The Viability of Developing a Small Office in London - Essay Example

INDIVIDUAL DEVELOPMENT PROJECT INTRODUCTION Property is an important asset that plays a critical role in the economic development of an individual or an organization. It is the platform on which important economic activities are performed. On another dimension, property is also termed as real estate wherein emphasis is laid on providing housing to the population depending on their purchasing powers. Thus, property plays a pivotal role in the development of the society and the economy as well. Therefore, constructing infrastructure in the name of houses and offices is not sufficient to develop ea property, but in addition effective consideration of certain other aspects in addition to the local situation play a critical role in the development of the site. It is in this scenario that the concept of property development & management comes into the picture, which provides the developer with a rigid framework for the effective development of a property. The present report will evaluate the viability of developing a small office site in a suburban London town location. All along, the report will concentrate on the information gathered on the property and will attempt to assess the viability of developing the property based on a series of valuations, funding proposals and elevations of the completed scheme. The report will initially consider, outline and assess the various important factors that will influence the decision to build and develop the property. The report therefore, would emphasize on planning the development of the property in the context of urban development, construction, quantity surveying, and design & property development. The report would then list out all the factors governing the development of the small office site and would proceed with discussing the development appraisal that was initiated as a major constituent of the property development scheme and will also model the cash flow involved. Therefore, the report would evaluate the viability of the small office site property development proposal on the whole. FACTORS AFFECTING THE DEVELOPMENT OF THE PROPERTY The concept of property development especially with regards to commercial spaces has been a subject of constant debate and a plethora of literature is available in this regard. Among the literature available, major topics of discussion have been focusing on evaluating commercial property sites on the basis of nearness to the target customer base & urban centres, location of transport facilities, the government legislation and the political situation etc. The current section will aim to outline the basic set of factors that were currently prevalent at the small office cite in suburban London. The first and the foremost factor that influenced the development of the small office site were the availability of the land, and the presence of other critical facilities. Even though the land was available, it was important to assess whether the quality of the soil was good enough for construction purposes. A civil engineer who conducted surveys of the land and certified that the proposed site was suitable evaluated the land. In addition it was also important to determine the nearness of the property to hotels and cafeterias for the purposes of the employees who would be working in the office site. It was additionally important to determine the availability of drinking water in the area. Fortunately, the area was quite populated and as such, both these needs were not a problem at all. The area was abundant with hotels and the local water department ensured a constant supply of clean drinking water. Thus, the prime concern under the property development scheme was to assess the proposed site for its physical suitability for development. The next major consideration under this was to dig into the legal restrictions of the area. This was important as certain areas had a different pattern of construction norms and adhering to the law of the land was extremely important. For this, the help of a legal advisor (who was an experienced advocate) was taken who explained about the legal considerations that had to be kept in mind while proceeding with the construction. One of the main points that came to light out of these meetings was that any property development activity had to get the nod of the local authorities that included the local municipality and other civil authorities. The land that was proposed to be developed for the small office was supposed to be registered with the government at the local office of the registrar. For the approval, the developers were required to submit a blue print of the proposed construction to the local civic authorities for their nod, subsequent to which the construction could be proceeded with. Accordingly, an architect was commissioned to develop the design of the site and the blue print that was the result of his efforts ultimately succeeded in obtaining legal approval. The suburban area was also examined & studied to identify whether there were any other offices of similar nature in the vicinity. This was important as the needs of all offices would be quite similar and the concentration of offices in a particular area would help further in attracting potential companies to set shop in the small office site as all needs such as transport facilities, stationary, communication facilities (like high-speed internet etc.) could be easily obtained. Fortunately, a number of similar offices were present in the area and therefore, it was understood that it would not be difficult to attract customers to