Property feasibility study is a comprehensive analysis and review on all project-specific factors which can impact the viability of the project.
In the cut-throat competitive world of today, making an informed decision is the key to success and a protection against failure. This is even more so about property development.
Property is an expensive commodity. It is a lifetime investment. Slightest of errors can lead to big and debilitating losses.
Hence it is critical to do a complete and exhaustive groundwork and collect all relevant information and data from reliable and credible sources, on a property, before investing into it.
A Property Feasibility Study is the very foundation on which a stable project plan on property development can be built.
Defining Property Feasibility Study
A Property Feasibility Study is a comprehensive analysis and review on all project-specific issues that can deeply impact the project. The Property Feasibility Study helps to determine the feasibility graph of a property development project and ascertain if it is worth investing in or not.
It is a detailed research involving a study on planning, strategies, external and internal influences, legal components, site appraisal, costing and so on.
It brings in valuable and informed insight into the project plan, with the aim of strengthening the project.
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Why is Property Feasibility Study Critical to the Success of a Property Development Project?
A Property Feasibility Study is critical to the successful development of a property because it empowers the developer with valuable information that protects and prevents the developers from making uninformed choices that can be disastrous for the project.
It compiles critical information on the following aspects of property development:
- It determines the practical viability of a proposed property project or development.
- It evaluates the proposed property development project to determine its technical feasibility within the estimated budget.
- It ascertains whether the project will be profitable or not.
- The valuation report of the Property Feasibility Study helps to reduce financial risks, and gives important predictive analysis on the investment required.
- It determines a timeline schedule to ascertain the probable time duration of the development. This is an important consideration when applying for loan, or looking at collaborations, or managing labour and resource.
- It collates important legal and regulatory approvals to ensure that the project moves smoothly.
- It helps to identify any irregularities with regards to building costs.
- It reveals risk of over or under capitalisation
- It assesses environmental impact, like the geographical, socio-political, climate influences.
- It summarises the statutory and other such country specific or zonal rules and regulations, with regard to the property development.
- It collects Site appraisal details
- It determines the number of units that are available and the procurement options.
- It helps in planning out a good strategy of property investment.
Aim and Objective of Property Feasibility Study
The aim of a Property Feasibility Report is to provide a clear base of sound analysis to generate a good return on investment.
It collates all areas of property development. This in-depth study provides invaluable insight into:
- The type of property
- Location of the property
- The purpose of the property development, whether it is for rental or for sale
- The identity profile of the end user
- Scheduled completion of the project
- Sourcing of the required finance
- Profitability of the project
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Key Components of a Property Feasibility Study
A property feasibility study is an analytical research on all segments of property and property development. There are some key components that must be covered to prepare a good and comprehensive property feasibility study.
The key components of a property feasibility study are -
- Analytical Insight on Concept and Objectives
An insight into the overall concept and objectives of the entire project brings clarity and allows the developer to take the project forward with better management, less risks and hiccups and aim for higher profits.
- Market Study
Whether purchasing, selling, or investing, an in-depth analysis of the market and competitors helps to maximise the profits and minimise the failures.
- Estimation of Development Costs
The Financial aspect of the project is crucial to its success. The Project Development needs an input of resources and finances. Having a clear insight and information on the proposed development cost helps the developer to not only arrange the required resources and finances, but also modify or streamline the project better.
- Planning Permissions and Restrictions
In a society, every area or zone adheres to certain administrative norms of permissions and restrictions imposed on construction, development, sale, purchase, leasing out of property. Information on these Planning Permissions and Restrictions allows the developer to know how to structure the project and bring it to smooth completion.
- Statutory Requirements
Like Permissions and Restrictions, it is critical for the Property Feasibility Study to do the requisite research on Statutory Requirements of the area or zone where the property project is located. Taking the statutory requirements into consideration, helps the project to become more credible, stronger and increases its viability, giving the developer greater confidence.
- Environmental Impact
There is a natural, topographic, climactic and a socio-political environment that is unique to every area. Collectively it constitutes the Environment that influences the property development process. Property Feasibility Study provides crucial information on the Environmental Impact that can make or break the project.
- Site Appraisal
Site, undoubtedly is the most important aspect of the property development, because this is the place where the property is proposed to be constructed. Site appraisal with regard to its valuation, costing, viability, future prospects, amenities, accessibility, future area development, all of this and much more, needs to be understood and covered in the Property Feasibility Study.
- Procurement options
Having the information on the area and site is one thing, but procuring the site is another. A Property Feasibility Study must lay out a detailed step-wise plan on the process of procuring the property. In fact it must also lay out different procurement options for the developer to select from, or play around with, for the best outcome.
- Scheduling an Optimum Time Frame
Containing the entire project into an optimum, viable time frame gives a definiteness to the project. It helps the developer to structure the process, from start to finish, in a more definite and practical format, and allocate funds appropriately.
