DEVELOPMENT

ECONOMICS
SBEQ 4452
Sr Dr. Fara Diva Mustapa, PQS, MRICS, MRISM
Faculty of Built Environment & Surveying
Universiti Teknologi Malaysia
DEVELOPMENT FINANCE

▪  Financial considera-ons
▪  Property financing
▪  Types of development finance
▪  Sources of finance
▪  Alterna-ve financing
▪  Public sector financing
FINANCIAL CONSIDERATIONS: NEEDS OF THE
DEVELOPER

Should developer intends to

built then sell the completed
development=require finance
for a limited -me

Should developer intends

to retain as a permanent
Short-term money is
investment=require 2
rela-vely expensive due to
types of finance. ie; short-
limited security in the land
term finance to purchase
and building under
land and pay for
construc-on and the
development cost, and
interest rate will be
long-term finance which
influenced by the financial
can be raised by selling an
status of the borrower
interest in the
development
FINANCIAL CONSIDERATIONS: NEEDS
OF THE LENDER

The lender of short-

An establish property
term finance will 1st
company should not
consider;
experience great
• The security of the capital difficulty in raising
which he lends
• Prospects of receiving
short-term finance as
interests un-l the debt is interest payments
repaid. can be covered from
• Risk in securing income accruing
repayment if his money from other property
at the end of loan period
POSSIBLE CAUSES OF LOSS TO
DEVELOPER
▪  Some of the main causes of loss;
①  payment of an exorbitant price of land
②  Unexpected capital expenditure stemming from maZers such
as; underground services, contaminated land, building
regula-ons
③  UnaZrac-ve layouts or provision of dwellings of types for
which demand is limited, resulted in selling problems.
hZp://www.estate123.com/insight/2016/04/pros-cons-of-
property-near-a-cemetery/
④  Organisa-onal weaknesses, such as inadequate or ineffec-ve
adver-sing, poor supervision and execu-on of work in wrong
sequence.
 CLIENT’S EXPECTATIONS
1.  PROFITS
2.  RETURN ON INVESTMENT BUSINESS
ENTERPRISE
3.  ENHANCE SHAREHOLDERS VALUE OF
(Private & Public)
4.  MAXIMISE BENEFITS BUILT ASSETS
5.  SUSTAINABILITY (CSR) (Economic Commodity)

ü  Opportunity/Site Selection
ECONOMICS
ü  Market Analysis
ü Site Investigation
TECHNICAL
PROJECT
ü Planning and Design
DELIVERY Ø FEASIBILITY STUDY
SYSTEM FINANCIAL
Ø PROJECT FINANCING
ü Procurement
ü ConstrucGon
ü TECHNICAL
MarkeGng
ü Completion
 FINANCE

LAND ACQUISITION CONSTRUCTION

GENERATE REVENUE

PROFIT

REPAYMENT/PAYBACK
 PROJECT FINANCING

Ø  The issue of financing is very important to

property developers/Contractors.

Ø  Finance or Capital essential input whose cost and

availability can influence development viability.

Ø  Need to know how to finance a project.

Ø  Proper funding is a prerequisite of a successful property

investment and development
 PROJECT FINANCING
Factors Relating To Project Financing
Ø Usually Large Projects
Ø Often exceed capacity of a single organization
Ø Technically comples demanding resources
Ø Dedicated to a single purpose (Building,infrastructure)
Ø Capital Intensive requiring substantial financial investment
Ø Long duration of project development and implementation
Ø Return on Investment is deferred for several years.
 FINANCIAL BASICS

▪  The FINANCIAL BASICS for a Developer/

Contractor to make a profit, the developer/Contractor
must:

▪  1. Understand All The Costs Involved in both

the land acquisi-on and construc-on phases,

2.  Accurately Assess the Potential Revenue and

3.  Manage The Finances to project comple-on.

 FINANCIAL COSTS

FINANCE COSTS include the cost of any:

v  Residential or commercial Mortgages required to

purchase the development site.

