What the lifecycle of a real estate project looks like
Value chain as a term is used across all industries when we think of what activities are needed to deliver a product. How does it apply in real estate?
An understanding of the lifecycle of a real estate project is needed: the value chain is tightly linked to this process. In essence, the value chain follows the phases of a development, and the developer selects which activities they would like to perform in-house, and which ones to outsource. Activities typically covered when developing an asset can be split into 3 phases: opportunity identification, development and operations.
Opportunity identification
At this stage, a list of potential investment/development options is being tested for various factors: location, strategic alignment with the objectives of a company, risk factors. Ultimately, this also includes a feasibility assessment: establishing a sound business case prior to proceeding to the next phase is fundamental, yet unfortunately often neglected — often resulting in a loss of capital. Once the business case is established and the opportunity is accepted, the company secures finance and/or land bank.
development
Following the preparatory chapter of the project lifecycle is the development phase. It starts with planning: a schematic and detailed master plan, architectural renderings, technical studies, approvals and other elements required before construction breaks ground. At this stage in practice, developers often tender out this scope to specialists who offer this technical expertise — unless there is an in-house resource. Still, most frequently, the in-house resource would rather supervise and overlook the overall process, carrying the role of a project manager.
Next, the construction stage kicks in. Aligning this process back with the value chain, construction as a service line/industry is the most asset-heavy and is seen risky and problematic to set up as part of one’s portfolio. For these reasons, it is often sub-contracted unless the developer has the consistent volume to sustain this business line.
Operations
Finally, the asset is completed, most capex is spent — it is time to generate income. Let’s take long-term residential lease operating model as an example — in which the asset management will involve securing tenants at pre-defined rates and processing their lease contracts. The operating models would differ in reality, and the more asset classes a developer is engaged into, the more departments with specialised expertise they would require.
In line with the asset management, many developers offer a facility management function — troubleshooting the issues the residents might come across when staying at the property, overlooking the public area appeal and health and safety regulations.
Once the asset is nearing its disposal time, it is time for the research department to evaluate various termination opportunities and potentially start assessing new projects to take up on.
That was a lifecycle of one asset in a nutshell. Very often, there will be not one but several projects running at the same time and this is when structured processes, defined scope, allocated responsibilities and unified understanding of the common goal are vital.
what has been learned?
When choosing which activities within the value chain to engage in, a developer has to consider a number of factors: what does it take to set up such department? Does the cost-benefit equation stack up? Are there enough resources to run this department? What is the profitability? What is the synergy potential with other departments? Finally, what are the risks involved?
Based on these judgements, developers opt to either set up an inhouse department, to create a JV with a suitable partner, to arrange a long-term contract with a specialised service provider, or to tender out individual projects to various third parties each time a need arises.
What are the success factors for developing an appropriate value chain for a developer? I would note the following: > Business-led design (as opposed to design-led business): This applies not only to evaluating business opportunities, but also to assessing the pros and cons of running an activity stream inhouse. This decision has to be pragmatic, fact-based and driven by a sound financial and strategic case. > Short, mid and long-term plans: Based on their interests and goals, companies lay out their objectives and assess growth scenarios. These goals would concern not only value chain activity-based evolution, but also geographical and asset class expansion. > It is also important that the goals change as the company grows and the market matures — being alert to changes enables one to react quickly and hence to benefit from the evolving market dynamics.