FACTORS AFFECTING PROFITABILITY OF OFFICES WITHIN AND OUTSIDE THE CBD

Abstract

Real Estate developments are investments at fixed sites that involve large initial capital expenditure in the hope to reap high future profits in terms of rental and capital gain. An analysis of the factors affecting the initial cost of the development of eight commercial buildings within and outside the Central Business District is attempted in this paper to establish some development criteria that ensures profit maximization. The analysis is divided into four parts. The first part aims at analysing in general, the percentage costs of the various elements contributing to the total development cost. It is found that the land and the building cost components take up a high percentage. The second part constitutes a detail analysis of the high land cost due to location factors in land-scarce Singapore. The study establishes that the less risky and more profitable locations to build on is still land within the CBD and the sites should be exploited to the maximum permissible plot ratios. This is attributed to the direction of economic growth in Singapore towards high technology goods and services and the national goal to establish Singapore as an information and financial centre thus stressing the importance of the locational factors of accessibility and agglomeration of office developments. The third part of the analysis concentrated on establishing the design criteria of buildings to attain the highest economic returns. The quality and capacity of the buildings are analysed. A well finished and serviced building does not affect the magnitude of profits significantly but will give a slight advantage over competing buildings especially in a falling market. The final part of the analysis evaluates quantitatively the profitability of projects, concentrating on the demand forces. The timing of completion of the development is an important criteria to developers contemplating real estate commercial investments. Developers should not merely aim at short term gains but to exercise professional and prudent judgement, considering the long term demand factors.