take up the commercial space. A search was also conducted to identify similar development initiatives in the area so that their experiences could prove beneficial in avoiding potential pitfalls and improving the site during the course of the property development. The site was also examined for its nearness to highways, as most employees would be using them to arrive for work and it was found that the site area was well connected by rail and road to London (main) and the other neighbouring parts as well. As the area was suburban in nature, it was clear that a major part of the workforce would be available locally and this would prove beneficial to the employers as well as the employees. The latter would have the advantage of proximity to their workplace, while the former would not have to look far for obtaining skilled labour. An additional advantage that the suburban area in London had in store was that it had excellent avenues for recreational opportunities in the form of golf clubs and was also well known for its hotels. The region was also known for having a good track record in terms of the crime rate in the region. Thus, it can be concluded that the area was a very suitable locations at least in terms of an initial analysis, and now it was important to assess the development of the property on the basis of economic terms. For the purpose of construction of the proposed site, a quantity surveyor was called in who looked at the designs and conducted field surveys of the proposed site. The quantity surveyor used the inputs collected from the blue prints and the survey to prepare a list of the raw materials that were required for the purpose of construction and he prepared an estimation of the cost of procuring those materials. Finally, the proposal of construction along with the blue prints was sent for the approval of the Urban Planning Department, from whom the feedback was good. The proposed site was cleared for approval and it was now the time for creating a development appraisal. DEVELOPMENT APPRAISAL FOR THE PROPERTY A property appraisal is the job of an appraiser that is used to obtain an assessment of the value of a real property, with the intent of generating the highest possible value for that property such that the use of the property is economically profitable. The appraiser also has the additional responsibility of value that is being developed. Some of the well-known values are market value, quick sale value, condemnation value, investment value etc. This analysis is known as property valuation in the UK and the appraiser is known as a Property Valuation Surveyor. The Royal Institution of Chartered Surveyors (RICS) regulates and coordinates these valuations, whose guidelines are followed by the surveyor through RICS's 'red book'. For the small office site development, the following were the key considerations that were used for preparing the appraisal summary: Office Area: 5000 Sq.ft. Rental: 4 psf. Yield: 8%. Construction Costs: 100psf. Letting Fees: 10% of first Year rent. Start on site: March 2006. Complete: February 2007. Disposal: February 2007 to August 2007. The rental and other variables were an estimate that was fixed by the local urban authorities, while the construction costs was specified by the quantity surveyor after having done an analysis of the job at hand. The major criterion for the appraisal was to evaluate the market value of the property. This will be justified by looking at the legal definition of 'Market Value', which would most likely go like the one shown below: "The most probable price at which a property would trade in an arms-length transaction in a competitive and open market, in which the buyer and seller each act prudently and knowledgeably and in which the price is not affected by any special relationship between them". Basically, many different approaches/methods were used to evaluate the market value of the property namely: Cost Approach. Comparable method Investment/Income method. As can be seen from the above definition of the market value of a property, no one would consider ending up by paying more for a property, when there is a possibility of procuring an equivalent site and constructing on it at comparable cost. This is the ideal situation for the application of the cost approach that is sometimes also known as summation approach that uses the technique of considering individual entities for the property in terms of the real property and all improvements made on it. The cost approach was the most suitable approach as the site was not vacant previously (the builing was an office previously and was around 20 years old). Thus, the cost approach provides an analysis of the replacement value of a property. As the first and the foremost step, the value of the land was estimated as if it were vacant. This was done by a look at the rates on the government scale and then consulting property experts on the prevailing market rates in the area. Upon conducting such consultations, it was concluded that the preveiling market rate for the land was around 120psf. Therefore, the cost of the land where the office was proposed to be constructed on two floors would be about 300,000. The next step was to assess the replacement cost of the existing building in the site, which happened to be an old building. The quantity surveyor took measurements of the dimensions of the building and made the following observations: Building area: 1000sft. Age of building: 20 years. Type of building: Non-residential real. Cost of primary construction material (bricks)= 25,000. Cost of cement for constructing the building=27,000. Cost of