Business of land property development

Many people and organisations are interested in investing in properties. For individuals, one might be interested in acquiring a property to stay in or to invest in so that he/ she can get regular rental income for future use. Organisations such as insurance companies, pension funds and corporates also invest in properties for different reasons.

Real estate development

Real estate development, also known as land or property development encompasses the following areas:

Purchasing raw or virgin land, develop it, build on it or parcel it out or sell to others;

Acquiring existing properties, for example in mature suburbs, change use of the land and for example build gated communities in the form cluster houses or block of flats, sell them or retain and rent them out. In other countries such as South Africa golf estates are quite common;

Buying existing properties, renovate or extend them, sell them off or retain them and rent out.

As regards virgin land usually meant for subdivision and parcelling out, land development is commonly known to include determining the mix of land use, infrastructure to be built, road network, culverts, drainage, water provision and sewerage, etc.

Types of properties

Real estate development may result in the following types of properties, at times in combinations:

Stand- alone stands or properties which are the most common, for example in residential suburbs,

Gated communities such as cluster houses or blocks of flats,

Industrial or commercial parks,

Commercial buildings.

Key legal issues

There are key legal issues that a real estate developer has to comply with for a successful project. The main laws include the following:

Regional, Town and Country Planning Act (Chapter 29:12),

Urban Councils Act (Chapter 29:15), or

Rural District Council Act (Chapter 29:13)

Council by-laws.

For example, section 39 of the Regional, Town and Country Planning Act (Chapter 29:12) (“the RTCP Act”) or (“the Planning Act”) requires subdivision to be done in terms of the Act. An application for such subdivision is done in terms of section 40 of the Act.

When a land developer has complete land development in terms of the subdivision permit issued by the local authority of the area a certificate of compliance is then issued. Where land is being sold to other parties the compliance certificate makes it possible at law to transfer ownership to the buyer. So at times properties such as stands cannot be transferred to the purchaser because the certificate of compliance is pending owing to outstanding land development work.

Financing arrangements for real estate development

Land or property development projects usually require a lot of capital outlay. Such expenditure is recovered over a long period.

0So property investment requires a patient investor who has long term finance. However, the following financing arrangements are worth considering in real estate development projects:

Using own funds, for example individuals or organisations with savings or access to surplus positive cashflows,

Borrow from financial institutions e.g. mortgage finance,

Deposits paid by purchasers of the subdivided properties and instalment payments over agreed period,

Staggered or phased approach where net funds from a completed phase finances the next stages,

Bring on board private equity (PE) firms. These firms may for example participate in the equity of the real estate development company or equity of a special purpose vehicle (“SPV”) created for the project, and usually sell off their equity at a higher price later on. They make use of funds from institutional investors, high net worth individuals, their own finances, or even borrow.

Joint ventures by the land owners, financiers, land developers, owners of land development equipment or with construction companies.

Joint ventures by the land owner and providers of building materials.

Key stakeholders

The following stakeholders are key in real estate development projects:

Department of Physical Planning in the Ministry of Local Government, Rural and Urban Planning,

Local authority being the approving authority for the area,

Surveyors and Surveyors General for land surveying and survey diagrams which are registered if approved,

Technical advisors such as architect for the architectural designs, quantity surveyor for estimating material quantities, structural engineers, plumbers, electricians, etc.

The land owner,

Financier, through for example joint venture, private equity, borrowings, etc.

Land developer, contractors such as owners of the land development equipment or construction company, etc.

Legal practitioner / conveyancer for advising on legal matters such as deal structuring, contracts and effecting transfer of ownership of the individual properties being parcelled out or sold,

Financial advisor to advise on deal structuring, sourcing and management of funds, viability of the project, etc. This is for example to ensure completeness of projects.

This article, which is based on various sources, is simplified, for general information only and does not constitute full professional advice.–heralc.cl.zw