Real estate development is a multi-stage process that can be risky, lengthy and difficult in modern conditions. There are many obstacles that may appear in the development of real estate. Such a process can take years to bring a project from the initial planning stage to the construction completion stage. Real estate development projects can also be very profitable investment opportunities.
The concept
In recent years, a new concept in economic terminology has appeared - activities in the field of real estate development. The development of this industry refers to entrepreneurial activity, which is associated with changes in existing buildings, structures or land, which leads to an increase in their market value.
Development is a type of business that is associated with the creation, reconstruction or modification of an existing property or land in the field of construction of multi-storey buildings, retail, office, industrial and warehouse premises in order to generate income from the growth of their price.
Concept
The difficulty of improving the development of the construction industry has led to the expansion of scientific and applied research in the development and implementation of new forms, methods and systems for managing real estate in order to increase the competitiveness and productivity of their activities.
One of these forms is development. The development of development in the Russian Federation is a relatively new type of business that has emerged as a result of market economy trends from related business areas in the field of real estate, investment and construction.
According to the figures of Russian economic science, Mazura I. I., Shapiro V. D., who were engaged in research in the field of management and development of real estate, development is a special process and type of professional activity (business) that is associated with high-quality transformation of real estate in order to increase its value.
Development is the process by which a high-quality change in real estate is achieved.
As a result, the main signs of development are specific qualitative indicators, i.e., the basic transformation and increase in the price of an immovable object, as well as the productivity and profitability of investments.
On the other hand, development also acts as a system for managing the process of creating and developing real estate, as a result of which its physical, financial and legal characteristics change.
A change in an immovable property during development takes place in such a way that its price increases several times.
As a result, the physical processes of development ensure the emergence of new consumer properties of the object, which correspond to the changing needs of society. These changes can be both dramatic and not particularly visible from the outside. However, they are constantly a necessary sign of development, a necessary condition for increasing the financial effect of the use of real estate.
Property objects change over time during the development process in such a way as to meet the requirements of society.
Financial development processes are realized in the form of an increase in the price of property as a result of physical changes. At the same time, price increases are not provided by any physical changes, but only by those that meet the requirements of the market and the needs of its customers.
The greater this correspondence, the higher the value of the created object, and the higher the development efficiency.
Development productivity will become higher if it meets the needs of customers.
By its structure, a company can be a multidisciplinary investment and construction concern or holding, having a complex, developed system that consists of several organizations, each of which takes its place in a certain hierarchy and has its own goal.
It must be emphasized that not all organizations that participate in the process of creating and implementing an investment and construction project are included in the structure (system) of a development company.
They can be municipal and private companies that participate in certain stages of the project. But the more they are included in this investment and construction holding and fall under the general management of a development company, the more productive this company will work. Moreover, these firms will perform certain functions of management, organization, motivation, control, etc.
Development is a new type of entrepreneurial activity related to restoration, engineering, construction and other works. After the completion of these works, a qualitative change in the property occurs and the value of the property increases.
Differences between Russian and foreign development
The main difference is that Western development is based on the scheme of the need to create a real estate object, which was built on marketing research. In our country, an investment project is being developed for a specific land plot that is available for the project.
Real estate development in Russia implies that our companies still cannot compete with foreign ones, but this doctrine is becoming increasingly popular due to the evolving system of urban planning and the Europeanization of modern society. The role of developers is becoming increasingly tangible. They can organize fundamental changes. Conversions are made in different ways. Developers are businessmen and specialists of a wide profile: in the field of law, money and construction. There are few of them in Russia, and the price of their services is quite high.
Development Tasks
The central objective of real estate development and management is to maximize income on the property. The source of this income is the value added that was created in the course of the project as the difference between the value of the object and the value of the project.
Here, the activities of the developer must be focused on maximizing the value of the completed facility and minimizing costs.
The main goals of professional real estate development:
- Effective organization of the project approval process with government agencies.
- Effective organization of work with contracting organizations, as well as attracting reliable contractors with minimizing prices and project implementation time through contract bidding. One of the fundamental tools for improving the management of the construction part (implementation) of development projects is to attract professional project managers with knowledge of construction technologies.
- Effective organization of project financing of funds - the formation of a cost-effective and streamlined mechanism for allocating financial resources, which includes a combination of different sources of revenue and changing the ratio between them as the project progresses.
Sources of funds for development projects are: equity, direct financing, borrowed funds (including bank loans, funds).
Any of these sources has its advantages and disadvantages. As a result, the developer’s own funds usually make up the smallest share in the total amount of financial resources allocated to the project.
The main source of allocation of financial resources of the project at the construction stage is borrowed funds and funds from direct sources of financing, while the share of the latter increases as the project ends. The developer must be able to combine these sources as the project progresses, avoiding the unnecessary dependence of the project on the allocation of financial resources from credit funds and minimizing the fee for attracted financial resources.
4. Effective organization of sale (lease) of the object, which is created with the involvement of specialized brokerage companies. Enhancing the work opportunities of sales departments through the use of various methods of organizing sales includes: working via the Internet, using social networks, and local sales.
