5 Things novice Property developers might overlook while doing feasibility studies:

Property developers need many arms to carryout many tasks before and during a project, which might include project management, accounting, marketing, and people management. But first thing is to determine whether a project is feasible or not before starting this journey.

A good feasibility study is way to go, to determine the business case for a project. There are many kinds of feasibilities that are undertaken at different stages of the project. This article is not intended for learning how to do a feasibility rather to inform about common mistakes that can happen while doing feasibility studies.

1.   Sales Price:

Sales price determines the revenue of a project which in return determine your profit margin. But sales price assumption can go wrong in many ways. Most developers use data insight tools like RP Data and price finder to determine the sales price of the product they are developing. Some may even ask their regular agents for sales comparable.

This data could be reliable in most cases, but there are certain factors that will skew your feasibility by using this sales data blindly.

 For example, if you are developing a project with a high quality specifications, but your sales assumptions are based on a product which is completely different from your intended quality, lower sales price will mislead you to assume lower revenue. This could make you lose many opportunities.

At the same time if your intention is to build low specifications product with standard appliances and finishes, but your comparable is a higher specification product with quality appliances and finishes, even though with similar area and same number of beds & baths would lead to incorrect revenue assumptions. This could affect your profit margin targets and might even cause losses.

The best way to do the assume the sales price is to first identify your target market and determine the kind of quality product you intend to develop and then find the sales comparable which can match with your quality and specifications.

2.  Over pricing the Construction costs:

Most people argue that higher sales price assumptions would balance the overpriced construction costs in general. But it may not be the case every time. Most common source for construction costs are Cordell or Rawlinson’s construction cost guide in Australia. These costs might give you a near idea what it will cost you to build per square meter basis. But one might need technical skills to completely understand these costs and apply them in their feasibility studies. Experienced developers have these costs readily in hand from previous projects. For a novice developer, it is advised to take the help of a good builder to give a basic idea on costs of your build quality and specifications.

3.  Omission of Common Areas & Balconies

While doing quick concept feasibility, most people consider the living areas and net sell-able areas for calculating costs. But they will miss the common areas, landscaping, and balconies. These things do cost lot of money to build but does not pay. There are regulations to provide different minimum sized balconies for different types of apartments.

This is one of the most overlooked cost which could lead to project failure, especially during land acquisition stages. It is advised to check local regulations regarding these provisions and include in the feasibility studies.

4.  Construction time & Development margin considerations

Most development project will take from a year to three years. The construction time will determine whether the profit margin is suitable to proceed with the project.

Different investors or developers have different risk profile and profit margins.

For example, for a project with 2 years construction time, 15-20% margin can work as the developer will get around 7.5-10% yield per year. But if the construction takes 3 years, it might not be feasible. At the same time one can go ahead with a project with lower profit margins if the project takes shorter time.

That is why it is advised that every developer should talk to consultants like Planners, Architects, and construction managers to understand how much time it will actually take to get complete approvals, to finish the construction and settle.

5.    GST implications

Most common mistake novice developers do when doing feasibility studies is not considering GST. Especially the construction costs specified in Rawlinson’s & other cost guides are exclusive of GST, which could lead to lower construction cost assumptions (You need to add 1/11th of the cost to get GST in Australia).

But all the sales prices are Inclusive of GST. You need to subtract the GST on sales (In Australia it is 1/10th of the sales price). If your feasibility had Sales revenue inclusive of GST and Construction cost exclusive of GST, the profit margin would be inaccurate. Even though you can claim back the GST during construction, you might end up paying more GST at the end of sales as your sales revenue is higher and your cash flow assumptions could go wrong.

For accurate information on GST implications it is advised to contact an accountant.

These are some of the most common mistakes or omissions that can happen while doing feasibility studies for a speculative property development. Property Development is a very exciting experience and journey with financial risks attached to it. It is always good to get self-educated in all disciplines of property development to achieve success.