Developing the right properties in Southern Spain

Share Diana Morales | May 17 2007

Among the many facets of the property industry so frequently highlighted there is one important factor that is often overlooked: the development of properties. No, I don’t mean the actual building, designing, styling, financing, marketing or even planning of projects and individual homes, but the all-important question: what should be built, where and in which quantities?

In any other industry this is called Product Development, a vital part of any company’s success, as it actually determines what they produce. Of course, Volkswagen produce cars, L’Oreal produce pharmaceutical products and Iberia ‘produce’ flights, so product development relates to the rather more specific choice of car models, hair care product lines and flight routes. Why don’t all car manufacturers produce prestigious limousines and exotic racing cars? Why don’t they all concentrate on the mid-sized cars that represent the largest share of the market? Why do they choose to produce the models they make and how have they arrived at them? Are they sure we really want or like those cars? Well, the truth is they have a pretty good idea of ours likes and dislikes.

Knowing your market

A businessperson, even one as omnipotent as Bill Gates, is faced with tough choices when deciding which products to develop, produce and sell. Resources and budgets are usually proportional to the task in hand, i.e. not without limit, so within the scope of what economists call the Production Possibilities Curve, the entrepreneur will have to decide which set of products to produce with his limited resources. Among a long list of potential candidates he or she has to select those that will ensure maximum returns.

Basing such decisions on anything less than sound market knowledge would be sheer speculation, so it is no surprise that large companies like Volkswagen and L’Oreal don’t rely entirely on previous experience and the general (current) trends of the market, but also pay hundreds of thousands to obtain reams of statistics otherwise known as market research. Such studies ensure that the engineers, designers and chief accountants at VW have a very good idea not only of which models are currently selling well, but also which segments are likely to show the most future growth – and therefore market share.

Segmentation

Now I’ve said it: market segment. Naturally, no endeavour to understand the market and get a feel for which products are needed/wanted is complete without an understanding of how markets are divided into segments. The most common qualification of a market segment is price, but there are other factors that influence consumer behaviour, such as age, gender, socio-economic background and culture. Within these segments, there are further breakdowns, but most product developers are happy to identify a sizeable market segment to focus their efforts on.

Having established an understanding of the tastes and preferences of the market, what do you do? Developers of this kind are often faced with the question: do you play it safe or try to be a market innovator? The choice between these is like the choice between a safe, low-yield investment and a juicy high-risk one. All too often, unfortunately, decision makers of all kinds opt for the safest of choices, the lowest common denominator, but doing so en masse could quite easily kill your market altogether…

The lowest common denominator

This, in marketing terms, is when entrepreneurs opt to cater for the largest chunk of the market—safe in the knowledge that they are catering to the largest chunk of the market. The problem is, if 70 per cent of property buyers on the Costa del Sol are in the market for two-bedroom apartments but 90 per cent of property developers opt for this ‘lowest common denominator’, then collectively they are misreading the market and flooding it with the wrong kind of product—or too much of the right kind of product, which is the same.

So what has all of this got to do with property? As the above example illustrates, lots. So much attention is focused on the construction, design, marketing, promotion and selling of projects on the Costa del Sol, but all of these processes are preceded by product development—and good product development should be preceded by exhaustive market research. Entrepreneurs are always being told to be creative in response to the market, to be market-driven, not married to a possibly outdated affiliation to a particular product type, but all too often this is not the case.

Building the right properties

Unfortunately, there is a delay in market feedback reaching decision makers, which reduces their ability to respond swiftly to changes in demand and consumer patterns. “It’s a problem that applies particularly to property development,” says Diana Morales, founding director of DM Properties. “The time between the inception of a project, the purchase of land, the obtaining of permits and licences, and through the process of construction to the execution of the project may involve several years. In the meantime market conditions and preferences may have altered greatly.”

The answer is to listen more closely to what the market has to say, but as Diana says: “developers should also talk and listen to agents more often, as they are very much in touch with the market, not just locally but also overseas.” A related problem is that too many projects are developed in isolation, with only the individual project’s details and short-term profit maximisation in mind. “The result is often a patchwork of little projects that lack infrastructural and architectural cohesion, and can enhance a sense of over-development that might have been avoided with the benefit of a master plan.”

Master Plans

Working to a master plan that facilitates the coordinated development of a far larger area avoids such problems, allowing not only greater economies of scale, avoiding the doubling up of expenses and uncoordinated networks of roads and infrastructure, but also ensuring a greater visual harmony and ability to plan in green zones and features that give added value, such as properly located and facilitated shopping and recreational areas. “The market always has space for quality projects,” says Diana, “so even if your product is over-supplied, it will outsell the others in the same segment if it is fundamentally desirable. To be desirable is has to be attractive both in itself and as an investment. Quality of design and finish, as well as a long list of modern facilities and comforts relate to the attractiveness of the project itself, but none of us live in a bubble, so developers have to start looking more at the living environment that surrounds their project. If it is enveloped by dense construction, messiness or low-rent areas it will lose desirability, no matter how beautifully finished it is.”

The central point here is knowing when NOT to do something. Those who look only at the short term and their own projects in isolation of all else are not, by definition, good developers, for they have the potential of damaging the market in the long run—not only through over-development of a particular property type, but also by creating a patchwork of unsightly construction that ultimately detracts from the desirability of the area as a whole. The good developer, therefore, recognises the increasing demand for less crowded quality developments and realises that sometimes it is better to leave some areas untouched, so as to make a project more desirable and saleable. We know that exorbitant land costs drive up volumes, but what is lost in volume should be made up for in yield per square metre, and while this option may not be as readily available in such densely built up areas as Benalmádena or Manilva, it is certainly worth considering in a luxury destination like Marbella.


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