v  Development Finance required for the

Construction.

v  Interest Charged on the finance either rolled over

the total project or payable on a monthly basis

v  Finance Deposits required for acquisition and

development finance
 DEVELOPMENT COST SPECTRUM
What are the Cost Drivers?
RETURN ON TOTAL PROJECT COST MANAGEMENT
MARKET ECONOMY INVESTMENT
(Supply-Demand, Pricing,
Values , Revenues,Cost,etc) PROJECT HARD COST SOFT COST
MANAGEMENT
1 LAND LAND ACQUISITION Project Management Cost
LAND CONVERSION FINANCING COST
Valuation General Overheads
Market Study Legal Cost

2 PLANNING Planning Permission

* MAJOR COST
Development Charges
DRIVERS
Contribution to
Authorities
Planning Fees
Social Contributions
3 DESIGN DESIGN FEES
Statutory Reports
Building Approval
4 PROCUREMENT Documentation
Tendering Process
5 CONSTRUCTION CONSTRUCTION COST
6 OCCUPANCY Life Cycle Cost
 DEVELOPMENT COST
PROJECT DEVELOPMENT MANAGEMENT

INITIAL CONCEPT DESIGN CONSTRUCTION COMPLETION

(Brief) DEVELOPMENT

COST FACTORS COST ITEMS

1 Associated with acquisition of Land Purchase Price
Professional Fees
Stamp Duties
Conversion Fees
Commissions
Subdivisions, Individual Titles
2 Cost related Local Authorities Planning Fees
Submission Fees
Contribution to Infrastructure Development Fund
3 Cost related to Professional Services Professional Fees

4 Cost related directly to Specific Infrastructure Works

Property Development Building Works
5 Cost Related to Project Financing Cost of Borrowing (Debt)
Legal Fees (Financial Procurement)
Market Study (Establish Funding)

6 Cost Related to Development General Administrative Costs

Activities in General Promotion and Marketing
Project Management
 CHARACTERISTICS OF PROJECT FINANCING
Ø Property Development Is Expensive.

Ø Most Projects require the investment of a large amount of

money at a fairly high risk

Ø Most Developers Cannot Afford To Pay The EnGre Cost of

development or nor would they want to.

Ø Most use DEBT FINANCING in order to invest in property

development.

Ø Debt Financing Reduces The Minimum Investment Necessary in

any single project.

Ø Debt Financing Increases The Percentage Of Return On Equity

Allows Tax DeducGon on Interest Payments. Debts also has cost
 CHARACTERISTICS OF PROJECT FINANCING

Ø  The Investor Covers The Debt Service Payments With Project

Income.

Ø  In determine whether to enter into debt financing, Investor must

consider incomes and expenditure in relation to the time value of
money (Time value of money is the basic framework in which
investment decisions are made)

Ø  These principles are the basis of determining the quality of

investment.
The Gme value concept of money is shaped by 3 Factors :
Opportunity
Cost and InflaGon
RISKS
 DEVELOPMENT LOAN
TYPES OF LOAN
1 An Acquisition or Development Loan
to cover the purchase, development
applica-on and pre-construc-on costs

2 A ConstrucGon Loan to cover the

building of a project

3 An Investment Loan if you are

retaining your project as a long term
investment
 SOURCES OF FINANCING

§  Investment in a property development requires adequate funds.

§  The ability to implement the project is determine by the finance available.

§  Project finance is a Long-term Method of Financing large infrastructure

and industrial projects based on the projected cash flow of the finished
project rather than the investors' own finances.

§  Project finance structures usually involve a number of Equity Investors

as well as a Syndicate Of Banks who will provide loans to the project.

