Real estate projects have been some of my most fun to finance. After about 10 years of experience in the field, I feel comfortable saying that I "get" property development in both a practical and intuitive way: market analysis, location, design, returns and so on. I understand it; I can run the financial models to analyze it; and when I step onto an empty lot or a shell, I can visualize marble floors, people milling around, centers of activity, iconic spaces.

It is perhaps this last feeling that is common to many who prefer commercial property as an asset class. It seems to be the accessible capital investment. The theory goes that since there are neither factories to build, nor assembly lines to run, it cannot be rocket science and anyone with a reasonably good head on their shoulders and a bit of cash at hand can oversee the building construction process. It is exactly this type of thinking that steers most people in the wrong direction.

The reality is that you can get it wrong, and many people, even the experts, do. Property development is serious business and even with teams with years of experience, projects can and do fail. In addition, to all of the construction challenges that stem from building large capital intensive projects, real estate is an asset class that can also be susceptible to bubbles - surpluses of supply at inflated prices with insufficient demand.

Think empty shopping plazas, empty office space and abandoned residential apartments or second home estates. From design to construction to financing to actual use, every aspect must be thought through, vetted, and alternatives must be put in place.

There are five major points that should be considered before tackling any real estate investment. This week we examine two of them.

Usage and market analysis
What use will your property have? There are two broad categories of investment classes: commercial (offices, industrial space, hotels, commercial centers) and residential (apartments, housing estates, vacation homes). This is likely to be your first decision and a comprehensive market study with robust demographic and macroeconomic indicators should precede it. Each sort of development has its own drivers that must be tested assiduously.

In the development of office buildings and parks, you need to consider traffic patterns, pockets of economic development and growth, likely commuting times for clients and complexity (class A vs. class B space). With hotels, you have to consider occupancy rates, tourist and business arrivals (past and future), competitor hotels, competitor markets and economic growth. With industrial space, you will want to consider the level of backward integration taken up by major players in the economy as well as understanding logistics patterns and constraints.

Finally, when considering residential property, you need to study carefully the availability of competitive mortgage financing and contractors who can work efficiently in a scalable way to improve margins. Whichever, type of development you choose to pursue, strong financial modelling with a range of scenario analyses is critical. Have a base case and then stress test this by assuming key indicators are at least five to 30 percent worse than you expected. Think through your decision process and outcomes in the event of a worst case scenario before you invest.

Design

Once you have determined the type of investment you will make, design becomes your next most critical decision. Design can make or break your real estate investment, and unfortunately, this is the area where many amateur developers spend the least amount of time and the least amount of money. If you have done your market studies correctly, they should feed directly into your design decisions. You have to assess both what your current and future customers want, what they are willing to pay for and what they expect, while always staying ahead of the competition.

Are you in an area where most people will have to drive? If so, does your lot have adequate parking, or can you rely on pedestrian zones if you have insufficient space for parking? With some of the highest dollar costs per kilowatt hour costs in the world, any development in The Bahamas would be remiss if it did not include some aspect of green building. In design there are a variety of factors that a skilled architect can consider that will bring you significant savings in cooling and light costs.

The designs of your respective layouts are also important. In commercial office spaces, you have to consider placement of bathrooms, possible canteens and the technology build-out required for modern office spaces (think audio visual equipment, floor based electrical outlets, cable wiring). Residential occupants of both low and high end properties want modern and thoughtful design finishes and solutions that are similar to the ones they see on interior design shows on cable TV. Industrial warehouses need to consider the practicality of investing in cold chain technologies.

In all of the above, you have to consider the overall "feel" of the design. Are you taking advantage of innovations in architecture? Is it beautiful, modern and, when budget supports it, iconic?

If you are building a shopping mall, do you have an anchor tenant who can drive the foot traffic to your location and to other stores within the complex? Prominently positioned with large footprints, anchors have traditionally been department stores, super markets or large retail chains. They may include popular eateries or entertainment components (cinemas, bowling alleys).

What is important is that patrons need to visit these anchor stores every day or several times a week. In The Bahamas, web shops typically substitute as an anchor tenant. It is not clear that this is the most successful way of driving traffic to the remaining (line) stores in the complex. Line and anchor stores together should combine to form destination experiences that solves shoppers needs (banking, dry cleaning, food, hair salons, coffee shops etc). Do you have the right mix and flow to accomplish this?

Rules for the road

1. Monkey see, monkey do: Spend sufficient time thinking through drivers, trends and possible niches. If everyone is putting up apartments or shopping plazas, this does not mean you should do the same. You have to be different, think about services that a community wants and needs that are not available and strive to provide theme.

2. Design and architecture are important: Good design is worth its weight in rental income, utility bills and repair costs. Also note that while good design is researched, it does not have to be expensive.  Simplicity can be energy efficient, beautiful and cost effective.

Next week we will continue with the last three themes in this real estate series which are financing, construction and maintenance. As always, please email at gravettebrown@yahoo.com if you have any questions. Gravette Brown is a principal investment officer at the International Finance Corporation of the World Bank Group. Her views and opinions are her own.

Gravette Brown

Click here to read more at The Nassau Guardian