In yesterday's post I spoke about the practice of buying land, rezoning it for a higher-and-better use, and then selling it for a margin. It may not make economic sense to do this in the current market, but it remains an important step in the delivery of new homes and other forms of real assets. Before you can build, you need entitled land.
But as I have mentioned before, there are people who look down upon this practice. They view it as a form of land speculation; one that just drives up land prices and doesn't ultimately create anything of tangible value. They might even go so far as to say that, if this is what you do, then you aren't actually a real estate developer!
Of course, this would be false and it shows a lack of understanding of how development works. It's also insulting to developers who work hard in this part of the business.
Let's consider Wikipedia's definition of development:
Real estate development, or property development, is a business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction or housebuilding, although many developers also manage the construction process or engage in housebuilding.
The two most important points for this discussion are bolded. One, development includes a range of activities that might include the sale of land or parcels to others. And two, real estate development is distinct from construction or housebuilding. So the more accurate way to describe a developer who sells land and doesn't build is to call them a developer who isn't also a builder. It's that simple.
But more important than nomenclature is the fact that there's nothing inherently wrong with securing development approvals and then passing off the land to a builder to complete the rest. Somebody has to do it.
Entitling a site often takes years — sometimes even decades. It’s a process that creates value and serves as a prerequisite to building new homes. Whether it’s done by one company or two shouldn’t matter.
Cover photo by Alexander Tsang on Unsplash
At the end of last year, I wrote this post arguing that development value has shifted from land to the build. And in it, I argued that it's no longer viable to be a high-density land developer in Toronto. The practice of buying land, rezoning it for a higher-and-better use, and then selling it for a margin, is over — at least for the time being.
It's also not easy to find value in the execution of new builds, but it's a better place to be looking. Because today, as we underwrite new development sites, we are seeing land prices (on a per buildable square foot) that are similar to what they were back in 2017 when we were assembling the land for Junction House. Meaning that, in some cases, land prices have been nearly flat over this 8 year period. This is despite a total inflation rate of approximately 25% and an average annual decline in the value of money of 2.86%.
This is not all that surprising, though. Land should, in theory, be the residual claimant in a development pro forma; so it should be one of the first things to reset during a market downturn. However, in the past, I have referred to land prices as being sticky in the face of changing cost structures, such as development charge increases and/or new inclusionary zoning policies. So which is it, Brandon?
Well, one way I think about this is that land prices tend to be sticky in the short term. Nobody wants to immediately take a loss. And as long as prices/rents continue to exhibit strong growth, there's a chance that these new costs will get absorbed into somebody's pro forma and that land prices won't need to adjust downward. But turn off demand and reverse price/rent growth, and now there's no other option but for land prices to come down.
This is what we've been seeing in Toronto since 2022.
Cover photo by Adam Vradenburg on Unsplash
One city that we didn't talk about from Monocle's recent Quality of Life Survey, but that regularly appears on the list, is Tokyo. In this year's ranking, it was bestowed with "best for cleanliness."
All of this isn’t to say that there’s no rubbish in Tokyo but, overall, it’s much tidier than other cities of a comparable size. Tokyo spends a fortune on keeping things presentable. The Clean Authority of Tokyo’s waste management budget for the central wards is ¥105bn (€640m) this year, of which ¥83bn (€507m) is dedicated to cleaning. But the secret to the city’s sparkle is that it’s not simply the work of city employees: it’s a collective job.
If any of you can remember my "Takeaways from Japan" post from this earlier this year, you might recall that cleanliness shows up in my first point. It is absolutely astounding that the largest city in the world — it almost has the entire population of Canada — manages to be so clean. On top of this, it manages to achieve this with almost no public garbage bins.
If you've been to Tokyo, you'll know this. There are very few places to throw out your garbage in a public space. This is perhaps the irony of Tokyo's cleanliness. But it works because of the expectation that people will take their garbage home and then sort it according to the city's strict separation rules. And of course, this is what people do.
That said, there are some other reasons for the lack of public bins, namely the 1995 subway sarin attack. There remains a deep fear that garbage bins might be used to conceal a terrorist device, which is why if you do see a garbage bin, it'll often be transparent in nature so that nothing nefarious can be concealed. But by and large, the Tokyo approach seems to work because everyone wants it to.
This reminds me of an incident when our ski and snowboard group was there in February. We were walking around Harajuku and a few of us decided to indulge in a set of elaborate desserts involving crepes, various fruit-like mixtures, and an absolutely excessive amount of whipped cream. You know, the sort of thing you'd never order if you were at home.
One of us ended up wearing their dessert. He had it on his face, his chest, his hands, and somehow all over this jacket sleeves. There was whipped cream everywhere. He needed to abandon ship immediately and rid himself of what remained of his dessert. Except, there were no garbage bins anywhere! This is despite being on one of the busiest tourist streets in the city (see cover photo).
It became a mission to get himself cleaned up. But what he absolutely did not do is litter. That's just not how one conducts oneself in Japan — with or without public garbage bins.
