Feasibility of Apartment Development Project (Real Estate) in Bangladesh

Feasibility of Apartment Project Development

IN 475 F IN

REAL ESTATE FINANCE

Submitted To

Submitted By

Tashfeen Hussain

Mohammed Mohamm ed Mahib Ullah

Senior Lecturer

ID # 073 267 030

School of Business

Date of Submission | 06.02.2011 Page | 0

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Acknowledgement One of the most pleasant parts of submitting a report is the opportunity to thank those who have contributed to it. Unfortunately, the list of expression of thanks – no matter how extensive is always incomplete and inadequate. These acknowledgements are no exception. My first thanks goes to the almighty Allah for giving us the patience and courage to finish this unconventional task within within its deadline. I am grateful to the employees, managers and the directors of various real estate developers who helped me to fill to giving me significant information on real estate industry. Special thanks to Mr. Enayet Ullah for encouraging me to continue the project. We would like to thanks my family to be patient and support always without any bother. At last, i sincerely acknowledge my debt to Mr. Tashfeen Hussain, honorable faculty of FIN 475 course, for his valuable counseling towards the improvement of the project. Without his encouragement, this would have been impossible.















Executive Summary This paper is intended for evaluating the feasibility of the Real Estate Developers of Dhaka city who are doing joint-venture apartment development project with land owner. The analysis involves the most up-to-date data of the land price per katha and apartment price per square feet. To evaluate the feasibility we have found some factors behind why developers and also land owners are interested into apartment development project. To initiate a project developers have to do calculation of financial feasibility. They also cannot ignore socio-economic factors, macro-economic factors, legal restrictions, rules and regulations by city development authorities like RAJUK and ministry of housing and public works, fiscal policy of government and infrastructural facilities like gas, water & electricity. The steps of developing an apartment from the initial approach with land owner and site selection are showed chronologically. Legal steps are very important part in the development process before a developer initiate the foundation of the building. Finance & Marketing plays a big role in cash inflows and cash outflows. Afterwards, feasibility of different areas of Dhaka city has shown in a way that everyone understands. For comparing the net profit, apartment of Dhaka City has divided into three parts; Luxury, Standard & Economy. Floor Area Ratio (FAR) & Maximum Ground Coverage (MGC) plays a very important role in apartment size. The construction cost is more or less same except the finishing materials which ornament the beauty of the apartment. But the main reason why apartment price varies is depends on mainly land price of respective areas. As the sector is flourished flourished in last two decades, I have analyzed a SWOT analysis which comes up with the strength and huge opportunity to the sector as well as weakness like bureaucratic legal procedures and finally threats from government like delay and unavailability of connection utilities like gas, water & electricity.















Table of Content Topic

Page

1

Introduction

4

2

Scenario of Apartment Project In Bangladesh

5

3

Factors Affecting Apartment Development

7

i

Cost Benefit Factors

8

ii

Socio Economic Factors

11

iii

Macro-Economic Factors

13

iv

Legal Framework

13

v

Financing Opportunities

16

vi

Fiscal Policy

14

vii

Infrastructure

17

4

Apartment Development Process

18

5

Feasibility Feasibility Analysis

21

i

Luxury Apartment Feasibility Analysis

22

ii

Standard Apartment Feasibility Analysis

23

iii

Economy Apartment Feasibility Analysis

24

7 SWOT Analysis

25

8 Conclusion

26

9 References

27

10

Appendix

28















INTRODUCTION In our everyday life, we use Real Estate in some manner; we make use of Real Estate resources to provide shelter, comfort, convenience, and privacy, a place of work, recreational facilities and related services. In an estimate Real Estate represent more than 40% of the national wealth (Hyote Weime, Principles of Real Estate). The basic component of realty is not only the surface of the earth but also the property rights and interests that attach to ownership of realty. Thus the Real Estate means acquirement of land and building which is called inherent right. The men who are o wner, user, maker, financer or marketer of the property have some rights to the property. Real estate development has got a momentum in the recent years in Bangladesh. During the Eighties, Eastern Housing was the pioneer who started the apartment dev elopment concept to mass people and later many real estate companies has grown to meet the growing demand of apartments. Financing the development of real estate projects such as apartment, office buildings and shopping centre is not a simple approach. Developers of such projects face changing conditions in the national and local economies, competitive pressure from other developers, and changes in location preference of buyers or tenants. All together they affect the ability of the developer to acquire the land, build apartments, sell them to buyers and earn sufficient revenues to cover operating and all other expenses. By Apartment By Apartment Project Development, we refer to the process of financing the acquisition of a tract land with the intent of constructing a building and eventually selling the completed project. As a part of financing and estimating the development, certain process may affect:

