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To understand how social infrastructure adds value to mixed-use developments, analyze its’ price points. What does a Waitrose supermarket, water views and high performing schools have in common? They all contribute to attracting price premiums on property values.
An article published in 2009 in the International Journal of Housing Markets and Analysis suggests much higher premiums of up to 18% can be achieved by adding wide water views. In 2008, the Centre for Economic Performance (CEP) at the London School of Economics published research for England showing high performing (academically) schools can have an impact between 3% and 12% on property prices in the surrounding area.
Whilst seemingly obvious, the better performing developments usually contain components of open space that drive demand from the purchaser. However, land is a major cost and careful consideration must be given to its reallocation from development density. Public squares, walkways and boulevards that enable people to enter the area and navigate their way through all bring a desirability at the human contextual level. They also drive footfall to and through retail areas increasing the sales patterns and driving rents whilst adding retail into the land use.
Colliers’ research suggests that price premiums for simply being within a well-designed mixed use project can range from 15% to 30% in Dubai and 25% to 45% in Cairo. These percentages increase substantially when items such as developer brand, proximity to retail, education and healthcare, and more recently walkability is added into the equation. Colliers research and experience in developing pricing matrixes/ models for mixed use communities suggest the hedonic house pricing theory revolves around a multiplicity of components for mixed use projects; ingress and egress, softscapes, retail (goods and services) and social infrastructure facilities; this is Tier one of the model. The price premium model also contains a second tier. Tier two focuses on the individual unit within the development. There are again several components that can come together to add value; situation, floorplans, parking, exterior design, to name a few. Among these aspects the view from the unit plays a vital role in determining its price.
Hedonic Pricing Theory: A Two-Tier Price Premium Model
Developing a successful residential community with mixed use elements should deliver value for money and value for time for the residents, and additional revenue for the developer – creating a ‘third’ place. The value of this ‘third’ place is directly translated into price premiums enjoyed by such communities.
Some of the factors that transform a standard residential development to a residential community are:
Global research indicates that a neighborhood movie theater can raise residential property values between 14% - 30%, while an upscale grocery store can increase the value by an average of 20%, compared to communities with limited or no retail facilities. According to Colliers research in markets such as the U.A.E. and Cairo, a development with supportable retail facilities achieve a price premium of 15% - 20%, compared to communities with limited retail facilities.
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Parks | Open Spaces | Walkability:
Adding parks, jogging and cycling tracks, and increasing the walkability in general can function as a key attraction for a residential development. Incorporating open spaces not only adds to the aesthetic appeal of the overall development, but there are a number of documented evidence globally that the benefits of greater walkability can be capitalized into increased house prices. Internationally, walkability increased values up to 9%, depending on property type, while a park being located 40 feet from the house, increases value by 33%, 9% at 1,000 feet, and 4% at 2,500 feet. Locally, a park/ garden view can attract a 4% - 6% premium.
In an international context, the value-maximizing distance between a residential unit and a school is between 300 and 500 metres, that is, roughly, a 9 - 15-minutes walk from home. In markets such as Dubai and Cairo where the climate does not encourage walking, residents generally prefer a 20 - 30-minute drive to the school. According to Colliers research, a school within a master planned community can add a price premium of 10% - 15% on house prices. However wrongly placed or inappropriate quality schools can have a negative impact on prices. Traffic congestion that restricted access to the development or a mismatch between the economic profile of the catchment area and the school need to be considered too.
Ingress and egress to and from the development and accessibility and travel time to key office districts are important drivers of property value. Transit-oriented developments generally enjoy a 20%-25% premium in property value over comparable developments that are not located near public transit. In the local context however, price premiums for developments with easy access to public transport are subject to the target market of the development. In the case of the mid-to-low income residents, accessibility to a metro / bus station is priority. For the upper-mid to high income segment, accessibility to the main highways are of concern. Rents in close proximity to the metro stations attract premiums of 10% - 15% higher than similar developments away from the stations. Global benchmarks that were studied suggest much higher premiums, being subject to the dependency on public transport.
Successful mixed-use developments maximize land efficiently, integrate and maintain synergy between uses, mitigate traffic and are generally designed to maintain a continuous flow through the development. The price premium of a house is reflected not only on location and build quality, but more so on the availability of on-site social/mixed-use elements, i.e. convenience of retail facilities and services, restaurants, green space, schooling, walkability and accessibility to transport.
Mixing land uses in correct densities that are supportable by the community yields positive effects on prices. A more diverse neighborhood is positively valued compared to neighborhoods with limited mixed-use elements. Incorporating sustainable ratios of land use leads to a positive impact on house prices. These elements include retail/F&B facilities, schools/ nurseries, community parks and public realm spaces. However, the density of these supporting land uses is primarily dependent on occupier and catchment demand.
A mixed-use development is not a standardized product. Its elements and densities cannot be replicated from one site to another. Careful consideration of demand and supply fundamentals of each asset class alongside proper integration of community infrastructure facilities, such as education, healthcare and retail/ leisure is needed.
These social elements create the essential ‘glue’ that holds a development together. The strength or density of these essential elements determine the success of a development, and pricing these elements result in the added hedonic value or price premiums of a mixed-use development.
Traditionally residential investments were driven by location. Today, return on investment also depends on people, not just property.