wiring & plumbing=15,000. Cost of flooring with marbles=6,000. Labour Costs: 21,000. Miscellaneous costs: 7,000. These individual costs summed up to around 101,000. Thus, the property development team, under the cost approach concluded that the cost of replacement of the existing property at the place was around 101,000 that was significantly less than the prevailing market rate of 300,000 for the land alone. Further, a straight-line depreciation method was applied for a depreciable period totaling to around 20 years. On a mid-month averaging convention, it was calculated that the period depreciation of the property was around 5,050 per annum. Thus, the building's loss in value from depreciation was around 5,050 per annum. Thus, subtracting the depreciation from the building's replacement cost, the value would be 101,000-5,050=95,950. Therefore, the value of the property under the cost approach would be 300,000+95,950=395,950. Therefore, the estimated value of the property was around 395,950400,000. Thus, it was concluded that the land in the proposed site had a huge potential in terms of future investment and therefore, the property was categorized as being of high value and suitable for development. The cost of replacement as far as the construction must not be confused with the variables listed previously (cost of construction, 100psf) as the latter is concerned with the small office that is proposed to be developed while the former is with respect to the building already in existence at the site. The next step was to calculate the period that was required for getting back the investment by letting out the constructed premises for rent. This approach is known as the investment/income method and comprises the calculation under the payback method. Under this method (this method comes under investment appraisal), Payback period = Initial payment / Annual cash inflow From the given variables, total investment=cost of land + construction cost. Cost of land=300,000. Cost of construction=office area*cost per psf. =5000*100 =500,000. Therefore, total cost=300,000+500,000 =800,000. Monthly rental=7psf. Therefore, total monthly rental=4*5000 =20,000. Annual rental=240,000 Letting fees=10% of first year rent=24,000. Therefore, total cost of the building=824,000. Total payback period=824,000/240,000. =3.43 years =3 years and 5 months approx. FUNDING PROPOSAL The previous section has discussed about the development appraisal (Property valuation) and it has been observed that the property is a suitable opportunity for investment. The next step is to prepare a funding proposal for obtaining funds from requisite economic sources for the purpose of implementing proposed projects. The funding proposal has 9 parts in general. Each of these sections is used for creating a funding proposal for the small office site development in suburban London. FUNDING PROPOSAL FOR A SMALL OFFICE SITE DEVELOPMENT IN SUBURBAN LONDON PROBLEM STATEMENT The perseverance towards economic growth is what keeps the economy running today. In fact, everyone aspires for obtaining economic benefits. But economic benefits are neither easy to come by nor are they readily available or visible to us. What separates a successful businessman from the rest of the populace especially in the real estate sector lies in his/her unique ability to identify the potential of a site that was previously unrecognized by others. The effect of development though may take some time to show signs of economic profit, but the end results are worth acknowledging. A similar site has been identified in a suburban London that promises to be a lucrative avenue for commercial property development. The prime concern is, however, the funding required for procuring the land and constructing the proposed infrastructure. The site has been identified as a potential land that may be used to create a small office site comprising two floors. The present proposal is directed in the direction towards obtaining funding for proceeding with the construction of the project without any glitches as far as the financing of the project is concerned. PROJECT DETAIL This section of the funding proposal will concentrate on providing details of the main aspects pertaining to the objectives and requirements for the successful implementation of the project in addition to describing the various methods that are proposed to be used during the course of the property development. Goals & Objectives This sub-section will attempt to describe the goals & objectives that the proposed property development of the small office site in central London would strive to accomplish. Firstly, it is deemed important to differentiate between goals & objectives, as both these terms seem to be quite similar. Firstly, goals are the statements that aren't measurable, in spite of which one aspires to achieve them. Goals help in creating the setting for anything that one would want to achieve. In contrast, objectives are the measurable aims that can be very specific on defining what one would want to achieve. Hence, they are operational in nature. As far as the funding of the property is concerned, the main goal of the development initiative is to strive for the utilization of the property that holds tremendous potential in terms of economic benefit for whoever happens to own the site. This can be ascertained from the prevailing land rates in the area, which comes to around 120 per square feet. The second major goal of the proposed project is to set an example to the real estate sector in the area by ensuring that all legislations are adhered and all existing environmental