§  For property investment purposes, Longer term finance is the most

important source,

§  Short term funding is usually used for working capital requirements

 BORROWING CONDITIONS

§  Financial institutions will study an application and will ensure that the
developer/contractor fulfils all conditions and finance policies. Among
the general conditions stipulated by financial institutions are;

§  Submission of working paper on the firm’s profile including track

record, profits, financial strength and present indebtednes, etc
§  Project information and viability report, eg., feasibilty report of
project, cash flow, property market conditions, proper survey of
demand and supply carried out, population study etc.
§  Colateral as securities for the loans; and
§  Sources of repayment (either internally or externally).
DIFFERENCES BETWEEN METHOD AND SOURCE OF FINANCE

Sources of finance Method of finance

– finance comes – method adopted
from to get the finance
 Retained profits

Sources of finance
Deprecia-on
Internal
provisions

Deferred payments
– taxes, dividends

Banks – commercial,
investment, islamic

Building socie-es
External
Insurance
companies

Main trust funds

DEFERRED PAYMENTS

Money the organisa-on has reserved to pay its tax

payments and/or dividends unGl the date for payment
is due

Suitable to finance if smaller amount of money

needed as it is the simplest and cheapest source

A firm’s liability for corporate/business tax becomes due

for payment in the following year. Firm used taxable
funds approximately a year before they must be paid.
RETAINED PROFITS
A propor-on of profits retained within the firm/
company instead of distribu-ng them en-rely as
dividend to shareholders.

Creates valuable source of funds for new

investment.

The firm has to decide each period what

propor-on of its profits it will retain for internal
use and distributed as dividends.
DEPRECIATION PROVISIONS

The process of deprecia-ng fixed assets of firm over their life

creates an invaluable internal source of funds

Based on fixed asset of the firm which has to be valued

when doing the tax payment. A reduc-on in value of an
income-producing asset will be applied.

Firms are permiZed to write off deprecia-on charges against

profits prior to the calcula-on of tax. These funds are available
for spending on new investments in the same way as profit
reserves.
 LENDING INSTITUTIONS
Regulated by Bank Negara Malaysia
(Central Bank of Malaysia)

Banking & Financial Institutions Act (BAFIA)

TYPES OF LENDING INSTITUTIONS FINANCIAL SERVICES

1 COMMERCIAL BANKS Full Banking Facili-es
2 ISLAMIC BANKS Syariah- Compliance Banks
3 MERCHANT BANKS/INVESTMENTS Banking for Investment Only
4 FINANCE COMPANIES Financing of Assets Purchased
5 PENSION FUNDS Funds invested by Pension Funds
6 REAL ESTATE INVESTMENT TRUSTS An Investment Fund in Real Estate
(Built Assets)
7 FOREIGN BANKS Foreign Banks Licensed to Operate
in Malaysia
8 INFRASTRUCTURE FUND Funds Make available by the Govt
to fund Infrastructure projects
 Retained profits

Sources of finance
Deprecia-on
Internal
provisions

Deferred payments
– taxes, dividends

Banks – commercial,
investment, islamic

Building socie-es
External
Insurance
companies

Main trust funds

BANKS
Largest and most important group of deposit-taking
organisaGons and play important and cri-cal role to play in
economic importance and financial strength in development,
progress and economy of country

Most banks prefer self-liquidaGng loans as opposed to open-

ended overdraqs. Self-liquida-ng loan is one that will be repaid
automa-cally in specified period.

Small and new firms may need to provide informa-on to convince

the bank of their creditworthiness. It is common for banks to exercise
a charge on firm’s assets as security for any advance, or, in the case
of smaller private firm, a personal guarantee from the firm’s owner.
BUILDING SOCIETIES

A financial ins-tu-on owned by member that offer

banking and other financial services. A finacial
ins-tu-on which was tradi-onally based on lending
money (as mortgages) to society members to buy
houses, from other member’s pooled savings and/or
money borrowed wholesale.

