17135 Property Development Principle and Process

Assignment Task

Scenario

You are working for a developer, Flatout Developments, who is active in the industrial sector and eager to bolster their pipeline of development projects. A compelling opportunity has recently arisen, and you have been tasked with putting forward a recommendation to the Investment Committee (IC), with the purpose of obtaining approval to submit an offer to acquire the site.

Recommendations of this nature are commonly referred to as IC Papers within your organisation, and they are a crucial quality management tool for sharing the key details with the senior leadership team.​ ​The site is located in Prestons, in Western Sydney, and the opportunity is listed by commercial real estate agency Cushman & Wakefield at the link below in the instructions.

The site is being sold with an approved development application on foot, which gives some certainty of the ability to develop the property. However, the existing development application was completed by an owner-occupier and is not considered the highest and best use for the property. The primary reason for the site being listed for sale is that the current owner seeking to capitalise on the strong demand for industrial land. Through word on the street, you are aware that some of your competitors are also interested in the site for its higher-order warehousing uses and therefore, bids can be expected to reflect the highest and best use for the site, which you believe would be a warehouse facility or distribution centre. Given neighbouring properties are currently being used as distribution centres for a major supermarket and poultry producer, there would appear to be demand for this type of facility in this location.​ ​

To determine the acquisition price, it will be necessary to complete a Residual land value (RLV) assessment. This residual land value assessment should be static (not influenced by price inflation) and need not consider returns that take into account the time value of money. Your organisation is more concerned with Margin on cost, for which it sets a minimum hurdle at 20 per cent.

Having undertaken some preliminary discussions with a friendly town planner regarding what is the maximum size of permissible development for a new development application, you have been advised that multi-level warehousing is an option for the site and that the facility must be setback 15m from Bernera Street and 5m from all other boundaries. Furthermore, 10% of the total site area must be dedicated to landscaping, and car parking must be provided at a rate of 1 car park per 250sqm of Gross floor area. You are reminded that authority fees in the form of development contributions are

levied in this LGA and for this type of development. However, the friendly planner, unfortunately, wasn’t able to confirm what these would be as they had previously scheduled four weeks of annual leave, which crept up suddenly!​ ​

You then engaged an architect to give some initial advice on what the footprint of the facility could be when optimising for truck access. It would be of significant benefit to operations if trucks were able to enter the facility from Burando Road and exit the facility from Bernera Road. To achieve this, an 8m wide driveway is required along the southern boundary. The architect also advised that the car parks servicing the facility are required to be 13.5 sqm each. However, car parks can be positioned in the building setback zones. A car park circulation area should be considered required at a ratio of 1:1 with the total car parking area.​ ​

With enough information to understand the footprint of the facility, you then speak with a quantity surveyor (QS) to gain an understanding of the costs associated with constructing such a facility. The QS advises that the costs to construct warehouse facilities typically are estimated at the below benchmark rates. External works in the form of landscaping, car parking and thoroughfares cost $400/sqm. The QS has further given an indication that consultant fees for the planning and design of the facility would typically be about 15% of construction costs for a project of this size.​

With some general comfort around costs for the new development concept, you touch base with a real estate agent who you know to be active in the local area. The agent confirms that the market remains strong, with logistics operators paying up to $180/sqm in net rent with an attached incentive of 20% of the net rent over the term of the lease. For a new facility such as this, it is expected that an occupier would sign up for a lease term of 7 years. Never to miss an opportunity, the agent lets you know that their business maintains the best connections with occupiers in the Southwest Sydney market and that the fee payable as a commission for brokering a deal to lease the space would be 18% of the first year’s net rent.​ The agent also suggests that 5% of the first year’s annual net rent is used as a marketing budget to engage with tenants.​ ​

Finally, you then catch up with your immediate manager to give an update on the progress of your work and seek their feedback and guidance as a second opinion. Your manager suggests that for a project of this size, a budget for legal fees of $750,000 would be prudent and that company policy mandates that all projects must allow 5% contingency (calculated on consultant fees, construction costs and leasing incentives) as well as a 4?velopment management fee (calculated on construction costs, consultant fees and authority fees).

​At your organisation, IC Papers used for acquisitions have a regimented structure, which you are encouraged to adhere to.​ ​ The site is being sold with an approved Development Application on foot, which gives some certainty of the ability to develop the property, however the existing Development Application was completed by an owner-occupier and is not considered the highest and best use for the property. The primary reason for the site being listed for sale is due to the current owner seeking to capitalise on the strong demand for industrial land. Through word on the street, you are aware that some of your competitors are also interested in the site for its higher-order warehousing uses and therefore bids can be expected to reflect the highest and best use for the site, which you believe would be a warehouse facility or distribution centre. Given neighbouring properties are currently being used as distribution centres for a major supermarket and poultry producer, there would appear to be demand for this type of facility in this location.​

Executive Summary 

• Describing the opportunity, your recommendation and what you are seeking approval for
• Return metrics from the RLV analysis
• The recommended acquisition price for this site
• The method of sale being utilised by the bidder

Rationale 

Describing the rationale for investing in this particular location and this particular site, including:

• Why is industrial development preferred over other asset classes?
• Why is the existing development application approval unlikely to be the highest and best use of the land?
• Why is Preston a suitable area for developing industrial property?
• What are the tailwinds supporting industrial as an asset class?
• What are the headwinds challenging industrial development and property development in general?

Title Structure and Land Zoning 

• What type of titling structure is the land to be acquired under?
• What LGA acts as the consent authority for this property?
• What is the land zoned as?
• What is the permissible height limit of the land?
• What is the minimum lot size of the land for the land? Should future subdivisions be of interest?
• Are there any environmental considerations that may restrict the development of the land (flood, fire, environmental protection?)
• Are there any easements encumbering the land?
• What are the development contributions payable?

Risk Analysis

Explaining any risks that will need to be mitigated and managed post-acquisition

• A sensitivity analysis showing the impact on profit (holding recommended land acquisition cost static) for the following cases:
  • 10% increase in construction costs
  • 10% reduction in rents
  • 25% increase in the overall incentive amount
• Works explaining the limitations of the recommendation put forward in the IC Paper

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