Economic obsolescence is fundamentally more important than physicalobsolescence.’Critically discuss...

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Economic obsolescence is fundamentally more important than physicalobsolescence.’Critically discuss this statement, with reference to the optimal timing ofredevelopment.(33 marks)
QUESTION 3Explain the economic forces that are likely to determine the location decisions ofmanufacturing firms.(34 marks)

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© The College of Estate Management 2009 Paper P0340V2-0 Profit in property: Development Contents 1. Introduction 2. The nature of development 2.1 Why development takes place 2.2 Development in the private and public sectors 2.3 Function of the developer 3. Estimating demand 3.1 Single development 3.2 City centre projects Activities 1 4. Optimum construction outlay 4.1 The quality of refinements 4.2 Capital costs as opposed to maintenance costs 5. The intensity of site use 5.1 Buildings as the addition of capital to land 5.2 Combining capital with a fixed supply of land Activities 2 6. The determination of site price 6.1 Corollaries 6.2 The extensive use of land 7. The timing of redevelopment 7.1 When does redevelopment take place? 7.2 The present capital value of the site in its current use 7.3 The value of the cleared site 7.4 Redevelopment of the site 8. The rate of redevelopment 8.1 Method of approach 8.2 Changes on the demand side affecting rental income 8.3 Changes on the supply side affecting operating costs 8.4 Building costs 8.5 Relaxation of assumptions of a perfect market 9. Conclusion Activities 3Profit in property: Development Paper 0340 Page 3 1 Introduction The pursuit of profit shapes behaviour in goods markets and factor markets. The marginal principle introduced in introductory economics applies to output decisions in perfect competition, imperfect competition and monopoly. It also applies to input decisions irrespective of whether the input is labour, capital or land. We may now extend the principle to the two major areas of decision making within the property market. Firstly there is the decision whether or not to produce newly built property and secondly there is the decision whether or not to invest in existing categories of property. These are respectively: z Property development z Property investment. This paper is concerned with the former.

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Robert · Accepted Answer

Q Economic obsolescence is fundamentally more important than physical obsolescence. 
Critically discuss this statement, with reference to the optimal timing of redevelopment. 
 ANSWER It is important to first understand the meaning of economic obsolescence and 
physical obsolescence and the distinction between the two. The physical obsolescence relates to 
diminishing physical life of the asset or property in form of the basic wear and tear of the 
property also accounted in depreciation; it may be visible in the peeled out wall paints, roof 
leaks, or worn out floors and lack of updating. It must be noted that the physical obsolescence is 
caused by the factors internal to the property. On the other hand economic obsolescence is 
caused by the factors that are external to the property such as increased operating cost in the 
current use of property, reduced returns from current use, regulations, or discounting interest rate 
or inflation etc. Economic obsolescence relates to decline in usefulness of property, or in other 
words diminishing economic life of the asset or property. 
It must be understood that redevelopment can enhance the economic and physical life of a 
property. But it is also important to understand that the property when bought involved a cost so 
it must be ensured that the asset is used to maximum possible extent, or in other words uptill its 
optimum capacity is tapped. Also redevelopment involves some cost, so it is important to know 
the optimal time of redevelopment. Such redevelopment at optimal time is vital for making 
maximum possible returns. 
Now, what is central to this issue is that what determines the optimal time of redevelopment; is it 
related to economic obsolescence or physical obsolescence.

Economic obsolescence is fundamentally more important than physicalobsolescence.’Critically discuss this statement, with reference to the optimal timing ofredevelopment.(33 marks) QUESTION 3Explain...

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