The Malaysian Building Society Berhad (MBSB)

was the first property financier in Malaysia. Provide
adequate provision for bridging finance and end
finance at reasonable terms and condiGon.
INSURANCE COMPANIES

Provide the latest supplement to the

funding market. Able to provide mortgage
through their accumulated funds.

Eligibility of a person or organisa-on to

obtain bridging finance is based on the
borrower's credibility such as stability or
financial statement, ability to pay and the
background of the borrower.
 Factoring

Bank guarantee

LeZer of credit

Term loan

Short-term Revolving credit

Methods of finance
Hire purchase

Overdraq

Trade credit

Bridging Finance

Mortgage

Sales and
leaseback
Long-term
Share issue

Debentures
FACTORING
Another method of short-term funding and involves raising
money on the security of the firm’s debt, so that cash is
received earlier than if the firm waits for its debtors to pay.

Factoring not widely used by construc-on firms, but

when it is used they provide cast at least 4 weeks
earlier than could otherwise expected.

The factors charge significant fees for this specialist service,

but it does help to ensure that the firm maintains an
adequate source of working capital during a cri-cal period.
BANK GUARANTEE
Known by several names depending on the requirement and purpose
of each type of guarantee. Eg. Banker’s guarantee, banker’s
commercial guarantee, leZer of guarantee etc before the guarantee
is issued, banks will consider several factors such as extent of liability,
period and expiry date and purpose and procedure of claimant.

A legal undertaking issued by a bank on behalf of a third party

9eg.firm), whereby it guarantees the payment of a certain sum
of money or up to a certain limit to the beneficiary in the event
that the firm fails to seZle a debt of fails to perform a legal
obliga-on

Bank may issue bank guarantee on behalf of the contractor for the
following reasons;
BANK GUARANTEE
Payment of money up to a certain limit for the supply of goods and
services on credit to a contractor. Applies where the open account
method adopted where the goods and services are supplied on
credit to the contractor. The contractor only pays aqer a certain
limit period, say 30/60 days

In some projects, tenderers are required to deposit a

certain amount of deposit known as tender deposit or
earnest money. Instead of deposi-ng cash, a tenderer
may request his bank to issue a gurantee. In the event of
the tenderer being unsuccessful, the principal merely
returns the guarantee for cancella-on to the former.

If the tender is successful, the tenderer is required to furnish a

certain deposit as security deposit for the due performance of
the project. The tenderer may approach his bank or banks
listed for public projects to issue a performance guarantee for
the contract.
BRIDGING FINANCE
A short-term loan to a contractor or developer. Only given to
finance construc-on and only approved aqer the project’
planning has been approved and the finance has yet to
expire directly aqer the comple-on of construc-on work.

The interest rate charged may be higher than a long-

term loan and the chargeable rate depends upon the
security provided to the banks or other financial
ins-tu-ons.

Can be arranged either as term loan with fixed repayment

period or overdraq facili-es or a combina-on of both.
 Factoring

Bank guarantee

LeZer of credit

Term loan

Short-term Revolving credit

Methods of finance
Hire purchase

Overdraq

Trade credit

Bridging Finance

Mortgage

Sales and
leaseback
Long-term
Share issue

Debentures
MORTGAGE

Also known as straight mortgage suitable for long-

term financing. Usually repaid by annual
installments over the period of loan but the rate is
likely to vary with the general level of market rates.

The amount lent on mortgage is normally restricted

by 2 criteria; the sum lent should not exceed 2/3 or
occasionally ¾ of the value of the property
mortgage or the net rental income must exceed the
interest and periodic repayments.
SALE AND LEASEBACK
Proven to be an important vehicle for equity sharing.
Involves the sale of property interest by the firm to an
ins-tu-on in return for a long lease; with the firm subleung
the property to occupying tenants.

Sale and leaseback provides all the necessary capital and

s-ll enables the firm to make an adequate return (the
difference between the paid to the ins-tu-on and that
received from the tenants).

