ANALYSE THIS
by Lim Lay Ying
Property Times, New Straits Times
28th August 2004

Donald Trump’s biography illustrates how unmanaged egos can contribute to irrational business decisions and failure. Seen as ambitious egomaniacs who believe that they are infallible and invincible, the downfall of Trump and many real estate developers who are obsessed about growth does not raise eyebrows.

Rather than recognizing the credibility of their new ventures, they assume that their past successes can be easily repeated. Their ego impairs their ability to listen to their advisers before making decisions, and because of their persistence and denial, they make grandiose mistakes which ultimately lead them to bankruptcy.

Many ego-driven developers are unwilling to admit their limitations and are usually the last to realize when they have failed. Despite warnings that some deals are just not doable and no amount of determination or skill can make them happen, their arrogance prevents them from swallowing their pride, and cut their losses and move on.

Alright, real estate development does require a developer to have “fire in the belly” and a pretty powerful dose of self-confidence to begin with. But it is an exceptionally risky business. Market and economic forces which are beyond the developers’ control have been observed to kill even the most solid of projects.

Recently, Land & General Bhd (L&G) was reported to be refunding the downpayments paid by the 67 purchasers of its Mustika condominiums in Bandar Sri Damansara because the sales response wasn’t up to the company’s expectations. Had the project’s market potential and marketability been more carefully deliberated prior to launching, the company could have been spared this dilemma.

The importance of market analysis in the real estate development process, particularly in highly competitive or unfamiliar markets, therefore cannot be overemphasized. It begins with investigating into the demands (needs and wants) of customers and satisfying them competitively. To generate development ideas and concepts, it also calls for a large informal component which is made up of experience, observations, and research which includes the old-fashioned shoe-leather fieldwork. Being able to unite or integrate objective data and instinct/intuition born out of experience, enhances the chances of success.

Analysing Demand

Real estate developers are all too familiar with their products. They claim to know their competition, their market, their industry – so they are tempted to assume that they know their customers’ needs and preferences. Thus, it’s common for them to ignore the need for research or even consciously decide against conducting consumer research.

Consumer research however, plays a vital role in real estate market analysis. Research findings can be used to:

• Identify the strengths and weaknesses of the project’s respective features or of the entire property;
• Help determine how a project can be positioned in the marketplace and what its advantages or disadvantages are when compared to its competition;
• Gauge customer interest in new concepts or features not previously offered in the market;
• Determine which factors (other than location or price) are most important in customer decision making;
• Establish price acceptability (not affordability) for property in a proposed project;
• Decide on the extent of renovation or expansion plans to fine-tune budgetary allocations;
• Assess customer satisfaction about amenities, services, property management, and maintenance – such feedback is crucial especially when new competition enters the market.

Analysing Supply

Typically, supply factors which affect development feasibility should take into consideration (1) macro-market trends; (2) local market conditions and development patterns; and (3) characteristics of the competition – both existing and proposed.

While most of the information on the supply-side of the equation can be sourced from official records, publications, and real estate research houses, nothing beats field observations when assessing a competitor’s “curb appeal” for instance. The competition’s image, design/architecture, amenities, landscaping, operations, and surrounding uses, are best appraised by visiting model apartments or commercial spaces to observe room layouts, natural light, quality of building materials, standard of amenities, etc.

Analysing Marketability

Analsying the marketability of a project is as much an art as it is a science: it requires judgement and vision as well as facts. In most cases, real demand does exist but cannot be statistically illustrated on the basis of population growth, household formation, or income gains. This is where being able to effectively unite the rational with the intuitive counts.

In today’s competitive environment, understanding the local market and targeting specific segments can further help set a development apart from the competition. Market research can yield a wealth of information on the target customers’ needs.

But it can also be flawed if the wrong questions are posed or the data are not interpreted/analyzed correctly – a task made more challenging because much of the analysis for any form of development relies on a qualitative understanding of the market and its dynamics.