The size and cost of the proposed apartment



The price that a developer may pay to acquire a land



The price that a project may bring when it is sold t o apartment buyers















SCENARIO OF APARTMENT PROJECT IN BANGLADESH In Bangladesh apartment project is recent phenomenon which was started in 1964 by Ispahani Group. But in early 1980s with w ith the inception of Eastern Housing Ltd. the apartment project started flourishing. Now it is a booming sector of the economy. Since the 1980s it came into the horizon of business field. This business initially concentrated in Dhaka due to the reason that it is the fastest growing city of Bangladesh. Some limited scales of activities gradually expanded later to Chittagong and Khulna city. At present there are more than thousands of firms (Source: Rehab) operating apartment business and they are producing apartment project in Dhaka city and some other cities. Over the last 25 years the real estate development sector has made significant contribution to many sectors in our economy. Since 1985 this sector has created homes for over 20,000 families in the Dhaka mega city. Additionally, thousands of acres have been developed into housing estates where lower and middle-income families can construct their own dwellings. The Dhaka metropolitan city has seen a new dimension of modern shopping complexes due to the initiative of the Real Estate Developers. Since 1985 this sector has been procuring construction materials worth over Tk. 1500 crores. It gives employment to about 12000 construction workers and pays wages to construction construction workers amounting to about ab out Tk. 60 crores annually. Approximately Tk. 2 crores c rores is paid annually by this sector towards professional fees for architects and consultants. The sector employs about 5,000 management staffs like accountants, sales personnel, engineers, supervisors, administrative staff and others and pays approximately Tk. 25 crores to these peoples in annual salaries. Apart from the VAT and taxes paid by the Real Estate Development to the government exchequer, the government should have collected VAT amounting to approximately Tk. 150 crores from importers and manufacturers of construction materials since VAT was imposed in 1993. The fact that many cement manufacturing industries have now been set up in Bangladesh is

















the Real Estate Development sector and several new mechanized construction material manufacturing industries have recently come up due to the existence of this sector. Today about 2000 architects and consulting engineers are directly supported by this sector and almost 5000 diploma engineers are engaged by this sector. The Real Estate sector in Bangladesh operates in the private market and accounted for 5.5% GDP in the period 1985-90 in the construction sector and another 8.41% of GDP in the housing sector. It is considered that the industry is very labor intensive, intensive, providing many jobs for skilled, semi-skilled and unskilled workers. The informal sectors also employ many people in the construction of simple shelter structures. For the migrants from the rural areas, the construction industry is a stepping stone in urban life.















FACTORS AFFECTING APARTMENT DEVELOPMENT

Cost Benefit Factors (Cost of land,

Infrastructure (Housing land,Electricity,Gas, Water)

Socio- Ec Economi onomicc Factors (Population growth, Mobility of people, Migration,, Level of Migration income)

Macro- Eco MacroEconomi nomicc Factors (GDP, Inflation, (GDP, Inflat ion, Savings, FDI)

Cost of construction materials,

Finance

Feasibility of the project)

(Private and foreign banks, DBH, NHFI)

Apartment Project Development

City Development Authorities (RAJUK, RDA, CDA, KDA)

Fiscal Policy Legal Framework (Companies act, Partnership act, RAJUK buildin building g

(Tax, Vat, Registration)















Cost Benefit Factors Every Real Estate Developer wants to build their apartment in Dhaka city but there is scarcity of land and the price of lands are increasing gradually. According to recent trend, Real Estate Developers follow joint-venture strategy with the land-owner. It allows Developer not to buy the land but build apartment and sharing the build flats with land owner. The financing in joint-venture techniques are stated below:I.

Give land-owner a certain percentage of flats equal to the value of land.

II.

If the values of flats are less than Land-owners expected value of land, developer has to offer some additional cash to the land owner which depends on the land price of the respective area.

III.

Collect some down payments of flats before commencing work

IV.

Taking external investors/loan if needed















Land price in Dhaka metropolitan area per Katha [1 Katha = 720 Sq ft].

Area

Price (per Katha in BDT) Min

Max

20,000,000

40,000,000

20,000,000

40,000,000

15,000,000

20,000,000

5,000,000

8,000,000

Niketon

6,000,000 10,000,000

8,000,000 20,000,000

Nikunjo

6,000,000

7,000,000

Mohammadpur

6,000,000

7,000,000

Adabor

4,000,000

6,000,000

Mirpur/ Pallabi

3,000,000

5,000,000

Dhanmondi

20,000,000

30,000,000

Lalmatia

10,000,000

15,000,000

Eskaton

8,000,000

10,000,000

Badda

3,000,000

4,000,000

Rampura/ Banasree

4,000,000

6,000,000

Moghbazar/ Malibagh

6,000,000

7,000,000

Shantinagar/ Shegunbagicha

7,000,000

8,000,000

Khilgaon/ Bashabo

3,000,000

5,000,000

Gulshan Baridhara Banani Bashundhara Uttara















Apartment price in Dhaka metropolitan area per Square feet.

