MODULE 4: Auditing Construction & Real Estate Industry PDF

MODULE 4 Auditing Construction and Real Estate Industry Overview: One successful business in the construction world is the real estate industry. This industry covers many aspects of the property such as development, leasing, appraisal, marketing, and management of c...

MODULE 4 Auditing Construction and Real Estate Industry Overview: One successful business in the construction world is the real estate industry. This industry covers many aspects of the property such as development, leasing, appraisal, marketing, and management of commercial, residential, agricultural, and industrial properties. The industry fluctuates depending on the economies but at the same time remains consistent since people always need homes and businesses need commercial space. While Covid-19 has thrown the Philippines’ economy into flux, early indications suggest that construction and real estate is one of the most resilient sectors and could provide a platform for national recovery. However, with construction projects delayed by lockdowns during the second quarter of 2020, and demand for office space and high-end residential developments weakened by mobility restrictions, the sector still faces headwinds. At the same time, the disrup tion of the pandemic is giving rise to new opportunities. For instance, with the pandemic inducing a significant shift towards working from home as companies adhere to social-distancing measures, co-working spaces are emerging as a solution for firms seeking to decentralize while ensuring a sound operating environment for employees. Agile real estate developers have the chance to establish a first-mover advantage and capitalize on emerging opportunities as tenants and buyers seek projects that meet the demands of the new normal. Module Objectives: Know the nature and background of the particular specialized industry; Learn the overview, statistics, and updates of the specialized industry in the Philippine setting; Identify the different audit considerations and trends for the industry. Nature and Background of Specialized Industry Construction. The construction industry comprises of building, alteration, and/or repair. Examples include residential construction, commercial construction, bridge erection, roadway paving, excavations, demolitions, and large scale painting jobs. Residential construction refers to the building or renovation dwellings. The vast majority of residential construction jobs are small renovations, such as addition of a room or renovation of a bathroom or kitchen. Commercial construction includes apartments, office and retail buildings, hotels, schools, public buildings, industrial and manufacturing buildings, highways and bridges, sewers, pipelines, power lines, power plants, and other civil engineering projects. Real estate is any real property consisting of land and improvements such as fixtures (i.e., access door, lighting, awnings, etc.), buildings, roads, structures, and even utility systems. Here are the four types of real estate: 1. Residential - This includes both new construction and resale. A common category of residential real estate is single-family homes. Other residential real estate’s include condominiums, co-ops, townhouses, triple-deckers, high-value homes, duplexes, quadplexes, vacation, and multi-generational homes. 2. Commercial - Included in this type of real estate are strip malls, shopping centers, educational and medical buildings, hotels, and offices. Apartments, although used for residences, are often considered commercial since they are owned to produce income. 3. Industrial - This kind of real estate includes manufacturing buildings and property, including warehouses. There can be various uses for industrial buildings such as research,  production, distribution, and storage of goods. However, buildings where goods are distributed, are considered as commercial real estate 4. Land - Land can either mean vacant land, ranches, or working farms. Subcategories of this kind of real estate include undeveloped, early development or reuse, subdivisions, and site assembly. How the Real Industry Works 1. Development Real estate development is the process of purchasing raw land, rezoning, renovation and construction of buildings, as well as sale or lease of finished products to end-users. Real estate developers end profit by adding value to the land such as creating buildings or improvements or rezoning and taking a risk in financing a project. 2. Sales and Marketing Firms that focus primarily on sales and marketing work with developers to sell buildings and units that they create. Commissions are earned by these firms for creating all marketing material and using sales agents to sell completed units. Sales and marketing firms focus more on new units. 3. Brokerage A brokerage is a firm with a team of real estate agents or realtors as employees. The real estate agents help in facilitating a transaction between buyers and sellers of property. One of their jobs is to represent either party and help them achieve the purchase or sale with the best possible team. 4. Real Estate Lending Lenders include banks, private lenders, credit unions, and government institutions. They play a huge role in the real estate industry since all properties and developments use debts to finance their business. 5. Property Management Property management firms play a role in helping real estate owners rent out the units in their buildings. Some of their jobs include collecting rent, fixing deficiencies, performing repairs, showing units, and managing the tenants. They charge a fee which is a percentage of the rent to property owners.  