Macro environment which shapes opportunities and threat Q2

Property development has a lot of  political connection with the government. Why is it so? A lot of development plans carried out by government is on a long term like 10-20 years. Infrastructures which are government projects like bridges, electricity cabling, water supply and road system are all part of governmental infrastructure building, fueled by political agendas. When the political influence of the rural folks are high, infrastructures will be extended to the rural areas. Accessibility will make property development in remote area more feasible. The once upon a time jungle and deserted area, now with highways and amenities will become a township.

On the other hand, if political condition is unfavourable, for example unstable government with worker strikes, curfews and upraising, investors and businesses cannot conduct normal business activities. Property development will be inhibited in many ways. Amidst chaos, people cannot have long term plan and bank would not conduct normal lending. Interest rate will skyrocket, therefore nobody can borrow and buy a home. Developers cannot get their plans approved as government is undecided on its long term plan. In fact, its survival is a the verge of collapse.

Economic activities in a country would have direct impact on property development. Usually a growth economy would cascade its wealth into real estate industry. In fact, GDP of a nation would have a correlation to property. The global and local economic situation affect the property as well as consumer confidence and sentiment. Strong foreign direct investment, good stock market performance and a healthy GDP growth can drive demand for property.

Based on historical figures, the value of property transactions typically drops whenever the GDP drops, as seen in the years 1998 (Asian Financial Crisis), 2001 (World Economic Slowdown) and 2009 (Global Financial Crisis).

In basic understanding, a household with labour and productivity would have more disposable income. This income would be expended to buy necessities. One of the needs of human is shelter. Hence, good progress in a country economically means more households are able to afford property.

Ref:
Tee, James (2016) Malaysian Real Estate Industry - Value Creation Strategies. Page 7.

Social structure of a society also has influence on real estate development. If society is made of small units of families, then demand for small size houses would be a norm. However, if society is made of large family units, big houses would be in demand.

Usually small families would sprout from kampung (villages) into urban areas due to urbanization. The demand for rooms would gradually evolved to apartment units. And, as the family units become more affluent, bigger units of apartments or condominiums. A growing society of small families will definitely spend money on comfort of child care, kindergarten, play school and parks.

Technology has impact of organizations in many forms. In real estate organizations, building technology is the major driver of cost and quality. Industrialized Building System (IBS) has become a buzz word for real estate developers. There are reasons that IBS would bring advancement to the real estate industry.

The benefits are many. Better efficiency of building, and over a long run, more cost saving than the labour intensive build-on-site method. However, technology can also have its risks too. The enormous initial investment into IBS technology also posts as a major obstacle to the startup. Especially in Malaysia, where we enjoyed cheap labour cost for many years. Another pitfall is also that there is no single one IBS. There are many 'close system' and one product has standards and distinctive features of its IBS and therefore, cannot be used in another IBS. So, the risk is that cost will be kept high, and real estate developers will have problem coping with the ever changing market demands.

Town planning is a integrated part of real estate development. Environment is a major determinant of infrastructure and real estate development in a given space. Green environment with government gazetting a buffer zone means no development in the area. Reserve land, forest reserve and parks and walkways are all examples of how environmental policy by government would affect zoning for real estate development.

Thus, organization which is involved with real estate development would need to take risk with this zoning policies to keep the environment preservation intact. Although it can be a selling point for greeneries, it can also be less available land (plinth area) for construction of projects.

The other side of the coin is zoning for industrial areas. A real estate organization would be at risk of noise pollution, effluents and health hazards if residential development is carried out at the fringes of the industrial mega hub. Thus, these are risks for the developers.

Legal
Legal framework of the local authority governing zoning, land ownership and dealings with real estate properties is very crucial for development of the real estate industry.

A  good legal system in the real estate transaction would ensure dealings are secured and ownership are passed down from seller to buyer. The conveyancing job can be completed in relatively shorter time as well as the disputes, if any could be resolved in open and transparent manner. For example, house buyers can ask for compensation in the House Buyers Claim Tribunal, or parcel owners can bring the Management Committee to the Strata Management Tribunal for misappropriating the funds.

Such law and regulation in place would foster real estate development as purchasers are confidence of their rights. Investors would put in money for good upkeep and management of these properties, and thereafter, would have long term capital appreciation.

This provide tremendous boost to the real estate industry as purchaser confidence is of paramount importance. Organization which deals with authorities to submit for approval or issuance of titles can provide systematic and necessary information in a speedy manner. For example, the registration of name of proprietor as in the Torrens System would guarantee an indefeasible title to the property.

The legal pitfalls are many as well. As land is a state matter, legal framework of different state can varies from each other. In fact, some dealings on land can be prohibited in some state over the other. Thus, legal matters are very crucial for real estate developers to adhere to individual state requirements.

Ref:
Own account.