Instruments to strengthen tangible factors: Real Estate Development
Local economic development is very often linked with land use. When a market needs to be enlarged because the vendors have become so many that they do not fit in the old market facilities anymore, when an external investor is looking for an adequate operation site and when an existing firm intends to expand its production plant because business is doing fine, then questions of real estate development are touched.
Real estate development is one of the "classical" activities of local governments. The purpose is to offer the business community real estate for business operations. This sounds easy, but in reality there is a bundle of issues and questions related to this that need to be tackled before one can offer land to a potential investor:
Separation of residential and industrial zones: Industrial activities are very often connected with external effects such as wastewater, noise and the like. In order to match the residential quality of the community (which is a non-tangible locational factor) with economic development objectives, a clear separation of residential from industrial zones is normally a prerequisite. This has also a social effect, since very often squatter settlements are located near zones for industrial use, resulting in severe health problems for the poor segments of the urban population.
Property considerations: Land is not always in the possession of the local government. It is not unusual that, for example, old - and now unused - industrial sites are in the possession of private owners. If a local government intends to reschedule the use of these sites, it needs to negotiate with the owner if and under what conditions he might be selling or leasing the real estate. In rural areas, modern land use legislation sometimes conflicts with traditional communal land rights. In these cases it is necessary to seek an understanding with the local communities in order to avoid social tension.
Developing real estate: Normally, it is just not enough to place "pure" land at the disposal of a company. It needs to be developed in the sense that basic infrastructural facilities have to be offered as well. These include a functioning sewerage system, access to water and a road. Not always is it necessary to provide "state-of-the-art" infrastructures. For example, a road does not always need to be tarred in order to guarantee accessibility to the site and satisfy the investor's needs. For sure, there are infrastructural facilities not in the direct realm of the local authorities (for example in the case of electricity). If this is the case, the local government may act as "broker", trying to convince the supplier of these facilities to invest in the area that the local government wants to develop.
Environmental aspects: In more mature industrial locations, one may have to deal with abandoned industrial sites that are contaminated. Rehabilitation is a costly exercise, which very often cannot be financed solely by a private investor. Thus, the question arises, whether and to what extent the public sector takes over the responsibility for clearing these sites (see also 2.1 Tangible Locational Factors).
Calculating the price of real estate provision: The price calculation needs to take into account all costs incurred in the development of the real estate. Depending on national legislation, the real estate may either be sold or leased. The problem is not the price calculation as such, but the market. If competition between local communities for investors is fierce, there is the danger of "a race to the bottom". Under these circumstances, prices of real estates would plummet, and local government would bear the brunt of the difference between the actual cost of real estate development and the price to be realized on the market. There are two options to avoid this: one is the cooperation between various local communities and the creation of a code of conduct among them, and the other is the identification of other locational advantages that may outweigh the high(er) cost of real estate.
next chapter: financial instruments
strengthening
locational
advantages
tangible
locational
factors
intangible
factors for firms
intangible
factors
for individuals