Area

Price (per Sq. feet in BDT) Min

Max

Gulshhan

12,000

20,000

Baridhara

12,000

20,000

Banani

8,000

12,000

Bashundhara

4,000

6,000

Uttara

4,000

6,000

Niketon

6,000

8,000

Nikunjo

4,000

5,000

Mohammadpur

4,000

7,000

Adabor

3,500

4,500

Mirpur/ Pallabi

3,000

4,500

Dhanmondi

10,000

15,000

Lalmatia

7,000

10,000

Eskaton

5,000

8,000

Badda

3,000

4,000

Rampura/ Banasree

3,000

4,500

Moghbazar/ Malibagh

5,000

7,000

Shantinagar/ Shegunbagicha

6,000

8,000

Khilgaon/ Bashabo

3,000

5,000

















Feasibility Feasibility Calculation We assume that a developer is going to build an apartment in a land in Gulshan with a land owner with the ratio of 50:50. The land area is 10 katha. The average price of the land is Tk. 30,000,000/ Katha. So the market price of the land is Tk. 300,000,000. From our data we assume that the flat price of the area is Tk. 16,000/ Sft. From the new rule imposed by Ministry of Housing & Public Works the FAR (Floor to area ratio) is 4.50 for 10 katha with 25 feet width road which means a building of 10 katha can be build up to (10x720x4.50)=32,400 Sft. Whether the Maximum Ground Coverage (MGC) is 65% for the land means that the building cannot be extended more than 65% of the land. So the MGC of the land is (10x65%) = 6.50 katha = 4680 Sft. So each floor size could be highest 4680 Sft. and maximum floor could be built 32,400 /4680=6.92≈7. But In order to build 7 floor except ground floor we have to maintain FAR of 32400 so the floor size is minimized mi nimized to 32,400/7 = 4630 sft/per floor Now, we consider each floor having 2 flats, so the neat flat size, 4630/2 = 2315 Sft















Socio Economic Factors The demand for housing is one of the major factors that lead to the development of apartment projects. Socio-economic characteristics of people influence the demand for permanent houses. There are four major socio-economic characteristics of population that influence that demand for houses – I.

Population growth

II.

Income level of people

III.

Migration towards cities

IV.

Mobility of people

Population growth is one of the major factor that requires increased number of residential houses. Bangladesh experienced high growth of population over the decades, which led to high demand for residential houses. However, the rate of population growth reduced significantly, the backlog in the creation of residential houses has still been significant. Here is the statistical information of rural and urban population o f Bangladesh

Year

Population (in Millions) Millions) Rural

Urban

Percentage of total population Rural

Urban















metropolitan areas like Savar, Gazipur, Uttara, Keraniganj and Narayanganj, is estimated 12.8 million as of 2008. The population is growing by an estimated 4.2% per year, one of th e highest rates amongst Asian cities.

Macro-Economic Factors Macro-economic Macro-economic factors influence the choice of e ntering apartment market. There are three major macro-economic factors that affect the development of apartment projects. I.

Rate of economic growth

II.

Rate of inflation

III.

Rate of savings

Higher growth of economic growth leads to increased income to people. With the economic growth of the country more people are likely to be economically able to afford a house with necessary facilities. Savings are also an important factor for members joining in housing cooperatives. In the absence of institutional loans for purchasing land, personal savings is the source of finance for real estate investment. Apart from economic growth and savings, the rate of inflation also affects the decision to















x 43,560 = 130,680). The greater the FAR allowed for a site the larger the project that may be constructed on that site. Setback/ Building line Construct the building in a specified number of feet (setback) from the other landmarks in order to ensure conformity with adjacent buildings and provide clear visibility for pedestrians or motorists. Maximum Ground Coverage Maximum ground coverage is used to restrict builders to build in only certain areas of their land. It varies from 50-67.5% depends on land size and front road. Here is the data of FAR & MGC which is collected from Ministry of Housing & Public Works. Plot Size (Katha)

Road width (Meter) Road

FAR

MGC %

≤2

6.0

3.15

67.5 %

> 2 to 3

6.0

3.35

65.0 %

> 3 to 4

6.0

3.50

62.5 %

> 4 to 5

6.0

3.50

62.5 %

> 5 to 6

6.0

3.75

60.0 %















There are so many acts, which wh ich affect the behavior and functions of housing cooperatives. Building Construction Act, Rules & code.



i.

Building Construction Act 1952

ii.

Bangladesh National Building code 2006

iii.

Building Construction Rules 1996

iv.

