As a registered valuer, I will further discuss on the understanding of economic cycle

and property cycle to Mr. Alex.

Economic does not grow in a straight line. Instead, economies fluctuate between
periods of strong growth and weak or negatvie growth, known as the economic growth or
business cycle. One widely held economic cycle theory is based on the relationship between
supply and demand, and economic activity.
First and foremost, the demand in the marketplace for property arises from all the
various activities that society pursues and the consequent need for properties in which to
pursue those activities. Property in itself has virtually no value, any value it possess is derived
from the usses to which it can be put. Thus, the demand is a reflection of the short-term and
long-term changes in the economy.
Mr. Alex has to undestand that the economic cycle is not moving in tandem with the
property cycle when business improves. The early reference on this statement include the
building cycles by Richard Barras (1994). As many property developments and investments
are closely linked to the economic and business frameworks, there is usually a relationship
between property cycles and business cycles. This relationship is as shown in Figure 1 below,
where there is a clear relationship between the property market, economy market and
financial markets.

A simplified version of Barras analysis is further discussed. Beginning with the

business upturn, the demand is strengthen and increase, causing to the rising rents, property

prices picking up and capital values trigger the start of the new developmenet cycle upswing.
By here, this condition can increase one developer and other consumers confidence, a healthy
economic growth and inflation remains low. This is the healthiest phase of the
economic cycle, as growth can be robust without overheating or higher inflation.
This phase usually lasts a year to several years provided growth is at a not-toorapid and thus sustainable pace. During this period, the inventory rebuilding that
we saw in the initial recovery period leads to greater hiring activity by firms and,
as employment rises so too does consumer confidence. This in turn leads to
strong sales. To meet increased demand for their goods and services, businesses
invest to expand capacity

If credit expansion accompanies the business cycle upswing, it can lead to a full-blown
economic boom. The banks may also fund a second wave of speculative development activity.
However, because of the long lead times in bringing forward new development, supply
remains fairly tight and values continue to rise.
By the time the development cycle reaches its peak, the business cycle has already
moved into a downstring, accompanied by a tightening of monetary policy to combat the
inflationary effects of the economic boom.
As the economy subsidies, the demand for property declines, rents and values fall as a
result and the vacancy stock increases in supply. As the economy moves into recession, the
fall in rents and values continues, property companies are hit by the credit squeeze,
bankruptcies increase and the development cycle is choked off.

The local economy

It should never be overlooked that risk and uncrtainty exist in the property
development process, no matter how thorough the research of the developer may be. Property
development involves a decision to commence a development for use at a future date that is
on completion of the development and the future being uncertain it is impossible to rid a
developement scheme of uncertainty. By here, uncertainty relates to factors which are
unpredictable and in respoect of which it is therefore not only difficult but perhaps impossible
for a developer to take precautions. For example, the fact that at some future date a war may
break out or a government may introduce new legislation which may affect the success of a
development may be completely unpredictable at the date of commencing a scheme.
An extremely important part of the developers activities is , however to try to identify
the risks that may be inherent in a scheme and to seek either to elimanate those risks or where
elimination is impossible, to make provision to minize the problems those risks could cause,
possibly using such devices as contingency allowances or taking out insurance cover.
A developer should seek to satisfy market demand by providing property suitable for
potential users and sited in appropriate locations. It should be developed at a cost which
enables the completed development to be let or sold at a price which is low enough to attract
suffiecient would-be users or customers to pay that sum for its use which in turn provides the
developer with an adequate net return to reward him or her for their labour, their skill and
their professional expertise, and to compensate them for the risks taken in undertaking the
development.