safeguards are followed all along the construction activity and subsequent to occupation of the premises as well. The long-term goal of adopting such a strategy is that such strict measures will make an impact on the customers as well, who would prefer the construction company for future construction purposes and this would in turn benefit the funding company by allowing it to gain control of premises that promise to offer better interest rates. One of the main objectives of the project is to utilize the land that is available and to provide employment opportunities to the local population. The replacement cost of the land exceeds 100,000, which goes to show that the property is extremely viable for investment. Clientele The commercial building that is proposed to be constructed as part of the property development project is aimed at attracting corporate companies who would like to set up small branch offices at the suburban area of London, where the site exists. Smaller companies may also use the small office site as a front office for providing services to customers who are local to the area. Before commencing with any kind of site analysis, extensive analysis was conducted on existing offices and commercial spaces in the area and many corporate companies have also been consulted to ascertain whether any of them have any operations or significant client bases in the suburban area. The results have however, been overwhelming, with most of them expressing their desire to open branches in the area, but have been unable to so until now because of the lack of any vacant commercial spaces in the area. Thus, the only feedback from the potential clientele has been that there is a huge demand for commercial space in the area and any new sites would immediately be taken up. Methods The major considerations as far as the property development project is concerned are the following: The prime concern would be to use the maximum space available in the site. This is because the more the area, the more would be the rent that can be obtained. This would have a positive impact on the payback period, wherein increased area would contribute towards reducing the payback period, which is one of the prime considerations of any funding organizations. The next objective would be to emphasize on the appeal of the building that would be constructed. Any company would have to look into this aspect so as to succeed in bagging lucrative and juicier projects in the future. This would benefit the funding company in a tremendous way as such an opportunity would mean an increased revenue and a higher rate of interest for the funding company. This is quite synonymous with the appeal of a web site. A web site with very good appeal would attract huge customer base while one with drab and dull content would never be touched by anyone. Staff/Administration The project would employ the following professionals: Project Director (Full Time): The Project Director is responsible for hiring able and skilled professionals, maintaining balance between the various operations within the workflow, deciding & allocating the budget for various departments and communicating with the various governmental agencies. The project Director will be Mark Sanders, who hold an MBA from the London school of economics. Architect (Full Time): The architect is responsible for designing the blue prints, plans & elevations for the proposed building. The role of an architect is extremely critical as it acts as data input for the quantity for all other role players in the project. Here, the Architect is Sandeep Singh, B.Arch, India. Quantity Surveyor (Full Time): The quantity surveyor is entrusted with the task of going through the plans & blue prints that are prepared by the architect and then subsequently conducting field surveys of the proposed site so as to assess the amount of raw materials that are required and the cost involved in procuring those raw materials. The quantity surveyor chosen for the small office site project is Phil Simmons, B.Sc, Construction Management, London. Project Manager (Full Time): The project manager is directly under the Project Director whose prime responsibilities are comprised of implementing the decisions taken by him in addition to monitoring the project all the while and giving feedback to the director on various critical activities. For the project, the manager is Ray Stevens, MBA, Monash University, Australia. Value Engineering Consultant (Part Time): The VE consultant's prime task is to reduce the costs incurred by conducting studies & meetings with all other members of the project by utilizing the techniques of Value Engineering. Mick Jennings, MBS, Finance, Paris is handling this job. Property surveyor (Part Time): The property surveyor is entrusted with assessing the economic viability of initiating & implementing the project and his prime task is to create a development appraisal. The property surveyor for the project is Gina Ellsworth, M.Sc, property & Construction, Leeds. Graphic Artist (Part Time): It has also been deemed important to use wide publicity through the popular communication mediums such as the television and the newspapers, posters etc. For this purpose, the services of a graphic artist are sought. Frank Lehmann, B.Sc, Digital Media & production is entrusted with this job. AVAILABLE RESOURCES As the site is being constructed in a suburban area, there is an abundant availability of raw materials as also local experts who are competent enough to handle the job. There are a number of food joints and there is also a constant supply of water that should lend a huge helping