A study to investigate and quantify the value added by Home Owner Associations to residential developments of Moreland Developments (Pty) Ltd focussing primarily on the area north of Durban.

Abstract

The Residential Department at Moreland Developments (Pty.) Ltd. (Moreland), the property development arm of the Tongaat-Hulett Group (THG), has for some time questioned the benefits of setting up and maintaining Home Owner Associations (HOAs) for the residential suburbs that they develop. This concern is a consequence of the significant time and cost incurred in setting up and maintaining these associations with very little perceived added value. The intention of this study is to quantify this added value (if it exists) and in so doing, assist management in matching the right product in the right market with the right price. In an effort to try to understand the concept of added value, the writer has chosen a theoretical framework on which to base the research methodology. The writer has used Michael Porter's Value Chain system as this theoretical foundation. The Value Chain disaggregates the various value-adding activities a company performs and establishes which value-creating activities lead to sustainable competitive advantage. This study develops Moreland's Value Chain and enables the writer to hone in on the value creating activity of setting up and maintaining HOAs. A scientific approach is adopted in the research design. A stratified disproportionate random sample was used because of its greater statistical efficiency. A sample size of 93 were interviewed telephonically using a standardized questionnaire containing a mixture of structured and unstructured questions. The five projects chosen were Broadlands, Somerset Park, Gardens, Mount Edgecombe Country Club Estate (MECCE) and Zimbali. Both descriptive and analytical statistical analyses were performed on the 93 data sets. The data shows that the main drivers of value within a HOA are security, architecture, landscaping, general environmental upkeep and maintenance, communication and rules and regulations. In Broadlands and Somerset Park, the main drivers of value at the time of purchase and presently are architectural theme and rules and regulations. For Gardens, MECCE and Zimbali, the main drivers of value at the time of purchase and presently are security and architectural theme. The research objectives were reduced to two hypotheses, which were tested at the 95% level of confidence :- Hypothesis 1: The presence of a HOA has no effect on the decision to purchase vacant land. This hypothesis was not rejected for Broadlands but rejected for the remaining projects as well as for the full population. Judging from the confidence intervals for the project means, it is evident that the presence of a HOA had a positive effect on the decision to purchase in all projects (except Broadlands) and for the full population. Hypothesis 2: The presence of a HOA will not allow Moreland to command a price premium on the sale of vacant land. This hypothesis is rejected for all projects as well as for the full population implying that Moreland can charge a price premium on the sale of vacant land. The only limitation is that the Broadlands price premium cannot, in real terms, be charged as Hypothesis 1 was accepted for Broadlands, as prospective purchasers perceived value but are unwilling to pay for it. The price premium that could be achieved for the projects are as follow Somerset Park 4% to 20% Gardens 1% to 17% Mecce Zimbali 16% 13.5% to to 45% 24.5% Further analysis revealed that when the added value items of HOA are tested against the project, the location of the project is the prime driver of value. However, when security is tested against the project, the project value subordinates to the security effect indicating that security is the only added value item that is more important than location. The writer has made two recommendations to Moreland. The first is that immediate withdrawal from the Broadlands Home Owners Association is necessary as the value created by the establishment of a HOA is not captured, either in full or in part, by Moreland. The second is that Moreland restructure its commitment to the other HOAs in line with the quantified added value ranges. There is no doubt that this work greatly enhances the existing, very limited, body of knowledge on this subject area in South Africa. It is hoped that future research students will expand the existing body of knowledge by future investigating the issues that have limited this study.