Benefits of Property Feasibility Study
A Property Feasibility Study is of great advantage to the Property Developer:
- Pre- Property Development Assessment - It provides a pre-property development assessment that helps to determine an approximate profit value and saves the developer from wasting time, efforts and money and resources.
- Concept Test - It helps to test the concept. Cost overruns cripple and debilitate a property development project. Property Feasibility Study allows the developer to cost analyse and make mistakes on paper, rather than on field where it can get crippling. And thus test the concept on paper.
- Confidence and Credibility – Property Feasibility Study increases the developer’s confidence in the project as it makes the project more credible and viable. A good Property Feasibility Study can even compensate for lack of on-field experience, because, if the concept is tested and there is a good demand for the product, success is guaranteed.
- Finance – Property Feasibility Study accurately defines the level of finance required, and for how long. Under capitalisation, as well as blockage in early cash flow are two primary causes of project failure. Property Feasibility Study enables the developer to not only be aware of their financial status accurately, but it also allows the developer to present their idea to bankers & potential investors, with greater power and confidence, to avail of loans and financial assistance, if need be.
Levels of Property Feasibility Study
A property feasibility study covers 3 crucial levels:
1. High-Level Property Feasibility Study
High-level property feasibility study provides insight on the suitability and viability graph of the proposed site, as to how suited the site is for the project.
It covers the basic information on the properties of the proposed site. It provides data on:
- Available floor space and height
- The type of property that can be developed
- Analyses on flora and fauna of the site area.
2. Static Property Feasibility Study
This is a more refined analyses with greater details. At this stage, involvement of professionals like architects, consultants, etc is brought in.
It covers surveys conducted to understand the property type suited for the proposed site, taking into consideration the input from environmental consultants on any potential issues.
3. Cashflow Property Feasibility Study
This is the stage which is conducted just before purchase. With the information from High-Level and Static Level Property Feasibility Study, the developer can negotiate a good price for the site.
Cashflow property feasibility study collates all the additional data collected from consultants. It addresses concerns like costs, time, and revenue. It helps run a sensitivity analyses to see how the project would behave in different situations, by accurately predicting the changes that may occur when cost and revenue changes, or if the project breaks cross the scheduled deadline.
It also takes into consideration other factors like fees, loan terms, and exit strategy.
Together, the 3 Levels of Property Feasibility Study empower the developer to confidently make the final decision.
Property Development Costs
Of all aspects of Property Feasibility Study, the segment that is the backbone of the analysis is the property development cost. Without this, the entire study is hollow.
There certain headers and guidelines under which the property development costs can be covered. In a nutshell, these are:
- Land Purchase & Acquisition Costs are costs that include costs of acquiring the development property or site, like land value, stamp duty, legal assistance and service costs, rates, and tax adjustments etc.
- Finance Costs can be in two parts, one for the development site and another for developing the site. Finance costs include application fees, establishment fees, bank valuations, and legal service costs, brokerage charge, and other interest charges.
- Professional Fees include all fees charged by consultants and professionals hired part time or full time in the project.
- Council Contributions are fees charged by Councils, like Development Approval or Planning Submission fees and building permit fees, development contributions, etc
- Utility Connection Fees are charges for connecting utilities to a development site, which includes supply of water, electricity, drainage, stormwater, telecommunication, and gas.
- Construction Costs are calculated based on the design or the size of the dwelling that is to be developed. Simply put, this is the cost of construction and must be real and accurate.
- Marketing or Selling Costs covers the brokerage charged by estate agents, to market or sell a property. By law, the commissions charged are negotiable.
- Insurance Cost is a necessary expense. Property development is full of risks, due to many people being involved. It is important to ensure that all parties, starting from consultants, developer’s own entity, professionals, builders, and their contractors have insurance to cover the project. A property developer is liable for insurance when the buildings are handed over. Insurance costs include public liability and insurances against fire, storms etc.
- Goods and Services Tax (GST) is a necessary expense, like insurance. When accounting for a property development project, BAS (Business Activity Statement) is filed monthly. This helps to claim tax credits monthly and it keeps the cash flow healthy. However, GST on the sales of the developed property is a compulsory charge at the end of the project.
- Contingency Costs cover cost overruns or challenges. It is a percentage of construction costs that a developer allows for to cover costs that were not taken into consideration.
- Income & Profit is the most important calculation for any business. Profit and Income is dependent upon the strategy to sell or hold the property.
- Rental Income comes into play in case the property is to be leased out. Rent is calculated as per the time duration of the lease.
- Gross Sales or Gross Realization Value (GRV) is the sum of cash received after the sale of all the suggested properties. This is a major component of income. GRV is what is left with after sale of all developed properties in the project. Banks use this value to calculate a percentage that they can safely lend against the project. The end sale value of the project is ascertained by the bank’s commercial valuation which is calculated on GRV.
A Property Feasibility Study is crucial to the success of the property development project. It is the blueprint of the project. It is important that the numbers provided by the property feasibility study Stack Up in the real time dynamics to ensure that the plan is moving as planned.
It is the backbone of a property development project.
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