The cost and the availability of finance, investment market

and property condi-ons, and the rela-ve bargaining strength
of the 2 par-es would influence the actual terms of the
agreement between the firm and ins-tu-on.
 ALTERNATIVE PROPERTY FINANCING

Residential
The developer sell the
Properties
Outright Sale developed property at its
Shophouses
full value and do not retain
Industrial Building
any interest

Office Block
The property company sell University (SEGI sell
Leasehold the freehold and to Amanah Raya
leaseback at a rent. Berhad & Leaseback

The freehold is retained by Real Estate Investment Trust

the property company and a Hotels
Leaseback
long leasehold subject to a Office and Commercial
lease to the future occupier. Buildings
 ALTERNATIVE PROPERTY FINANCING

In recent years, there has been growing interest in

Design-Build-Operate projects in which owners
prescribe functional requirements and a Contractor
Handles Financing.

Contractors are repaid over a period of time from project

revenues or government payments. Eventually,
ownership of the facilities is transferred to a government
entity.
 ALTERNATIVE PROPERTY FINANCING

PUBLIC PRIVATE PARTNERSHIP

Ø  Long term partnering relationship between the public and

private sector to deliver services.

Ø  Private setor mobilize finance instead of government

Ø  Efficiency with private sector involvement

Ø  Methods of bidding results in transparency and lower cost

 PUBLIC SECTOR PROJECT FINANCING

TAXES •  Multilateral & Bilateral Funding Institutions

Dividends •  International Monetary Fund
Interest •  World Bank
•  Islamic Development Bank
Rents

NATIONAL BUDGET
GOVERNMENT GOVERNMENT
CORPORATIONS AGENCIES

DEVELOPMENT DEVELOPMENT
EXPENDITURE GRANT
• Development CorporaGons • Employees Provident
• Economic Corridors Fund (EPF)
• Government Buildings • State Economic Corpn • Amanahraya Berhad
• Public Housing • BLT Sdn. Bhd. • Permodalan Nasional
• Infrastructure Assets • Khazanah Berhad
• Government Link
Investment Company
 BUILD- OPERATE - TRANSFER

Ø  Concession Company given concession to Design, Build,

Complete, Operate and Maintain for a concession Period.

Ø  Strategic Asset to Country

Ø  Useful life of the asset goes beyond the concession

period Express Rail Link(ERL)

Ø  At the end of the concession period,

asset transfer to Government at No Cost.
Proposed KL-Spore
High Speed Rail
Highways, Ports, Energy, Railway

Manjung-Coal Fired
Penang Bridge North-South Highway (PLUS) Power Plant
 BUILD- LEASE - TRANSFER
Ø  Concession Company given concession to Design, Build, Complete,
Operate and Maintain for a concession Period.

Ø  Lease Land and Facilities,

Ø  Government pay sublease rental (Deferred Payments)

Ø  At the end of the concession period, asset transfer to Government at No Cost.

Government Buildings in Putrajaya

 BUILD- LEASE- MAINTAIN - TRANSFER
Ø  Concession Company given concession to Design, Build, Complete,
Operate and Maintain for a concession Period.

Ø  Lease Land and Facilities

Ø  At the end of the concession period, asset transfer to Government at No Cost.

Universiti Teknologi MARA (UiTM)
 OBTAINING FINANCING
1 2 Establish how much
A Project developer
you can borrow and
you will have to
UNDERSTAND how you will be able
FINANCE and what the to manage all
BANKS LOOK FOR associated costs of
WHEN LENDING for the development.
development projects. 5

Important to submit
your loan request in a
professional manner,
3 4 including a detailed
feasibility study to
Lenders look after show that you have
their own safety first Based on the allowed for all
.When deciding security of the contingencies
whether to finance project; they also
your project they will want to establish
assess the risk, ability the track record of
to repay the loan the people behind
the viability of the the development
development itself.
Thank you for your aZen-on.