Transcript
As a registered valuer, I will further discuss on the understanding of economic cycle and property cycle to Mr. Alex. Alex. Economic does not grow in a straight line. Instead, economies fluctuate between periods of strong growth and weak or negatvie growth, known as the economic economic growth or business cycle. One widely held economic cycle theory is based on the the relationship between supply and demand, and economic activity. irst and foremost, the demand in the marketplace for property arises from all the various activities that society pursues and the conse!uent need for properties in which to pursue those activities. "roperty in itself has virtually no value, any value it possess is derived from the usses to which it can be put. #hus, the demand is a reflection of the short$term and long$term changes in the economy. Mr. Alex has to undestand that the economic cycle is not moving in tandem with the property cycle when business improves. #he #he early reference on this statement include the building cycles by %ichard &arras '())*+. As many property developments developments and investments are closely linked to the economic and business frameworks, there is usually a relationship between property cycles and business cycles. #his relationship is as shown in igure ( below, where there is a clear relationship between the property market, economy market and financial markets.
A simplified version of &arras analysis is further disc ussed. &eginning with the business upturn, the demand is strengthen and increase, causing to the rising rents, property
prices picking up and capital values trigger the start of the new developmenet cycle upswing. &y here, this condition can increase one developer and other consumers confidence, a healthy economic growth and inflation remains low. This is the healthiest phase of the economic cycle, as growth can be robust without overheating or higher ination. This phase usually lasts a year to several years provided growth is at a not-toorapid and thus sustainable pace. During this period, the inventory rebuilding that we saw in the initial recovery period leads to greater hiring activity by rms and, as employment rises so too does consumer condence. This in turn leads to strong sales. To meet increased demand for their goods and services, businesses invest to expand capacity If credit expansion accompanies the business cycle upswing, it can lead to a full$blown economic boom. #he banks may also fund a second wave of speculative development activity. -owever, because of the long lead times in bringing forward new development, supply remains fairly tight and values continue to rise. &y the time the development cycle reaches its peak, the business cycle has already moved into a downstring, accompanied by a tightening of monetary policy to combat the inflationary effects of the economic boom. As the economy subsidies, the demand for property declines, rents and values fall as a result and the vacancy stock increases in supply. As the economy moves into recession, the fall in rents and values continues, property companies are hit by the credit s!ueee, bankruptcies increase and the development cycle is choked off.
#he local economy
It should never be overlooked that risk and uncrtainty exist in the property development process, no matter how thorough the research of the developer may be. "roperty development involves a decision to commence a development for use at a future date that is on completion of the development and the future being uncertain it is impossible to rid a developement scheme of uncertainty. &y here, uncertainty relates to factors which are unpredictable and in respoect of which it is therefore not only difficult but perhaps impossible for a developer to take precautions. or example, the fact that at some future date a war may break out or a government may introduce new legislation which may affect the success of a development may be completely unpredictable at the date of commencing a scheme. An extremely important part of the developers activities is , however to try to identify the risks that may be inherent in a scheme and to seek either to elimanate those risks or where elimination is impossible, to make provision to minie the problems those risks could cause, possibly using such devices as contingency allowances or taking out insurance cover. A developer should seek to satisfy market demand by providing property suitable for potential users and sited in appropriate locations. It should be developed at a cost which enables the completed development to be let or sold at a price which is low enough to attract suffiecient would$be users or customers to pay that sum for its use which in turn provides the developer with an ade!uate net return to reward him or her for their labour, their skill and their professional expertise, and to compensate them for the risks taken in undertaking the development.
