What are the different types of Real Estate Development?

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Welcome back, here is a brief overview for our members as to the different types of development projects out there and some advantages and disadvantages of each. Each development site is different so these lists are a general overview and nothing is set in stone (no pun intended).

  1. Brownfield

  • In general, it refers to previously used land or areas of industrial or commercial facilities that are to be upgraded.

                                 Benefits:

    • Lower total costs: with the existing infrastructure in place, cost of upgrading is usually lower than starting from scratch (vary from project to project) and occupancy can happen much faster
    • Quick turnaround time: because of the existing infrastructure, planning permission (given the purpose of the site remains the same as previous establishment) is already in place and the upgrade can kick start straight away
    • Economically and politically favorable: being brownfield means that they are no longer suited to their previous use. It is usually desirable for both the local residents, the government and the investors/developers that an alternative use is found for these sites. Economic and/or regulatory incentives may be given for such projects
  • Drawbacks:
    • Development constraints: since it is based on prior establishments, brownfield developments will often require compromises, and are often faced with constraints
    • Operating difficulties: usually brownfield sites are located at inner-city and developers may encounter traffic congestion and noise when developing the sites
    • Environmental issues: many brownfield sites are already exposed to certain level of pollutions and it can be extremely costly for  the developers to comply with “today’s” environmental standards and clean up rules

2. Greenfield

  • It refers to undeveloped land in a city or rural area either used for agriculture, landscape design, or left to evolve naturally.
  • It can be unfenced open fields, urban lots or restricted closed properties, kept off limits to the general public by a private or government entity.
  • Benefits:
    • Maximum flexibility: greenfield sites are vacant, they will be able to provide maximum flexibility for the design and operation of any new developments
    • Easy to comply with environmental standards (comparing to brownfield)
  • Drawbacks:
    • Long turnaround time: planning permissions may take a very long time to be approved by relevant government agencies and hence delay the project development process
    • Huge cost involved in developing from scratch

3. Sub-division

  • Subdivision is a property investment strategy which divides up a single piece of land into smaller pieces or lots, which can be developed (buildings on them) and sold separately.
  • In order to succeed in sub-division projects, the development potential must be evaluated carefully and accurately, factoring location, development permissions, cost of development and local market conditions
  • Partnering with experienced investors and developers will substantially increase the success rate of the sub-division projects as well as the maximum return on investment
  • Benefits:
    • More rapid creation of profit: the investor is buying properties/lands at the wholesale price and selling two or more smaller properties/pieces of lands at a higher per sqm price
    • Capital growth: a properly managed and timed sub-division project can increase the capital value of the properties
    • Lower costs and benefits: often land is sold with approvals to build, but those building costs are put back onto the buyers
  • Drawbacks:
    • Higher risk involved: higher multiples of revenue also signals a higher multiples of losses if the project fails since costs can sometimes be prohibitive and may vary from project to project
    • Potential surprise costs: if feasibility study were not performed with due diligence, there will be a lack of contingency plan in place when potential surprise costs (eg land structure problem) occurs.

4. Industrial

  • Used for manufacturing and production
  • Benefits:
    • Cheaper land & longer/better tenant
    • Construction costs maybe lower (open air factory vs high rise construction)
  • Drawbacks:
    • Slow moving project
    • Might involve cleanup cost
    • often developer needs to find a client and build to suit their needs

5. Residential

  • Used for living purposes
  • Benefits:
    • Necessity: everyone needs a home and wants to own a home
    • A great inflation and deflation hedge: a good diversification
    • Easier to sell under normal market conditions
    • Easy to do comparable on sales projections
  • Drawbacks:
    • Developing at the wrong time or in the wrong area, will be very costly and sales will stall

6. Commercial

Buildings or land developed to generate a profit, either from capital gain and/or rental income

  • The businesses that rent in commercial real estate usually lease the space
  • A developer/investor usually owns the building and collects rent from each business that operates there
  • Benefits:
    • Often higher income potential: higher rent per square foot than residential real estate or apartments
    • Stable cash flow: the continual tenant income
    • Lower vacancy risk: since commercial real estate is usually divided into smaller units for rental/lease purpose, the vacancy risk is spread over several units
    • Less competition: given the huge size of investments needed, it takes deeper pockets to invest in commercial real estate projects such as office buildings and shopping malls
    • Long-term capital appreciation
  • Drawbacks:
    • Management issue: it is not a one-time deal. The developer needs to manage multiple leases, maintenance issues and public safety concerns.
    • Bigger initial investment, sites often bought years in advance of construction beginning.
    • Holding costs are significant

7. Repositioning and re-development

  • Repositioning and redevelopment projects can offer many advantages that new developments do not have. Every project is different, but here are some of the positive aspects of using an existing structure and developing it into something new and better.

     Benefits:

    • Existing building can save money on construction costs
    • Can be much faster to renovate/develop
    • Can have heritage and historical value and elements
    • Larger floor plates
    • Unique features and story
    • Community value add
    • Generate income/taxes in idle buildings
    • Generate jobs
    • Increase land values of surrounding real estate
    • Increased sales price /sqm
    • Government support

    Now, with the yin comes the yang. So there are also many challenges that can arise when redeveloping an existing structure including but not limited to:

    Drawbacks:

    • Approvals can be onerous and time consuming
    • Structural upgrading can be very expensive
    • Some areas of the building may not be useable under desired floor plans
    • May need to add many elements to meet today’s building regulations which are much more strict than they were decades ago
    • Piping for heating/cooling/sewage can be very expensive to make work, both internally and also externally
    • Access/Entrance may conflict with new business model for the site
    • Push back from neighbours complaints causing delays, and they can complain about pretty much anything

InvestaCrowd is a global real estate crowdfunding platform headquartered in Singapore, bringing our members institutional grade real estate investment opportunities, from markets with transparent and established legal systems and real estate developers who have proven and successful track records.

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