Real Estate Development Feasibility Studies

The importance of performing the Real estate feasibility study

Real estate development projects, large or small, have a number of common features such as taking considerable time from initiation till the point where they function as earning assets, very large outlay relatively with the income/profit initially generated by the project and; risks associated with project funding and finance costs(i.e. risk of financiers failure to fund the project), completion delay, failure to meet quality standards, changes in construction costs and interest rates, and/or reduction in occupiers demand due to Social and technological changes.

 

Our real estate strategic advisory and financial feasibility studies are used by property developers and investors for various purposes including, Internal management decisions, to prove whether the assumptions in the development project are sound-based, determine the best feasible scheme, determine the price to be bid for a piece of land, determine the profit or loss the scheme will make (I.e., viable or not). Also, it helps developer/investor owns or has an option on a site and wish to determine the optimum use for it, and choose a location and identify an appropriate site and/or source finance on acceptable terms.

 

Identify an appropriate source finance

Generally speaking, a real estate development project can be funded by using either equity (i.e., developer’s own money, retained business profits in the forms of the forward funding, Joint venture, or Partnership) or; Debt (i.e., money borrowed from a third party, mainly come from banks, capital markets, clients, partners). How much should be borrowed and how much equity funding should be relied upon, depends on many factors such as interest rate and loan terms and conditions.

 Lenders primary task is to ensure a return on their loan that compensates them for their risk exposure. The risk evaluation from the lender point of view will be based on the possibility that the borrower/s inability to meet the agreed regular payments or/and pay back any money whatsoever and; assess the minimum amount the property could be sold if the borrower defaults.

 The banks’ criteria for making loans will vary depending on their operating policy and a wide range of unique factors including, the size, track record and history of the development company, the nature and development size; loan length and strength of the security being offered. In assessing the risk of corporate loans, the banks are concerned with financial strength, property assets value, track record and profits and cash-flow of the development company.

What are various types of Development appraisal during the project stages?

Initial viability study

  •  Test the viability of the proposed development / unlikely to contain any scheme design, just abroad outline or concept of the scheme. The appraise must make broad and general assumptions) 

Detailed final viability study 

  • This stage is based on the results of the later stage. This stage involves the employment of other consultants, land acquisition, the scheme design. The estimated components in this stage are more soundly based. The appraisal is more accurate, due to the increase of information. 

Project management monitoring studies

  • it involves using the final appraisal as a plan against which the real data (expenditures and receipts) is recorded. The purpose is to ensure that the project remains on track. 

 

Sensitivity analysis

Sensitivity analysis is used to assess the impact of changes of uncertainties (key input variables) on investment decisions (outputs). Also, the method identifies those critical elements which have the greatest impact on feasibility (Costs and returns) and allows them to be subjected to management scrutiny and, for defining mitigation measures or for at least further investigation.

 

Scenario testing (Scenario modelling)

The purpose of the method is to identify the worst-case and practical steps that could be taken to prevent that from happening. Scenario modelling can also be used to evaluate how different combinations of inputs, perhaps optimistic and pessimistic views of the economy, can affect the valuation. Using these risk analysis techniques in combination with the discounted cash flow technique permits the testing of the impact of different timings of events on the valuation more easily than within the basic residual framework.

Key factors impact on Real estate development success 

The marketability and demand of any potential development are impacted by various factors such as; Building layouts and; specifications, investors’ requirements, location, access and the availability of transport routes, car parking facilities, amenities attractive to tenants and/or potential purchasers, the scale of the development in terms of sale or lettable packages, development form; and market supply, including actual or proposed competing developments.