What does the Development Management consist of? Why does this business model emerge and what has led it to be the trend during the last year? What advantages does it entail? And, who are the beneficiaries of those advantages? In this article, we will try to provide an answer to these questions, by making an initial tour through the normal process of a property development.
As I imagine many of our readers will already know, in a normal promoting process, three agents take part. First, the real estate developer, the one that boosts, plans and finances a building work, so it is the one in charge of buying the land in which the construction is going to take place, assuming at the same time civil liability for future defects which may arise. Second, the building company, the one in charge of carrying out the work by appointing the convenient resources and means needed. And finally, the real estate agency, whose task is marketing the final real estate product. At present, a large number of companies incorporate these three elements under the same name, which may lead to some confusion.
If we look back about 20 years, we can see that time was marked by a period of economic boom, with easy access to low-cost financing, a wide range of land supply and a growing demand for housing. This “easy” access to land meant there was a critical need to be competitive in relation to construction costs, and more generally in the management skills of the developer in order to achieve an optimal margin and guarantee the success of the venture. If we study the value chain of a real estate development at that time, the cost of land did not represent more than 30% of the final sale price.
However, just before the housing boom, the cost of land represented more than 50% of the total sale price, which pushed the quality of the developer’s management skills to the background. The venture was based on the purchase of land.
The current Development Management peak is due to the effects of the real estate boom: the banking sector owns a large amount of land or buildings that they have not been able to sell because of the circumstances of the socio-economic environment and because property management is not an area of their expertise as it is not the sector’s core business. This then is where Development Management comes into play: the banking sector occupies the position of the real estate developer, and hires a real estate entity to deal with the project of the construction of the housing or the corresponding real estate product. Thus, the real estate company receives a percentage for developing and commercializing housing, but does not assume any kind of risk because the bank is the owner.
In the specific area of development management, the fact that the partner chosen by the banks can add value in the control and adjustment of construction costs becomes essential once again. It is fundamental to avoid deviations from the budgeted construction costs, and experience in negotiating with suppliers and transparency throughout the entire process is a must.
As Winston Churchill rightly said, “the optimist sees opportunity in every danger; the pessimist sees danger in every opportunity”. At Eneas we are optimistic, and we are of the philosophy that looks for opportunities and possible synergies in situations of possible adversity in the market; opportunities for which we offer our expertise, our rigorous work methodology, and our excellent negotiation skills, with the objective of walking hand-in-hand with the client to achieve a win-win scenario.