Principles
One of the main principles of the basics of real estate development is to create a powerful team of consultants who will work at various stages of the project - from marketing to the implementation of the operation phase of construction projects. Attracting such professionals is not cheap, but experience shows that it is profitable.
At each step of the project development, it is necessary to highlight the main points, with the successful implementation of which we can expect a successful result of the entire project. Market research should answer the following questions:
- in which sector of the market now there are unfilled niches and whether they will remain in the future;
- what is the most affordable price level for the sale of the built area;
- what is the project profitability forecast;
- what level of competition in a particular sector;
- probable risks and methods for their reduction.
A study of the real estate market allows you to find the existing balance of supply and demand in different sectors and thereby identify unfilled niches in which there is a shortage of certain areas.
The study of selling prices and construction prices allows you to find sectors in which the effectiveness of the development project will be maximum.
Enormous attention in the study should be given to the forecasts of these characteristics, since the situation on the market is constantly changing. The study should also include a study of the work of competitors with the identification of their strengths and weaknesses.
Kinds
It is usually customary to distinguish between two main types of development: fee-development and speculative development.
Fee-development is a type of construction business in which the developer company does not own the object that is being built, but only deals with clean development without investment functions. This type of development carries the least risk.
Traditional development in the modern Russian construction market presupposes the indispensable participation of development funds in the investment and construction aspects.
The share of the role of a construction company in investment projects ranges from 100 to 35-40 percent.
Speculative development is more difficult than the first option. The developer builds commercial real estate, taking action as the founder of the project. The financial scheme of large development projects is a complex combination of developer’s own funds and attracted investments: bank loans and payments from future tenants.
High profits in the framework of speculative development are accompanied by high risks in the event of a project failure. Speculative development is the most difficult form of relations between participants in the investment process in the real estate market, as real estate, construction process, design and extremely difficult banking operations are mixed in one project.
Who is a developer?
A developer is a company that creates an object and manages this process. The totality of all the work performed by the developer is a comprehensive investment project in real estate. During the implementation of the project, the developer (aka developer) seeks to minimize risks and increase profitability. In some cases, he can only act as a contractor and receive a fixed fee from the client for his work. If the developer is the initiator of the project, then he is forced to take all the risks.
A developer is a real estate professional who specializes in creating new or reconstructing existing objects, successfully marketing and selling them. These employees often work with partners to share risk and workload, and they can work for large companies that carry out large-scale real estate development or use real estate development as one investment tool in a diverse portfolio.
People can approach the career of a developer from different points of view. Developers may have degrees in real estate development, or may come from acting as a real estate agent, contractor or architect.
Working as a real estate developer is a very difficult task. Developers should be able to evaluate a wide range of future options for events and determine whether they will be operational and acceptable. He can look at an empty plot and find potential in it, or take a tour of a dilapidated building and create a plan for reconstruction and successful sale in the future.
Developers, as a rule, work on a large scale, participate in the construction of several units, which can extend to thousands of objects.
Experience in real estate is crucial, as the developer must know the market well in order to understand whether the project will be successful or not. Developers also need liaison with local governments to help them complete projects, ranging from people in the office who can provide recommendations to help promote the project to planning partners in municipalities who will promote these projects.
A good developer is also part of a larger team. The developer must work with architects, contractors, landscape designers, politicians, real estate agents and many other professionals to accompany the project from start to finish. Developers must choose good teams, organize them effectively and manage them, satisfying the needs of the project and team members, while maintaining control over the overall development.
Many developers choose a specific area of specialization, such as luxury residential real estate, commercial real estate, middle class real estate, housing for the poor and so on.
Developers can also expand the geographical boundaries of their projects. For example, development that is associated with the high-end residential market in New York will not necessarily be as successful in Minneapolis.
Project stages
The residential real estate development project can be divided into three stages:
1. Early stage: at the initial stage, the project is focused on examination, research and permission. Usually this is the most variable part in duration. Investing at this stage carries the greatest and most varied risks, because there are many unknown factors. Some of the basic steps at this stage include the following procedures:
- environmental assessment;
- surveys;
- market analysis and feasibility study;
- land acquisition or securing rights to purchase land;
- site plans, development plans and construction plans;
- organization of construction financing;
- infrastructure improvements.
2. The middle stage (construction phase): includes the construction and improvement of buildings. Since the pre-design work has already been completed, the risks of the project at this stage are significantly reduced, but not completely eliminated. Some of the main steps at this stage include procedures:
- raising financing for construction;
- project marketing;
- preliminary leasing;
- organization of real estate management (if this is not done during the preliminary development).
3. The final stage (operation): is the first stage of the life cycle of the building. Although the risks associated with pre-development and construction can be eliminated by now, the condition of tenants is still at risk. Some activities at the final stage include the following procedures:
- search for a buyer, if this has not been done before;
- continuous marketing and leasing;
- determination of retention strategies;
- strengthening property management;
- achievement of stabilization.
And if we are dealing with commercial real estate?
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