hand in the implementation of the project. In addition, the proximity of the site to interstate highways and the availability of round-the-clock rail & road transport make it even easier to transport raw materials and pave the way for effectively and timely conveyance facilities as far as the workers are concerned. NEEDED RESOURCES In spite of the availability of so many resources, there is still a huge requirement for many more resources in many respects and from numerous domains. Each of these are discussed below: Personnel: upon referring the staff/administration section, it can be understood that the project Director, manager, VE consultant and the property surveyor would be paid through the grant given by the funding company. Under this approach, all these professionals would be paid 100% salaries. The rest would be paid at 50% salary regardless of whether they are full time or part time. Facilities: the first and foremost investment would be made on constructing a small office at the site so as to monitor and coordinate all activities concerned with the project. In addition, arrangements would have to be made for providing shelter and water & toilet facilities to the workers. Equipment/Supplies/Communication: the following are the requirements that would be required for the funded project: Tables Chairs (for the site office) Civil engineering equipment Drilling machinery. Electrical power. Drinking water & coffee. Shelter for storing constructing equipment. The estimated cost for all these is in the range of 4,000, which is not exorbitant. In addition to this, it would also be important to equip the site office with a telephone and Internet access so that the managers and the professionals at the site may be able to communicate with the main office where the project director would be based at most of the times for the purpose of critical decision-making & implementation. Budget: the analysis of the budget required for acquiring the site and constructing the small office has been discussed in the development appraisal section. The project surveyor has estimated that the total cost of the project would be in the range of 824,000. The budget report has been studied and verified by the director, manager & the quantity surveyor and has been found to be realistic. In addition to the estimation of the costs, it has been decided that the company would prefer to receive the funding in a phased manner that would enable to plan out its distribution and accounting in an effective manner. The estimated time for the property development is one year, and the company would like to receive the funds once every four months. EVALUATION PLAN Upon the completion of the property development, it is important to assess the degree to which the project has been successful. The building must be assessed in a thorough manner to ascertain whether it conforms to the predefined goals and objectives. The best approach that can be adopted in this regard would be to conduct a survey on the opinion of various parties that are directly influenced by the project as well as the local population of the suburban area. The questionnaire would involve specific questions on the facilities provided in the building, the appeal of the building, the conformance of the infrastructure to legal & environmental standards etc. the evaluation would basically involve the twin techniques of formative as well as summative evaluation. As the objectives have been stated and defined clearly as has been mentioned earlier in the report, the creation of a summative/product evaluation would be rather easy. On the other hand, the formative evaluation would enable the development team to obtain feedback on the project while it is still under progress. Thus, both strategies must be adopted. CONCLUSION The current proposal is therefore, aimed at providing an insight to the funding company into the favourable situation that exists with the development of the small office site I suburban London. The area has been experiencing a boom in the real estate market and has been witnessing increased corporate presence over the last few years so much so that some of the companies are now scouting for commercial space that is presently unavailable in the area. Therefore, it would be in the best interests that the site that is currently available could be acquired as soon as possible so that a small office building may be constructed in the site. Any decision in this regard must be taken as soon as possible so that no other company may succeed in getting hold of the site. Therefore, this funding proposal is a sincere request to the company for consideration towards funding the acquiring and development of the proposed site. BIBLIOGRAPHY 1. David Cadman & Rosalyn Topping (1995), Property Development. London: Spon Press. 2. Joseph Levine (2006), Writing a funding proposal. Found at: http://www.learnerassociates.net/proposal/ 3. Amy Glasmeier (2006), Research Funding, Proposal construction. Found at: http://www.geog.psu.edu/people/glasmeier/funding/frame.htm 4. CRISIL (1999), Methodology for rating real estate projects. Found at: www.crisilratings.com 5. Miles Keeping (2004), Sustainable Property Development. Victoria: Blackwell. 6. Spon (1993), Urban Regeneration: Property Investment & Development. London: Chapman & Hall. 7. Martin Rogers (2001), Engineering Project Appraisal: The evaluation of alternative development schemes. Oxford: Blackwell. 8. Nathan S. Collier, Courtland A. Collier & Don A. Halperin (2002), Construction Funding: The process of Real Estate Development, Appraisal & Finance. New York: John Wiley. Read More