Development feasibility study is critical to any development project to determine the level of profit the project can generate.
Development feasibility study is divided into three stages - first being the groundwork stage of collecting and analysing the requisite data on the subject. The second being the structuring of the development process and the third is the analysis of the final outcome.
The more accurate and detailed the Development Feasibility Study is, the higher the success expectancy of the development project.
Defining the Development Feasibility Study
In a property development, acquisition, analysis, and feasibility study of site is one thing. However, this is not enough to ensure a successful development. For a development to be successful, it is important to have an accurately detailed development feasibility study in place.
It collates all data on the available resources, on site feasibility, on costs and budgets, on the expected output, and outlines a detailed development plan to be set into motion.
A good development feasibility study lays out a structure that ensures smooth execution of the project, minimizes organizational chaos, reduces the chances of mismanagement, and ensures the scheduled completion of the project. A Development Feasibility Study ensures that the project achieves its target outcome. It analyses all areas of the property project to ensure that the project is commercially viable to its fullest potential.
Importance of A Development Feasibility Study
Development feasibility study is extremely critical to the success of the project. The idea of any project plan is to ensure that there is an increase in the profits and losses are cut down. A development feasibility study research into all aspects of property development and available data to give the developer a comprehensive idea of how the project will pan out in the real time dynamics.
This naturally boosts the viability and credibility of the project and empowers the developer to move forward with confidence.
Also Read: What is a property feasibility study?
Aim and Objective of Development Feasibility Study
When dealing with property matters, a tiny miscalculation or inaccuracy of numbers can result in huge and devastating losses. A development feasibility study is aimed at ensuring that the project plan is as close to reality as possible and achieves its target outcome. The Development Feasibility Study determines that the project is commercially viable to its highest potential.
The objective of the Development Feasibility Study is to:
- Expose the weaknesses and the gaps in a project development process and throw light upon the strong points of the project.
- Interpret the data and offer development alternatives that enhance the commercial viability and success of the project.
- Offer accurate numbers and deductions that give the developer a clear and real picture, thereby help in the decision making process.
- Ascertain that numbers add up by ensuring that values on paper add up and align with their real time counterparts, i.e. values in reality.
- Bring focus on potential risks and problems that may be encountered during the development process, which may slow down the process or cause irrevocable loss or damage to the project.
- Ascertain whether the project is practically and commercially viable and equipped to bring in the targeted profits on its completion.
- Check and determine all data on site to ensure that the development is suited for the site, and as such headed for a successful output.
- Check and Test the accuracy of the preliminary feasibility study and finally conclude if the project is worth moving forward with or not.
KEY COMPONENTS OF A DEVELOPMENT FEASIBILITY STUDY
A good Development Feasibility Study is crucial for the success of a property development project. To write a comprehensive and accurate Development Feasibility Study, the key components, or segments, must be adequately covered and accurately addressed.
The key components of a Development Feasibility Study are:
Accurate Fact Analysis of the Proposed Site
In theory, all ideas are amazing. Independently a site and a project plan may be excellent. But together they may not support each other. Hence it is very important to ascertain that the selected site is suited for the proposed property development. Also, the proposed property development is approved of and permitted on the selected site or location.
Research and Study of the Site Area and Location
The best of the properties on the most amazing sites, become white elephants and incur heavy maintenance costs without reaping in good profits. This is because the location or area of the site does not offer good commercial prospects. A proper feasibility study of the area and its future growth and commercial prospects help ascertain a realistic valuation of the proposed development project.
Assessment of Property
Commercial viability of a property is nothing but the profits it brings in on completion. Profits are based on the cost of development and the value returns at the completion of the project. A Development Feasibility Study provides an accurate assessment of the property with regard to site, location, development costs, revenue returns, and maintenance costs, to determine the value worth of investment of time, energy and finances, in the proposed property development.
Assessment of Cost Estimates
It is important to have an accurate and detailed assessment of cost of development. The Development Feasibility Study provides a detailed analysis of costs incurred in each phase and segment of property development. This enables the developer to accurately allocate funds and arrange finances.
The Development Feasibility Study must carry a detailed and accurate review of cost estimates and outlays on the following:
- Acquisition costs
- Development Approvals
- Construction costs
- Sealing & Titles expense
- Selling Costs
Capital Investment and Fund Investment
There is no project that can move forward without adequate and a smooth flow of capital. Adequate funds, available and properly allocated, are a prerequisite for success. A Development Feasibility Study details the cash inflow for the project. It outlines the loans, investors, capital investments, fund movements, and all documentation and legalities around it. It gives insight on the total investment needed for the project, and the source of availing it.
