2. (a). Assess base on Mr Alex’s understanding that economic cycle is not moving in tandem with the property cycle when business improves.
As a registered valuer, I will further discuss with Mr. Alex Pang on the understanding of economic cycle and property cycle.
Economic or business does not grow in a straight line. It is fluctuating between the periods of positive growth and negative growth, which is known as economic growth or business cycle.
The economic cycle or business cycle is based on the relationship between supply and demand level, and economic activity while the demand level is affected by the factors such as fluctuating prices of shop rental. This statement is proved by Richard Barras and is shown in the figure below.
Figure?Barras’ (1994) model on economic analysis
From Barras’ (1994) model on economic analysis, there is a relationship between property cycles and business cycles. However, business cycle will not moving in tandem with property cycle. This is due to the nature of property development. The property developments and investments are related to the economic and business frameworks.
Figure: Barras’ (1994) six stage model
The Barras’ (1994) six stage model analysis is the simplified version of explanation. It is beginning with the upturn business or economic activities. This cause an increase of employment rate. In short run, the demand for the property will be increase rapidly cause the rental price rising due to higher employment rate or any business activities.
When business growth is achieved peak in economy, the property demand is also strengthen and receive the peak but the supply will remain fairly tight. In this situation, the property value will continue to increase due to the long lead times in bringing forward a new development. However, the supply of property in real estate will lag far behind as longer time is needed to supply the properties. The property growth is unable to catch up with the business growth.
When the property supply achieves peak in economy, the business will start to turn weak. Business will be turn into the recession stage and usually accompanied by a tightening of monetary policy to against the inflationary effect. When the economy turns weak, the demand will be decrease follow by the fall in rental price and property value.
Thus, the demand of properties is a reflection of the short term and long term changes in the economy. The economic cycle is not moving in tandem with the property cycle when business improves.
2.(b). Assess market analysis required for the out-of-town retail development.
In this case study, the demand of proposed out-of-town retail development need to be identify through the access of market analysis. There are 7 steps to the market analysis which are required for the out-of town retail development. The sevens steps are listed below with the explanation.
a. Property productivity analysis
In this step, the features of the proposed property development which are affect the productive capabilities and the potential use of land will be identify. The features can be in term of physical characteristics, legal characteristics and locational.
There are some example of criteria which can be used for property productivity analysis which are demographics, economics health indicators and commercial property overview. These analysis can quantifies the potential demand and the position of a property.
b. Market delineation
Market Delineation is that market segment identified to be most likely interested in the subject real estate and the services it provides. Thus, market analysis combines market segmentation and product disaggregation. (The Appraisal of Real Estate,2010)
Market delineation consist the consideration of the most suitable development plan throughout several research and analysis of neighbourhood continuity and environment features. For example, what form of development can be considered, whether is residential or commercial development and who is the target market.
There are 3 common techniques which have been used which are catchment areas, gravitational models and customer spotting. The catchment area boundary is adjusted according to the specific geographic, demographic and economics characteristics of community in Jalan Kuala Langgat. The gravitational models is a variation of a catchment area circles which determine the effects and impacts of the neighbour of existing retail center. Customer spotting is a more specific form of catchment areas method to determine the distances and linkages by doing survey.
c. Forecast demand
Forecast demand can use the economic base analysis as the basis in order to anticipate market demand. The population can be established as base analysis . For instance, more population will demand for more houses. Besides that, segment demand also can be analysis throughout the household income level and employment opportunities which means that more employment will increase the household income and people will have more effort and more savings to buy house.
In the case study, there are some forecast demand factors need to be determine:
1. Proposed Area of Population and Households
2. Mean Income per Household in Proposed Area
3. Income Spent on Retail Goods ; Services
4. Most Probable Percentage of Retail Expenditures for Subject-Center type goods
d. Competitive supply analysis
Identify all competitive retail space in the subject’s trade area is important to achieve a good market analysis process. The number of existing competitors may affect the number of properties supply and price. The competitive supply analysis consist the research of resale market which include existing and vacant houses, new houses for sale, current lot supply and unrecorded lot supply. Catalogue all key physical, location, and economic characteristics for each comparable. These analysis is important for Mr Alex Pang to planned the type of proposed development.
e. Equilibrium or residual analysis
This is a hard task. In this task, the existing demand and supply have to be estimated, including the future demand and supply. Estimate of the amount of excess demand or supply of space in the trade area for which the retail property will compete to estimate the additional space needed. For example, the future market conditions can be estimate and current surplus of retail space may be absorbed in the future.
Figure: Example of Steps in Residual Demand Analysis
f. Forecast subject capture
This step is to make a comparison between the product of proposed property and other property development. The estimation can be calculated by accessing the market share or location and amenity rating. Forecast subject capture is important to compare performance of the most comparable competition and also compare average performance of competitive subdivision.
Below is the example of calculation of subject capture.
Share of Market
Based on size of the Center
•Example: 5-acre in subject center,
4-acre iin existing competitors,
9-acre total SF in trade area,
•Subject Capture is 5/9 or 55.56%
g. Financial modelling
This is the final step in market analysis. This is considered as financial feasibility study. Financial modelling consists of financial statement forecasting which is usually the preparation of detailed company-specific models. These are very important for decision making purposes and also financial analysis. Mr Alex Pand has to consider various type of development for his land based on his financial feasibility study.