6. Professional services There are a variety of real estate professionals who work in the industry and help make it function. The most common examples (other than the ones listed above) are accountants, lawyers, interior designers, stagers, general contractors, construction workers, and tradespeople. Overview, Updates, Statistics of the Specialized Industry in the Philippines The construction sector is one of the important industries that the government has been focusing on since 2016. With the aim to build more infrastructure construction to help ease traffic and trade across all regions, 100 infrastructure flagship projects have been prepared by the public sector as of February 17, 2020. The majority of these developments would be enforced by the Department of Public Works and Highways and the Department of Transportation. The DPWH would manage 38 projects and 42 projects from DOTr. One of the big tickets in the government's infrastructure development plan is the Metro Manila Subway Project, which would be managed by the DOTr, which would cost around 357 billion Philippine pesos. Its targeted completion year is on 2025, and the construction would commence in six to eight months from February 2020. Other high-valued tickets in the pipeline that would begin construction in six to eight months are the North-South Commuter railway extensions (PNR North 2, PNR South commuter), PNR South long haul, Bataan-Cavite interlink bridge, Panay-Guimaras Negros bridge, Taguig integrated terminal exchange and the New Manila International Airport. The" Build Build Build" program which significantly introduces the administration's intent to propel the country in achieving more developed and connected life among Filipinos, have so far increased the number of licenses for building contractors in the Philippines. In 2018, approximately 4.8 thousand permits were issued for general engineering contractors, around three thousand for general building, nearly two thousand for trade contractors, and around one thousand for specialty contractors, respectively. In addition, the number of building permits has been on the rise since 2016. For non-residential building permits alone, there were approximately 24.4 thousand permit issuances in 2018 compared to only 17.9 thousand licenses in 2016.  Within the private sector, the motivation to construct buildings is driven not only by the "Build build build" program but also by the income potential in the real estate business. Private construction caters both to residential and non-residential unit consumers. Different business sectors occupy a large amount of office space in the country, especially in the National Capital Region for their operations. Across the region, the Philippine Offshore Gaming Operators (POGO) occupied about 738 thousand square meters of office space while businesses engaged in information technology occupied around 573 thousand square meters. Other companies not belonging to these categories occupied only 379 thousand square meters. In terms of residential units' supply, the number of condominium units within the major districts of Metro Manila has shown a different kind of appetite on property investments. At the end of 2018, the supply of condominium units among the highly urbanized cities of Fort Bonifacio, Makati, Bay area, and the Ortigas Center were higher compared to Alabang, Araneta Center and Rockwell Center. The Philippines real estate market has been penetrated with high investments arising from the presence of both, domestic and international players, in the market. The Philippines real estate market is expected to post revenues of USD XX billion by 2020 due to the increasing urbanization and expansion in the real estate construction projects. The demand is expected to rise due to growth in the number of multinational companies and a number of BPO’s. The real estate market in Philippines is poised for growth at an estimated CAGR of XX.X% over the forecast period, from 2016 to 2021. Drivers A growth in the number of multinational companies and BPO’s, increasing urbanization and expansion in the real estate construction projects are the major drivers for the real estate sector in the Philippines. More number of Filipinos are moving to urban areas and are adopting better ways of living and the difference between the rich and the poor is on the decline leading to growth in the middle-class population that can afford to buy properties. Moreover, a large chunk of the population works in the large number of BPO’s and MNCs, which are expected to rise, leading to an increase in the demand for commercial spaces. Restraints and Challenges Currently, it is important for the real estate developers to meet the growing demand for properties in the Philippines. It is necessary to solve the problem of housing backlog in the market. Moreover, the major challenge the government faces is to boost the infrastructure spending and provide more incentives to the real estate developers so that they shift their focus towards socialized housing. The fear of property bubble has been around for some time now and has limited the growth of the market. Opportunities Investing in real estate is considered as one of the best investments, globally. The size and scale of the real estate market make it an attractive and lucrative market for many investors, who can invest directly in physical real estate or choose to invest indirectly through managed funds. Investing directly in real estate involves purchasing residential or commercial properties to generate income or for resale at a future time. The Philippines, being a developing economy, will never be short of opportunities and in addition, more people are adopting urban lifestyles.