15. Conclusions The performance of office and retail synergies within a mixed use development increases all measures (yield, profit and residual land value) compared to the dominance of a single use. Residential within a mixed use development increases the complexity of a risk and market model as a consequence of mixed tenure housing/affordability housing provision The inclusion of hotels in a mixed use development contribute to a residual land value enhancement over a single use development

16. Conclusions Mixed use development increases land residual value relative to risk levels and may offer strategy to hedge recessionary impact. The findings of the model emphasises the benefits of entrepreneurial developer’s effort of innovation and strategic management in value creation.