Property Management Economics and Planning Topic 3 Abdul Jalil Omar

Key words Business cycle Comparables Comparative incomes and expense analysis Economic oversupply Five year forecast Gross rental Income Management plan Market analysis Neighbourhood analysis Operating budget Operating Costs Optimum rental Property analysis Regional analysis Reserve fund

Key topics General Business Economy The Real Estate Economy The Management Plan Market Analysis Property Analysis Analysis of Owner’s Objectives Preparation of the Management Plan

Business cycle

Expansion Production increase Full employment level Wages and consumer purchasing climb Demand for goods increases Price increase of greater demand Credit ease, more money available for purchasing Profit increase Capital expansion

Business cycle (cont.) Recession Supply begins to surpass the demands for product and services Peak of the cycle How to know the demand surpass the demands?

Contraction Less demand for products and services Fewer product are made Decrease of productions Unemployment and retrenchment Consumer spend less Price are lowered to attract buyers Essential economy (food, wear, lives) still continue. Video – Detroit USA – Dangerous City

Revival When consumer venture back to market Excess of goods have been exhausted Major purchases (government and private)

Real Estate Economy Question Economy drive the real estate market; or The real estate drive the economy?

Factors affecting value of RE General business cycle Up business means people are having more money to buy property and spending power. Affordability Interest rate Population trends Movement, age, culture etc Government policies - Taxation

Class Activity Page 46 Pair activity – 30 minutes

Market Analysis Regional and neighbourhood analysis; Property analysis; and Owner’s objectives.

Regional and Neighbourhood Analysis Look for demographic and economic condition in the region and surrounded area. Population statistics and trends Major employers in the area Average incomes and employment data Transportation facilities Supply and demand trends Economic activities in the area Future economic prospect.

Neighbourhood Market Analysis Normally, property management is carried locally. Neighbourhood factors should be considered: Boundaries and land usage Transportation and utilities Economy Supply and demand Neighbourhood amenities and facilities.

Property Analysis Involves with the nature and condition of the property through building inspection Elements need to look for: Leases Quantity and quality of space Physical condition of the property Exterior Interior Equipment Health and safety hazards Evaluating comparables Operating costs (cont.)

Property Analysis (cont.) Operating costs Salaries of the building staff Cost of utilities not charged to tenants Contract services – elevator, landscape maintenance, rubbish removal and security guards Supplies and equipment Advertising and management expenses

Analysis of owner’s objectives The management plan cannot be completed until the manager has identified and analysed the owner’s goals. Corporate and institutional objectives Profits (REITs) Own use (corporate companies) Minimise expenditures (residential condominium) Care and maintain the value (trustee) Government objectives Preserving the value without seek for high rental income

Individual owner’s objectives (cont.) Profit or cash flow from investment Normally, short range planning Highlight the importance of establishing reserve and appropriate maintenance schedule PM need to have enough info from owner in order to draft management plan, especially about: Annual real estate taxes Cost of debt services Insurance premiums/policies etc

The management plan Financial Planning reports Information required: Operating budget Five year forecast Comparative income and expenses analysis Information required: Optimum rents Gross annual rental income Adjusted income for market anticipation (vacancy rate included) Yearly operating costs Reserve fund Anticipated revenue Cash flow as based on owner’s objective

Presenting the plan Submit proposal with suggestion for improvement. Then, the owner will decide what to do such as: Authorize all the repairs to increase long term income and reduce taxes Only important maintenance should be performed Make no change at all (no capital expenditure involves)

Summary Economy moves in cycle that will drag real estate as well Understanding of real estate market help the property manager to prepare action to be taken Proposal for property management should consider several important elements such as market analysis, neighbourhood analysis and property analysis. Owner’s objective that will decide the next step in achieving property management goals.