Real estate development is a lucrative development project; however, the success rate is slowly decreasing due to increasing number of entities in the real estate sector. Consequently, real estate developers are forced to come up with creative ways to maintain competitiveness. Niche real estate development is an effective way to maintain profitability; businesses are now specializing in niche real estate development projects such as flipping real estate or luxury real estate development. Flipping real estate development projects in poor neighborhoods has its own risks and rewards as there are many stakeholders to consider just like in the housing project in Show Me a Hero by Lisa Belkin.
Lisa Belkin’s Show Me a Hero is a detailed account of Yonkers’ public housing desegregation battle in the 1980s and 1990s. The book explores the struggles of public housing projects especially when the project touches on sensitive issues like race and class (Belkin, 1999). The book also shows that each stakeholder has unique needs that must be met, otherwise, the project will not proceed even when it benefits a majority of the stakeholders. Evidently, development projects are quite costly, and they are subject to a lot of regulation as seen in the book.
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Khedekar & Dhawale (2015) define risk as exposure to the possibility of financial loss/gain, physical damages or delay as a result of the uncertainties that arise from pursuing a particular project. Large scale real estate projects attract a lot of risks, more so, because they take longer periods to be completed. Most importantly, real estate development project entails various stages, each stage has unique risks. Regardless of the risks, flipping real estate in up-coming neighborhoods has economic incentives to the investors when it is properly planned for.
A notable risk across all the stages is development risk; it is the risk that the cost of leasing or selling the project will generate insufficient returns to cover costs and create the desired return. Investing in poor neighborhoods is less costly than investing in middle and upper neighborhoods; however, there is no guarantee that the property will attract enough customers.
Timing risk is another significant risk. Accurate and pre-planned timing is a critical success factor for real estate development projects. Therefore, businesses that fail to put into consideration the ‘timing’ risk are more likely to build properties even when the market conditions are unfavorable. The perfect timing depends on the real estate market, such that at that time the developer can access attractive land plots easily and be guaranteed of a market for the property.
The market risk is closely related to the timing risk. It is concerned with the supply and demand situation that will affect the project in the short and long run. The investors have to worry about how readily the project will be absorbed into the market and the effects of absorption on the value of the property. Though the market analysis is an objective view of the market that allows the investor to review the strength of the investment, sometimes it can be misleading. Ineffective market analysis can lead to disastrous investment that will not bring profit.
Other risks involved in real estate development are: cost risk, financing risk, building site risk, approval and letting risk. There is a probability of loss due to cost overrun which is quite common among real estate projects. Developers find themselves spending more than they budgeted for, and it eventually the costs will have an effect on projected profits. However, a major risk seen in Lisa Belkin’s book is approval risks. Regulations, local politics and the views of other stakeholders can play an important role in the success of the project. When all the stakeholders do not support the project, the project has a high probability of failure. In flipping real estate in poor neighborhoods, developers often find themselves in conflict with the local community. The local community knows that real estate developers want to make profit by attracting a new class of tenants that will pay increased rent. In most cases, complaints from the local community can prevent the project from taking off.
Despite the many risks, real estate development project still attracts a great deal of rewards. Real estate development is a perfect form of yield enhancement. It enables the investor to achieve higher returns with decreased risk. Unlike other forms of investment such as stock, real estate attracts less risks and guarantees the investor of a steady income once the project is complete. Additionally, real estate development deals with tangible assets, and the investor can modify the property to increase value. After all, real estate development in low income neighborhood is based on the concept of improving already existing property to attract more lucrative buyers who are willing to pay more. Once the project is complete, the owner has a greater degree of control on the performance of the real estate project as compared to other types of investments.
Historical appreciation rates have favored the real estate development business. Housing prices are constantly going up with the economic changes making the investment more lucrative. Furthermore, investors can make increased profit by flipping their real estate investment. Lastly, real estate development projects operate on a cyclic market. There are highs and lows in real estate, and well planned real estate development projects can bring a lot of income to the investor. Since the recession, real estate prices experienced a dramatic rise. Therefore, developers look for cheap real estate development projects to invest in and hold on to the property until it can be sold for maximum profits.
From the book Show Me a Hero , it is evident that there are various stakeholders that influence the project in different ways (Belkin, 1999). A real estate development project involves a number of stakeholders: investors, developers, local authority, statutory authority, community, suppliers and special interest groups such as heritage organizations. Due to the complex nature of property development projects, it is necessary to define stakeholder participation and anticipate stakeholder resistance for some of the stakeholders.
Investors are the key stakeholders in a project. They are responsible for initiating and funding the project. In a private real estate property development, investors play an active role in setting the direction for the project. In Belkin’s book, the federal government invested in the public housing project, and it was responsible for deciding on the location for the public housing project. The federal government imposed fines on Yonkers for failing to implement its directive, and this shows that as a stakeholder, investors have a lot of influence on the project.
The local authority is another important stakeholder to consider; it can approve or disapprove the project based on the legality of the projects. Real estate development projects have to fulfill various local requirement regarding: waste management, social care, public safety, environmental sustainability, and fire safety. Additionally, there are smaller authorities responsible for planning applications, rubbish collection and tax collection. In Belkin’s book, the local authority was against the federal government which funded the housing project. This did not go well for Yonkers and the new mayor as the city as the federal government fined the city and threatened to withdraw services operated by the federal government. Local authorities have a considerable amount of power, and lack of compliance to local business laws and regulation is a punishable crime.
Alternatively, the community has influence on the success of a development project. The community acts as the watchdog for the project to ensure that the project is for the greater good of the public. Flipping real estate occurs in low-income neighborhoods, and it has been met with resistance by community members who feel that such projects could kick them out of their homes. Community members have considerable influence in that they can liaise with the local authority and special interest organizations to reject a project. However, businesses that show genuine concern for the environment and social causes tend to be welcomed easily by the community. Yonkers housing project became quite controversial because community members from the East did not approve construction of public housing in their neighborhood (Belkin, 1999). They felt that it would attract gangs and criminals into their peaceful neighborhood.
Other stakeholders such as developers, customers, suppliers and the statutory community also play an important role. The developers are responsible for transforming the business idea into an actual business. Property developers have vast knowledge that must be respected for the business to succeed. Lastly, customers determine the success of the project. Hence, developers have to attract clients by meeting the requirements of the target market. Customers are attracted by good quality, safety, affordability and availability of amenities.
In conclusion, development projects are complex. There are various risks and shareholder opinions to consider equally. Failing to please important stakeholders can be quite disastrous for the project as seen in the case of Yonkers housing project.
References
Belkin, L. (1999). Show me a Hero; The story of an urban tragedy . Boston: Little & Co.
Khedekar, S., & Dhawale, A. W. (2015) Qualitative Risk Assessment and Mitigation Measures For Real Estate Projects in Maharashtra. International Journal of Technical Research and Applications, 3 (4), 49-57.
