How to reduce risks in construction of real estate with the project approach
First, identify the consumer needs, carry out the segmentation and develop the project concept, and then proceed to design works and construction. That is how the development project should work. Unfortunately, in practice it happens vice versa. Construction is already in progress, free working capital is getting over, and the company only then raises the question – why the apartments are so badly sold? In our material, we are talking about why it is so important to apply the project approach to constructing real estate, and how the proper use of the opportunities of investment funds, in particular, venture capital, affects the operational effectiveness of the main activities of the developer.
For whom we construct?
The construction industry has recently shown very high growth rates. The total area of residential housing accepted in January-September 2017 increased by 21.4% in Ukraine compared to the corresponding period of 2016, according to the State Statistics Service. However, should we be satisfied with these figures? Some experts again throw a scare into the collapse in the real estate market, as the offer begins to substantially exceed solvent demand. Nevertheless, problems can arise not only because of low demand, but also due to unsuccessfully formulated offer. Simply speaking, not because there are no purchasers, but because the real estate is constructed not in that place and not for that consumer (without a clear assessment of the consumer needs and capacities). Not properly segmented investment project generates a number of risks.
In such a case, you need to look for the underlying causes of a possible crisis in the industry. The prerequisites for the crisis are created by both the market regulators and the players themselves. The lack of the developers’ practice in designing projects under the project management rules, on the one hand, and the absence in many cities of Ukraine of the master plan for the development of the territory, on the other hand, raises many problems for both the developers and consumers.
I construct how i want
In the developed countries, in particular, in Europe, the architectural appearance of the cities is tried to be preserved. It is impossible to construct a skyscraper in the historic part of Warsaw, Budapest, Vienna or Paris. Nobody will allow doing it. There are such concepts as homogeneity of building and a storey factor, which no developer has the right to violate. The European cities are divided into zones and for each the restrictions on building are given in detail. For example, in the center of Paris there is a zone, in which it is forbidden to erect buildings above nine floors. In the central district of Berlin, a new building is limited to a maximum height of 30 meters. In Warsaw, it is forbidden to construct skyscrapers near the architectural and historical monuments.
In Ukraine, they construct as like as they wish, regardless of historical and cultural aspects, ignoring the architectural style, the communication load (parking, heating networks, water supply, distribution of productive forces, etc.). Kyiv is the most vivid example. The capital has almost lost its face over the past decades due to the fact that the regulatory documents that could have made the conditions on the market more transparent and understandable so far have not been adopted yet. Here we speak about zoning in the cities and the housing classification standards. Zoning should protect the city not only from chaotic, but also from illegal construction. As mostly, the developers are not aware of the rules and restrictions regarding the types of real estate they are entitled to construct and at which sites.
Separately, those zones, in which the business life of the city is concentrated, should be designated. In most large European cities, these are skyscraper islets with a large number of office space and appropriate infrastructure. For example, in Paris, multi-storey business centers are outside of the historical part of the city and form separate districts. In Kyiv, some business centers are scattered around the city, but not concentrated in certain areas, which adds individual colors to the overall architectural chaos.
Another problem of the Ukrainian real estate market is the lack of a unified housing classification in the primary market. It is somehow connected with the uncertainty regarding zoning. As, to a great extent, the zone, in which the building is constructed, impacts on its class – location is one of the most importance criteria. National developers are trying to adhere to the classification developed by the specialists of the Ukrainian Construction Association, which defines four classes: economy, comfort, business and premium. However, the use of such a classification is not a mandatory requirement. At the same time, the developer is tempted to overestimate the class of a new building. The higher the declared class of housing, the more a square meter costs. This state of affairs may lead to misunderstandings with real estate purchasers (many of which are venture capital investors) and affect the sales in general. There is another problem that many developers do not treat the investment projects as the construction of real estate, but as the development projects, which ultimately worsens the situation.
Construction or development?
To construct in the modern world without using methods of the project analysis is simply dangerous. In addition to the developer, the venture investors, lenders and other project participants take on their share of risks. Therefore, before putting the “first brick”, the pre-design studies shall be carried out and the concept of a construction project shall be defined.
First of all, it is necessary to establish what types of real estate and which class is allowed to be constructed on the corresponding land plot. Moreover, it is necessary to make an assessment of feasibility of the real estate construction whatsoever from an economic point of view. It may appear that a detailed miscalculation of the construction dates and costs, estimating the demand and forecasting the level of sales will show that the initiator of the project will not be able to get the anticipated high returns. Then the correction of the model is in question. It may appear that at first, they wanted to construct a multi-storey building, but later they agreed to better construct a business center. Consequently, if the developer does not have its own development department, then the best solution will be to apply to the financial institutions that can help to calculate a profitable business model. At least, this will allow avoiding a fatal error – the wrong segmentation of the project.
