Site selection and acquisition is arguably the most important activities that a developer must undertake to ensure the success of a project. It is usually a prerequisite for securing finance for a development that a site has been identified and appropriate site control has been established (site control is some form of right to acquire or lease the site from the current owner).
Macro Economic Review
While site selection is one of the prerequisites for a development, there should be some analysis undertaken to identify macro-economic trends that may impact the potential development. These macro-economic issues generally fall under the following categories:
- Economic Outlook
- Trends and Cycles
- Inflationary impact
- Interest Rate
- Where is the growth potential;
The above activites would best be undertaken by a financial advisor who can also advise on your ability to secure finance for your development. Generally, you should prepare to be able to provide 30% of the total project cost in order to secure finance.
The above Macro Economic review should give you confidence in the long term financial viability of your project.
Micro Economic Review
Further to this, some micro economic factors must be considered as well. These need to be undertaken on a neighborhood or regional level to ensure that you are gaining relevant information to the proposed area of the development. These are:
- Population numbers and growth projections
- Socio- economic and demographic profiles
- Residential Property Market
- Competitor Analysis
The consideration of the above micro economic factors can and should be reviewed by a qualified real estate agent in order to provide some clarification on the viability of your project.
The above Micro Economic review should allow you to narrow your search down to a neighborhood or municipality.
Development Site Selection Criteria:
While every site is different, scouting for a site should be done on an apples to apples basis. You want to ensure you are reviewing all the statistics in an equal manner so that you can have some impartiality to your decision. Some of the most important factors in this selection process are:
- Current sites zoning overlay and relevant applicable by laws
- Development type (multi-level multi-residential/estate housing/mixed use)
- Land acquisition or lease costs
- Social impact on the surrounding community
- Location
Current sites zoning overlay and relevant applicable by-laws
Every piece of land under a city’s or municipalities ownership will have a corresponding zone applied to it. This generally means that in a Commercial Zone 1 (CUZ1), you can only construct a commercial building. Zoning overlays are not just limited to the use of a particular site, they may indicate the presence of ‘right of way servitudes’ owned by municipalities, service authorities and/or neighbours.
If a selected sight is not under the zoning scheme that you require, a land use application will need to be made to the City of Cape Town. These generally take up to 2 months for a determination, a positive result is not guaranteed. Generally, developers tend to keep away from a site that will trigger a land use application.
Your aim here should be to minimize any need to seek planning approval from the council as this is process is open to public scrutiny.
PRO TIP – The city of cape town, as well as individual municipalities will, in some areas, have initiated a long term strategic planning outline that will serve as a masterplan for future council initiatives. It is always a good idea to review this to see where your potential site sits in relation to these future plans. You may be able to bank on future council funded developments that could increase land values in your area i.e. development of new transport/educational hubs. Please review Cape Towns Municipal Spatial Development Framework here -(http://resource.capetown.gov.za/documentcentre/Documents/City%20strategies%2c%20plans%20and%20frameworks/Cape%20Town%20Metropolitan%20Spatial%20Development%20Framework_2018-04-25.pdf)
PRO TIP – if you have identified a site that has an unfavourable zoning scheme overlay or a right of way servitude that is undesirable, a method of removing this complication would be to negotiate this into your contract with the seller of the land (i.e. make it a performance requirement of the sale contract that the seller provides a change in zoning or eased right of way servitude before the contract can be executed – you would need to sign a memorandum of understanding with the seller).
Development Type
The type of development to be constructed is a major element to site choice. An existing site may be located in a low density neighbourhood which would therefore lend itself to being a more scattered or detached development type for individual home/offices. This would not be the case for more dense areas that could sustain a multi-unit type development.
Existing buildings on a selected site may need to be demolished or repurposed for the new development. Any existing buildings on the land will add to the acquisition costs.
It should be noted that while it is cheaper to repurpose an existing building than build new, the risks of existing buildings are never known until they are discovered. This represents a significant risk to any development and should be undertaken sparingly.
Social impact on the surrounding community
The potential for a local community to be up in arms about a proposed development should be reviewed during site selection. It is important to understand the current surrounding areas property values and resale potential while comparing this with your proposed developments required sale prices. These two need to align to with 20 – 30% of eachother. Any further than this and you risk the project being seen as a gentrifying agent as the development would be financially inaccessible to the surrounding community – creating hostility towards the project.