Dhaka Metropolitan Building Construction Rules 2008

Associated acts related to Building Construction



I.

Bangladesh Environment Conservation Act, 1995

II.

Fire Control and Protection Act 2003

III.

Town Improvement Act 1953 (CDA ordinance 1959 )

IV.

Cantonment Act 1924 (Building Construction Rules 1985)

V.

Private Housing (Land) development ordinance 2004

VI.

Open Space and Wetland Preservation Act, 2000

VII.

Public Park Act 1904

VIII.

Antiquity act 1968

















City Development Authorities There are four city development dev elopment authorities in Bangladesh, I.

RAJUK (Rajhdhani Unnayan Kartipakkha/ Capital Development Authority)

II.

CDA (Chittagong Development Authority)

III.

KDA (Khulna Development Authority)

IV.

RDA (Rajshahi Development Authority)

Rajdhani Unnayan Kartripakkha, Kartripakkha, or RAJUK literally the Capital Development Authority of the Government of Bangladesh, is a Bangladeshi public agency responsible for coordinating urban development in Dhaka, Bangladesh. RAJUK is composed of various public officials, city planners, urban administrators, engineers and architects. It is the National Authoritative Board on building planning, estates and resources, plot allotment and construction















Fiscal Policy The fiscal policy of government has some impact on the development of Apartment business. VAT imposed in different items would be payable by the apartment company during the time of material, machinery and equipment purchase. The registration charge for transfer of land has to be borne by the developer. The apartment buyer also face the VAT imposed by the government.















APARTMENT DEVELOPMENT PROCESS As each stage in process the potential builders has to rely his knowledge and association with other people as each stage difficulties are placed in the way of the developer.

1. Initial Search for land, prior to purchase or co -sharing with the land owner Developer comes into an agreement with the landowner to develop the land. The basis of agreement may be the sharing apartments or cash payments or both. Sometimes the land owner may take initiative and find a suitable developer for development of this land with the aforesaid agreement. But the very recent phenomenon is different that the developers are searching for vacant v acant and suitable land in urban areas.

2. Acquisition, Acquisition, possession and registration of land when buying After acquiring the land the Real Estate Company has to do the legal procedure in















7. Selection of contractors/vendors for different items of works A developer company mostly looks after the management of the company but they also have to select a good and experienced contractors and vendors for different items of works like piling, construction, sanitary works, tiles works, interior works etc. Approximately 20% of total construction cost is assumed to be the cost of contractors and vendors.

8. Overall financial management and marketing The management has to calculate the upcoming costs of the proposed apartment and management has to decide which medium they should use to potray their advertisement. Before marketing the product, pricing is the most important task for the producer. Many techniques can be used for apartment pricing. But whatever the price is fixed the market mechanism is the vital factor. In years, apartment developers have















all types of customers’ demand developers are bound to depend on imported and high

quality construction materials, especially floor fittings and electrical fittings. Actually the cost of exclusive apartment varies mostly using the imported fittings used by the developers. What type of material will be used depends on various factors, a) Location of the project, b) Prospective buyers, c) Total price of apartment Imported materials are used for making posh or luxury apartment. But in developing standard apartments, the developers use mixed components of materials. But when making economy apartments developer use maximum locally produced materials. Availability is an important factor getting construction materials. Many construction

















13. Transfer of the title for purchase of flats/apartment Developer hand over the flat when the finished their finishing process. If developer fails to deliver on time they should compensate both land owner and apartment buyer as par agreement and vice versa.

FEASIBILITY ANALYSIS















Luxury Apartment Feasibility Feasibility Analysis Area

Gulshan

Avg. Apartment Price (per Sft.)

Tk. 16,000

Avg. Land Price (per Katha)

Tk. 30,000,000

Sample Land Size

10 Katha

Market Value of the land

Tk. 300,000,000

FAR (Floor Area Ratio for 10 katha land

4.25 + 0.25 = 4.5















Standard Apartment Apartment Feasibility Analysis Area

Lalmatia


Tk. 8,000


Tk. 13,000,000

Sample Land Size

6 Katha


Tk. 78,000,000


3.75















Economy Apartment Feasibility Analysis Area

Adabor


Tk. 4,000


Tk. 5,000,000

Sample Land Size

5 Katha


Tk. 25,000,000


3.5















SWOT ANALYSIS Critical Appreciation of Real Estate Sector can be done by analyzing its Strength, Weakness, Opportunity and Threats. Significant features of this industry have been summed up in the following SWOT Analysis.

Strength

















Threats















REFERENCES





























Construction Construction Cost of Luxury Apartment in Gulshan















Construction Construction Cost of Standard Apartment in Lalmatia















Feasibility of Apartment Development Project (Real Estate) in Bangladesh

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