Of course, the project should take into account not only the interests of the developer. Rather on the contrary, the concept of a project should be developed for the future consumer. Therefore, at the pre-investment stage, it is necessary to form a portrait of a perspective consumer – the purchaser or the tenant of the constructed real estate. To make a portrait of the consumer means to precisely determine his needs. In order to fully satisfy the consumer needs, the developer must clearly determine the class of real estate under construction. At the same time, the project should have its unique properties and extra advantages that will enable the consumer to choose an apartment in this house, but not from a competitor. When speaking about the residential housing, the projects positioned as a business or premium class shall have a wider range of options allowing to attract a consumer. It can be a swimming pool or a gym located in a business class residential complex. In the premium class buildings, some unique services can be introduced that increase the safety and comfort of the residents.
By focusing the project on specific customers, you can further develop an effective business plan of the project, which should present the exact risk allocation schemes, models of financing and construction, a marketing plan, and monitoring of the project implementation. A clear understanding, for which consumer the real estate should be constructed and what needs should be met, reduces the duration of the investment stage, i.e. makes the project more profitable.
Pre-project research shall be a comprehensive assessment of investment opportunities, marketing peculiarities, project risks, etc. It covers the analysis of all factors that may have impact on the project. After all tasks of the pre-investment phase are solved, one can proceed to the design stages, and after receiving all the approvals and permissions for the investment stage of the project – to start financing and commence constructing.
Only with the right segmentation of the project, you can choose effective sales channels. Mistake in choosing this or that channel can lead to significant damage. There are no universal channels, they need to be selected depending on the concept of each project. The range of sales channels is quite wide: from the banner advertising in Internet to holding the specialized events. The following channels may be named, such as, direct sales, telemarketing, online sales, events, distribution, etc. Before connecting this or that channel, you need to calculate the cost of attracting of one purchaser. Actually, this is one of the indicators that will allow you to evaluate the effectiveness of the sales channel.
Online sales channels are quite effective. You can achieve fast results at relatively low costs. When organizing such channels, the social networks, the banner ads on the company and partner pages, e-mailing and the like can be used. At the same time, customization and support of the sales Internet-channel should be carried out by professionals.
Growth in sales can be achieved through specialized measures/events or participation in them. We are talking about various kinds of presentations, exhibitions, seminars, fairs, etc. Events can be both external (public, designed for the general public) and internal (events, receptions, webinars, which focus exclusively on consumers).
In the matter of choosing the sales channels, the developer surely needs to cooperate with the professionals, who are ready to provide such comprehensive services.
In this regard, the asset management companies are facing new challenges today – a financial institution should not only be a financial mechanism, through which the funds are redistributed. The asset management company should help the developer to prepare a balanced project of the real estate construction, taking into account the investment, budget and marketing components.
Comprehensive financing models
Fair competition, adherence to civilized norms in urban development, market segmentation and design approach in construction – all this could substantially change the principles of the investment mechanisms operation in Ukraine.
In particular, this applies to the construction financing models through the institutions of joint investment (hereinafter referred to as IJI), including the venture funds. It is no secret that for today most of such projects are implemented at the expense of the developer (who initially invests in the IJI), and then the sale of apartments is started in the early stages of construction, and thanks to this resource, the project continues to be financed. With such approaches, so far the main role is played by the developer. Actually, the developer bears all the risks. However, in fact, such investment mechanisms should work differently. The right situation is when the issues related to the financing of the project will be settled by the institution of joint investment. In this situation, the fund will “vote” with the money of its investors for one or another project, but it is the developer’s money.
The asset management companies that manage the corporate and share venture funds could better perform the function of analyzing the investment opportunities at the pre-investment stage. The professionals of the asset management companies will carefully inspect the project concept of the developer and make sure in the proper segmentation of the real estate. And only after that, the investment committee will decide on the possibility of funding. The IJI project support is already an indicator that the participant, who finances the project, nay be sure that all apartments in a new building will be sold on time and at a price not below the level of profitability.
Such a scheme is advantageous mostly for the housing purchasers, as the commercial capability of the project will be proven. It is advantageous to the developers – they get the confidence that the real estate will be sold. By the way, it is quite probable that the apartments in the building (or complex) will be sold at the stage of full readiness. If the asset management company can attract such investments (actually, venture capital investments), it will allow financing the construction until the time the real estate is put into operation. This practice is common in Europe. Finally, it is beneficial to the state, because the risk of non-completion of certain projects will be reduced.