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UNDERSTANDING THE DUTCH MARKET FOR INDUSTRIAL AREAS with System Dynamics Modeling ERES conference Eindhoven 2011 Session: Market Research, Analysis and Forecasting Erik Blokhuis Eindhoven University of Technology [email protected] GENERAL • Dutch policy on industrial areas is fully aimed at: – attracting companies – stimulating local economy – creating employment • From these perspectives, the Dutch policy is very successful – – – – 32% of total employment 35% of added value in NL is created on industrial areas annual yield: € 1.7 million / hectare distributive effect on employment GENERAL • Supply of space for industrial activities is important factor for Dutch economy • This economic relevance influences the planning and realization of industrial areas – large governmental influence (80% of supply of building land) – availability of large stocks of immediately grantable land – strong connection to wishes and demands of companies • legal certainty, good accessibility, flexibility, sufficient space, low costs PLANNING APPROACH 1. ESTIMATION OF DEMAND Estimate level of regional demand (municipality / province) Determine future supply in terms of existing plans (municipality) Planning task Select new locations based on planning task (municipality) 2. PLAN DEVELOPMENT Update land-use plans for the selected new locations (municipality) Fixed landuse plans Try to buy up all of the necessary land (municipality) Prepare the land for granting (municipality) 3. CONSTRUCTION Sell the land plots to individual companies (municipality) Build a suitable accommodation on the site (company) Arrange servicing: roads, sewer, water, power (municipality) 4. MANAGEMENT & MAINTENANCE Manage/maintain buildings and private spaces (companies) Manage/maintain public spaces, infrastructure (municipality) Completion PLANNING APPROACH • Three main steps in planning process: – estimating the level of regional demand (business location monitor) – determining the future supply of industrial areas (existing plans) – selecting new locations • Actors’ influence – municipalities have control over supply of industrial land – companies find industrial areas attractive, because of low land prices, legal certainty, and possibilities to buy more land than necessary – investors are almost absent, because of low gaining capacity, low rent level, high sale risks NEGATIVE CONSEQUENCES • Large supply of new industrial area land plots • Low land prices • Low occupancy rates and rapid deterioration of existing areas • Stagnating redevelopment processes NEGATIVE CONSEQUENCES • Large supply of new industrial area land plots – 50% of construction land is reserved for industrial activities, while industry covers less than 20% of the currently built-up land • Causes: – lack of realism in demand estimations – municipalities choose development in stead of redevelopment – mutual competition between municipalities in attracting companies NEGATIVE CONSEQUENCES • Low land prices – Land prices for residential areas are 3-4 times higher Related problems: inefficient land use, low investor involvement, low attention for maintenance, … NEGATIVE CONSEQUENCES • Low occupancy rates and rapid deterioration of existing areas – Redevelopment task: NEGATIVE CONSEQUENCES • Stagnating redevelopment processes – Lower line represents finished redevelopment projects INTERVENTIONS • Government recognized problematic situation, and proposes five interventions: – employment of the so-called SER tool – introduction of park management – reservation of 400 million Euros to accelerate the redevelopment of deteriorated areas until 2013, aiming to redevelop 6.500 ha – stimulation of regional cooperation, which should result in a competitive and sustainably managed stock of industrial areas – increasing involvement of professional real estate parties in the industrial area market SYSTEM DYNAMICS MODEL • Most of these interventions will not have an optimal effect because the Dutch market for industrial areas functions as a complex system – governing interventions will only be successful when the underlying processes support them – using System Dynamics (SD) to model the market for industrial areas as a system – SD deals with internal feedback loops that affect the behavior of the system (more realistic), and can comprise a high number of soft, hard-to-quantify factors besides numerical data – now: only causal loop diagram. In the future, a stock and flow diagram will be constructed – eventually, we want to identify leverage points in the system, in order to recommend on most effective intervention measures External process guidance Added Value for Municipal Land Company (agriculture -> industry) - competition between new and existing areas (+) + + - profitability for municipalities (+) + + Execution of Redevelopment Task - Interest Charges + Potential of Achieving Added Value through Redevelopment (when necessary) Complexity of Redevelopment Task Yield of extra space through redevelopment - Recovery Time Production Costs (Mun) Redevelopment Costs - value potential of redevelop ment (+) - Stocks of Prepared Sites + municipal competition (+) + - Land Prices New Areas Share of New Areas in Meeting Spatial Demand + Inter-Municipal Competition + Investments in Quality and Maintenance Existing Areas (Mun) + land and RE prices (+) + Necessity for Redevelopment Uniformity of building stock Real Estate Costs New Areas - + + - + + demand and supply (+) + Spatial Demand for Industrial Areas Attitude: Industrial Areas / Activities Stimulate Local Economy + + Utilization on Existing Areas Attention for real estate maintenance + + + + + Park management + + Employment Occupancy on New Areas + Growth of the stock + area value and profitability (+) Depreciation of buildings - Economic development Role of professional real estate companies Circulation + + Overestimation in Demand Calculations + Quality of Existing Areas Market value of the building stock Value of Existing Areas + - + Profitability of industrial area real estate RESULTS • Remarkably, this causal loop diagram lacks negative feedback (or viability) loops – These keep systems working everlastingly – Domination of reinforcing loops will result in an unstable system and oversupply of stocks (the case in the current market for IA) • Leverage points: – – – – – – Demand calculation Share of new areas in meeting demand Land prices Value of existing areas Municipal competition Role of professional real estate companies RECOMMENDATIONS • Short term: – Improving demand calculation method – Obliging municipalities to study possibilities of redevelopment for meeting spatial demands – Drastically increasing land prices – Establishing a national fund for increasing area value • Long term: – Positioning planning and development of IA on regional scale – Creating strong preconditions for professionalization of IA market (increasing role of professional RE parties) Requires large public investments! THANKS… Questions?