A good example of this occurring in Cape Town is the proposed River Club project in Observatory, Cape Town, that has seen major setbacks due to community uproar, specifically in relation to affordability. More on this here.
Land acquisition or lease costs
A developer should be aware of the various methods of calculating land value as opposed to what the seller wants to sell the land for. This may be the limiting factor in determining a site for best and most efficient use. An easy calculation method to determine whether a piece of land can work financially is set out below:
- Figure out construction costs:
Construction Cost (Between R6500/m² – R8000/m² depending on desired market
+ Professional Fees (usually around 10% of project budget) + Finance Cost
+ Finance Cost
- Do the Math:
- Potential Sale $ – Costs (Identified Above) = Residual Land Vale
- Add Profit (on costs)
- Aim for 20% – 30% Profit
- Construction Cost x 30% = Profit on costs
- Land Cost x 30% = Profit on land
- Establish Max Offer Price
- Residual Land Vale – (Profit on Costs + Profit on Land) = Max Offer
- Check the math
- To ensure your calculations are correct, run the math from the back.
*Note that this is a preliminary calculation and does not include any taxes or soft costs that may need to be considered. ROOT Architecture offers this advice as a general outline to site selection. ROOT Architecture is not a Financial Services Provider and advice is only general in nature.
Location, Location, Location
Multi-Residential developments, as well as office developments thrive off interconnectivity. It is therefore crucial to select sites that are part of a municipalities overall long term plan to develop transport, employment, educational and community hubs. Evaluate the following existing amenities in your proposed site neighbourhood to determine whether a potential customer would be drawn not just to your development, but the to the area:
Public Transport: South Africas public transport network is abysmal. That should not limit your thinking on public transport. There are many alternative networks that Cape Town residents have been forced to consider including the uber and lyft networks. Also consider access to main road networks.
Employment Opportunities: A very important metric is to try and understand the available industry in the area. New home buyers today are looking for lock-up and go type properties with easy access to their work.
Day Care and Schooling: If your target buyers are young families then proximity to schooling will be a major metric to consider.
Security: South Africa has a major image issue with violent crime. For this reason people seek the least dangerous areas and will pay for it.
Neighbourhood Amenities: Is the proposed site close to shopping malls, banks, parks, open space and recreational facilities? These factors can add to the desirability of your project.
Additional considerations
- Check Title Deed – Restrictive of title, Zoning, Servitudes, Heritage, environmental
- Conditions of Township Establishment- Bulk contributions, Local authority; Ensure they can deliver, Electricity, Utility company
- Timelines – Rezoning application, Eskom Supply of Electricity
- Geotechnical Investigation – EIA, Dolomitic conditions
Who should undertake this search?
Generally, the more qualified professionals that you have working on your project, the less risk you have to take on. The following actors may be helpful in your search:
Real Estate Agent
The use of a real estate agent is probably the most common method of conducting a site search. While this is probably the most obvious choice for professional advice on the matter you should be aware that the real estate agent is motivated to sell you a property, while the agent should be looking at further opportunities (i.e. helping you sell your units once developed), there are some short-sighted agents out there that could give you a run for your money.
An Architect
The use of an architect at this early stage of the project can benefit the projects financials. Understandably, a developer will be looking to save on costs at this stage as the scope of the project is still undetermined. Regardless of this, the developer should see the value in engaging an architect early, if only for limited services, to help in determining the potential value of a site. At this stage, the architect can provide:
- A review of planning requirements;
- An Architectural feasibility study to determine the maximum development potential of the site;
- Surrounding amenity analysis including transport networks, schools, shopping, etc;
Independent Site Search
If you and your team have an adequate amount of experience and capacity, it may be prudent to undertake this site search yourself. This may be especially beneficial if your team is looking to work in a specific area.
Some strategies to consider:
- Conduct a windshield survey: drive or walk around the target neighborhood and note any sites that meet your requirements;
- Research Property Ownership: Real estate agents and municipalities generally keep property ownership data that can provide insight into the historical pricing trends of the area;
- Directly contact owners of any property you are interested in and determine their intentions for the property (are they willing to sell/lease.