The Development Feasibility Study provides a comprehensive analysis on profit forecasts. The profit forecasts in property development, applicable for all “sell models” are calculated and presented as one of the three stated below -
- Return on Investment (ROI)
- Return on Invested Capital (ROIC)
- Internal Rate of Return (IRR)
Due Diligence Report
A well-researched Due Diligence report that gives a comprehensive insight into the complete property development project is a crucial component of the Development Feasibility Study.
The Due Diligence Report must contain accurate facts and data on -
- Audits and all financial records,
- Project capabilities
- Site capabilities and approvals
- Developed Property capabilities and commercial viabilities
- Legal and administrative allowances and approvals, zoning laws etc.
The Due Diligence Report must also contain inputs from other departments and professionals like factual inputs from –
- Consulting Architects and draftsperson on the size and structure of the property development project.
- Local authorities like Town Planning Body on development approvals
- Legal team on legalities regarding Titles, Contract Details, Zoning Laws etc.
- Marketing Department on prices, demands and services prevalent in the area selected for the project.
- Financiers and Investors, affirming approval of the project feasibility and confirming their commitment to finance the project.
- Research with regard to Size and Style of Development.
- Titles Department on any easements, caveats or encumbrances
- Council Research with regard to zoning laws, services and utilities like water, sewage, electricity etc.
- Company or Vendor office with regard to the authentication of the identity and the financial status and capability of the vendor of the site proposed in the project.
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For any project to stand in the market, it is important that it aligns with the demands and is a cut above the rivals. The Development Feasibility Study covers a comparative research and analysis on the market with regard to revenue forecast, design briefs, and other demands and needs of the market that may give the project an advantage.
A Market Research in a Development Feasibility Study includes an area specific profile on:
- Market trends
- Growth patterns and projections
- Age of the demographic segment
- Target profile and market
- Income profile of the area
- Market Size
- Market development graph of the area
The success of a development project relies heavily on the quality of the technical input. The Development Feasibility Study provides investigation and analytical brief on -
- Engineering profile
- Geotechnical conditions
- Site geography and topography
- Civil dependants
A good Development Feasibility Study profile typically includes an accurate and exacting financial analysis. This is the backbone of the project. This includes –
- Revenue profile
- Proforma statement
- Budget costs and expenses
- Operation costs and projections
- Profit and loss
- Purchase details – this includes
- Price of purchase
- Date of Purchase and Settlement
- Stamp Duty
- Mortgage details
- Project Equity – this determines
- Required size of borrowings
- Interest payable
- Finance Establishment Fee (in percentage part or flat fee)
- Legal Expense Profile — this includes expense incurred on legal consultancy, conveyances, documentations etc. It may be in percentage part or a flat fee
- Expense on Professionals – this includes costs and expense on consultants and professionals like
- Town planners
- Project Managers
- Construction Cost Details- this is the overall cost of the development of the project from scratch to finish. These costing details and profiling of construction costs is included in all stages of feasibility study and are spread over the entire life and duration of the project.
- Rates and taxes- these are self-populating values that are derived from the property values that are subject to market fluctuations.
- Contingency Allowance- a Development Feasibility Study must profile a contingency allowance to ensure smooth operations.
- Revenue Earned – this is a profile of income from sales and rentals.
You may also like to read the post What is a feasibility study?
Benefits of Development Feasibility Study
Development Feasibility Study is the backbone of a property development project. It empowers both, the developer and the project with accurate and exacting analysis, thereby closing in the gap between theory and practical application, and makes the project credible.
A Development Feasibility Study benefits the project as it-
- Tests the Concept before it rolls on to the field.
- Provides accurate real time facts that make the project practically viable.
- Removes hiccups and ensures smooth operations.
- Provides accurate and exacting financial data and thus minimises or removes the risk of debilitating losses.
- Boosts the confidence of the developer.
- Makes the entire project presentable, credible, and authentic for investors and banks.
- Ensures a hassle-free successful culmination of the project.
The most important criteria that ensures the success of a property development project is that the “Numbers Must Stack Up”. There should not be an unexplainable gap in number values and statistics. Also the gap between theory and practical application must be covered to the maximum to prevent losses and risks that may damage the project. A Development Feasibility Study is that critical bridge between concept and execution that ensures that the Developer’s Concept successfully manifests into reality.
You should also explore below external contents on the development feasibility study:
- Early Feasibility Studies - mdic.org
- Feasibility Studies: An Overview - areadevelopment.com
- Common Feasibility Study Mistakes - groundfloorpartners.com
- How to find Net Present Value - sapling.com
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