Some years ago I was asked by the University of Cape Town to run a course on architecture and its place in the world, particularly business.
The students received it with an enthusiasm that surprised everyone. But the real surprise was the constant question. "How do I become a developer?"
This forced debate on what a developer should be and development itself. And we quickly established some rules.
There are certain commonalities among successful developers - I have been privileged to work with some of the country's leading developers, and some of its worst.
The talents needed by a developer come in two joined sections. Those of the first half hinge on some nebulous words: creative, intuitive, flair, vision, able to think outside the box. The problems arise where control, structure and channeling are absent. Warren Buffett said any person who worked for him had to combine three qualities: intellect, integrity and energy; leave out one and disaster looms.
So why an equal or greater emphasis on this side? First, development is highly competitive. Good development opportunities are scarce. It takes inspiration, subtlety and knowledge to spot what others are missing in the fog.
Second, one needs a feel for markets and where they are going, how they are going to change, and what will become of them. It is not difficult to see the logic behind the recent housing boom. But few participants predicted that it would run as far or as fast.
Third, social change. Office design, for example, does not stand still. Look at the medium height, low-tech, no parking, CBD office buildings of the 1950s. Look at offices today. Changes produce development opportunities. Anticipating them - and the coming demand - is the clever part. For instance, cities develop what planners call the inner ring, accommodation close to town where lower-income workers live. Apartheid planning reversed this and the inner ring was made the outer ring. The mess in our inner cities is partially caused by this function reforming itself. This change presents opportunities. Some early-bird amateurs will gain from it and become big developers. But the professional will make the most of these changes over the next decade.
Fourth, product change. Changes occur for good reason, arising from technical or social trends. Property is about designing a product with a long life that will start in the future. Reading change is crucial.
The superficial fashions catering to property demand have a shorter life.
Fifth, product design. In times of exceptional activity, any junk will sell. We have had one in the residential market. The tough times will return. The developers and investors who can pick the real winners will still prosper as the rip-off brigade disappears. It will become clear then why quality is the key word.
THE SECOND HALF
Without the technical side the creative part can't flourish.
- Be able to do the job. Do you have the technical knowledge, or if not, the humility to accept that you need to acquire or hire it? The public perceive development as simple - buy a site, borrow money, knock up a building, sell it and bank a fat profit. They don't know the long history of failures and near-disasters.
- Be competent, thorough, reliable, flexible.
- Target and control costs.
- Be a deal maker. The skilled operator will turn around a deal about to go belly-up. The novice will lose it. To be able to formulate a structure is the key. Generally, these will be town planning or financial issues requiring knowledge of both the bureaucratic and project costing. The important aspect is technical knowledge plus lateral thinking.
- Understand that projects must be financially sound. Plan for the downside.
- Possess technical abilities. If planning, delivery cost, quality and adhering to programmes are not present, calamity will follow.
- Understand design. Your building must work. Bad buildings see rentals fall against market norms.
- Understand the development cycles. There are points in every cycle where supply exceeds demand and where demand will be sluggish for an extended period. We have been through a vrot office market since 2000. The signs are that this is changing.
The early 1980s and the early 2000s have a lot in common. But a more open SA economy has changed the mix of commercial properties and the people involved in the industry.
For instance, there are many markets, distinguished by use, location and price range. Choose one that you can make your own. For example, the residential market works differently from the commercial market. The first signs of the emerging black middle class moving into formerly white suburbs came in the late 1990s.
This coincided with rising economic and political confidence, and falling interest rates. It gave rise to the current burst of development, just as the office market came to the end when everybody had forsaken offices in the cities for new suburban space and rents everywhere began to falling.
Commercial brokers, the SA Property Owners' Association and others keep statistics that can help you keep in touch with the cycle.
COMMON MISTAKES
When the residential market suddenly took off after 1994, an army of "bakkie builders" moved in. The early entrants did well but there were too many of them. Inexperienced and with no interest in proper research and marketing, they piled into buying land and building more or less what the last man had built and sold.
The growth on the supply side has pushed the residential market towards equilibrium.
Expect trouble over the next year or so in developments that are lacking in overall quality. The difference between profit and loss is often found in the detail.
In the late 1970s, gold rocketed to US$800/oz. Three factors converged with it: SA was awash with cash; business started moving out of the city centres and industries started decentralising; and mid-1970s recession and high interest rates wiped out many experienced developers.
New developers were low on technical knowledge. Many projects were sold "off plan". They built bad developments - too little parking, bad design and shoddy building. There was little rental difference between the good and the bad, but 29 years later the bad ones have to be rebuilt, while the good buildings retain their allure and high rents.
Building users in 2007 are more sophisticated. Technology and globalisation give access to international tastes and standards. Multinational corporations are moving back into SA.
The property lessons of 20 years ago are sinking in. The gap is wider than ever between what consumers pay for properties they really want and what they pay for the ordinary.
Take The Oval office development in Claremont. Throughout the last office downturn, when over 30% of A-grade offices in Claremont were empty, it was always full. Rentals were about 30% higher than adjacent and comparable buildings. This trend will become even stronger. Quality rules.
HOW TO START DEVELOPING
Site selection is critical. Is the site in an area where there is proven space demand and will this continue? Should you move to an area that looks set to pick up? Property moves more slowly than equities but can be just as punishing. Land values change slowly with demographics. Rosebank prices per square metre of lettable area were 10 times that of Sunninghill Park not long ago. The appalling management by Old Mutual, the dominant landlord, led to unnatural decay in Rosebank. Suddenly Sunninghill's prices were the same as Rosebank's. Rosebank is reversing its decay - with opportunities for astute developers.
Officialdom holds traps. The availability of services can change demand for land and value. Developers in Bryanston have properties, designs and ample buyers but no electricity.
You can bet zoning changes, particularly in the older cities, are going to be more complicated and expensive to resolve. To officialdom, your urgency is irrelevant.
CREATING A TEAM
A competent and experienced development team is vital to success. Your architect, quantity surveyor and engineers need to understand the sector you are in - an architect who is great with residential property can ruin a shopping centre.
Work closely with the members of the team and get to understand as much as you can about of their disciplines. Do not mess them around with endless changes and new schemes. Learn to work off drawings at investigation stage.
FINANCING THE DEVELOPMENT
Be aware of the finance you will need, how you are going to raise it and what level of debt is acceptable.
Banks are great on small print; the finance they offered so enthusiastically might become unavailable because of the detail.
WHERE TO START
With so many pitfalls, how do you break into development? By getting knowledge of the sector. Many gain it in broking or working for a developer. The easiest entry point is probably to renovate a house or small factory at low cost.
Get to know the market. Look for what is not being provided. Test market feasibility. If it all adds up, roll up your sleeves and dig! From there, move to a bigger project or a group of houses. But beware: markets turn. Your renovation can cost more than you can sell it for. Partnerships are a good route into this market, where opportunities are scarcer than cash. Find an opportunity and approach a developer you can trust to partner you.
There are unsavoury developers, but a lot of very decent ones. The better your scheme, and the more you have worked it out and have in place the components of the development, the larger your share will be.
