Why Are Small Developers More Efficient Than Large Developers?
Psilander, Kurt, Journal of Real Estate Portfolio Management
The efficiency of 16 small-scale developers is compared with large-scale developers in Sweden. For a given level of quality, the small-scale developer came out as more cost efficient. The reasons appear to be strong leadership, day-to-day operational involvement, and greater flexibility in the management through out the process. Small developers, however, face difficult entry issues.
In the mid 1960s, many small real estate developers in Sweden disappeared as a consequence of the so-called "million program," in which the government and the municipalities had promised to produce one million apartments within a ten-year period. The method was to subsidize developers with a capacity to carry out very large projects.1 In the beginning of the 1990s, medium-sized developers went bankrupt and large developers stagnated due to the recession. With the disappearance of medium-sized developers and distressed large developers, small-scale developers, who had been through tough times for a quarter of a century, could finally meet with officials at the municipalities' land offices, at the planning authorities, and at the banks to discuss how to counter the emerging scarcity of housing. The number of small developers, however, had not increased much before the large developers woke up and started to acquire what remained of the medium-sized developers (Nordstrand, 2003). These large developers began producing condominiums and single-family houses financed by generous governmental subsidies. Rent control, however, kept them away from rental apartments. Today (2006), four large companies account for more than 90% of the annual production of 30,000 units, but mostly condominiums. Newly established small-scale developers did start to build rental apartments from beginning, which was in line with government policy, but the government ignored them, probably because a single small developer does not add much to the stock, or that government policy in general tends to be directed at big business.
This paper presents the results of a survey of the working methods and cost efficiency of 16 small-scale developers in Sweden and compares the data for all kinds of developers.2 The industrialized methods of large developers are discussed. Political implications of the conclusions are also considered.
The critical issues for home building are logistics, and committed and trained workers. Logistics includes not only the timing of transports and temporary storage of material, but also the efficient coordination of flows of ongoing work. Committed workers can accommodate a disturbed workflow and continue to stay efficient. To accomplish these tasks, a real team leader has to be in charge to instill confidence by constantly staying in the midst of the work process. This is an opportunity for small developers. They are working with projects of limited size and therefore able to simultaneously keep the whole project in mind and adjust and control the flow of work. A small developer who carries out small projects can be effective, and successfully compete with the large developers in both production cost and project quality.
Gibrat's Law (1931) is used as the theoretical point of departure for answering the question as to whether there is any reason to expect one type of developer (large or small) to be more efficient than another. The proposition has been discussed in a number of studies covering different industries, but not yet in the real estate development sector. In accordance with Gibrat's Law, the hypothesis for this study is that there should be no differences in productivity between small and large developers.
Small-Scale Developers in Sweden
An extensive search identified 32 possible small developers in Sweden (Psilander, 2004). Telephone contacts and visits reduced this number to 16, of whom only 12 had the profile defined for this study: the developer should be a one-man company where all the requisite human and physical capacity for a housing project has to be outsourced; that is, production could be distributed over different specialists, professionals, and contractors in the market. …