The Three Levels of Feasibility for a Property Development

You’ll conduct three levels of feasibility before making a property acquisition. Here, Steve Chandler discusses those levels in detail so you know what they contain.

Feasibility is one of the fundamental facets of property development.

Simply put, you need to know how much money you’re going to make from your development. The more detailed your feasibility study, the clearer the picture you paint in this regard.

This means you have to look into several areas before committing to a purchase. You need to know about the demand for your proposed development, what your revenues will be and the costs involved. Furthermore, you’ve got to consider potential profits and any restrictions you’ll have over the development.

With the Property Development Institute, Steve Chandler highlights three levels of feasibility:

1. High-Level
2. Static
3. Cashflow

You’ll conduct these at various stages of the proposal process. Each makes use of the information you have at a certain point in time to determine if a site’s feasible. You must also conduct each before committing to a purchase.

This article examines these three levels in more detail so that you know how to conduct each study.

Level #1 – High-Level Feasibility

This is the very first feasibility you’ll use when you’re considering to acquire a site.

In this case, you’ve found a site that you like the look of. You feel that it has some potential and you may already have a few ideas in mind.

With this feasibility, you’re considering whether those ideas could work on a fundamental level. There’s a simple question that you’re looking to answer:

Is this site suitable for development?

You’ll examine the site’s attributes and constraints. At this stage, you’re unlikely to call on the services of any consultants to help you with this. You’ll bring them in later. At this stage, you’re just creating a single-page document that covers the basics. Do not make any decisions based on this document as it’s usually inaccurate.

It’s very important to remember that this stage is just your start. It’s not suitable for forming your full opinion on the viability of a project.

Usually, you’ll make assumptions here regarding things like height and maximum floor space. You’ll consider the sort of properties that you could develop on the site. Furthermore, you may conduct your own analysis into things like flora and fauna.

You’re creating a foundation for further refinement at the later levels of feasibility. If the site isn’t checking all of the boxes at this stage, that’s a good indicator that you should walk away.

Level #2 – Static Feasibility

This is also a one-page document. However, it contains a lot more detail than you’ll find in a high-level feasibility study.

At this stage, you’re using data that you’ve acquired thanks to software and consultants. Your architect has likely completed your concept and your town planner’s offered more information about the site. You may have had a survey conducted so you know what type of development the land’s most suitable for.

You’ll also have environmental consultants. They inform you about issues relating to contaminants, flora, fauna, and heritage.

The concept you had at the high-level stage will likely get amended several times as this information comes in.

At this level, you’re basing all of your assumptions on facts. However, it’s important to understand that these are still relatively high-level facts. There’s still room for error at this stage. As a result, you should think of this as building the shell on top of the foundation you laid with the high-level feasibility.

You’re still making some assumptions at this stage, particularly in regards to revenue, time and cost.

As a result, you shouldn’t make a purchasing decision based on this level of feasibility. That’s where the final level comes in.

Level #3 – Cashflow Feasibility

You’ll conduct this feasibility just before you commit to making the purchase. At this point, you’ve likely negotiated a price based on what your previous studies showed you. There’s essentially an agreement in principle in place. However, you haven’t signed on the dotted line just yet.

With this feasibility, you’re putting every bit of data that you and your consultants collect into the study. At this stage, you’ll confront issues such as revenue, time and cost.

For example, let’s say you’re going to develop residential apartments.

You may have an average figure for the value of each apartment or the value per square metre. Or, you may be able to create a more detailed valuation for each individual apartment you plan on developing.

It all depends on the amount of information that you gather for this final level. The more data that you put in at this level, the more accurate the cashflow feasibility becomes.

This level also enables you to run tests based on different sensitivities. With your numbers in place, you can conduct a sensitivity analysis to determine what happens if the project runs over time. You can look into things like changes in costs and revenue and how they may impact the project.

You’ll also look at fees that relate to the project, such as any fees related to getting finance. Information about interest rates, loan terms, and conditions your lender places on you go here.

In the end, you’ll have a clear idea of how much money’s going out and how much you anticipate bringing in. You should also be able to see how various issues may affect the project’s progress and viability.

You may also consider things like your exit strategy at this stage. Which strategy would you prefer and what are your alternatives if that first choice doesn’t work out? What impact does going with Plan B have on your projections?

Your cashflow feasibility aims to answer these questions as accurately as possible.

Go Through All Three Levels Before You Commit

The point of these three levels of feasibility analysis is that you have checks in place at all stages of the acquisition process.

Your high-level feasibility confirms that a site’s viable based on your assumptions. The static feasibility gives you more data and paints a more accurate picture.

Finally, the cashflow feasibility gets into the nuts and bolts in terms of whether the project’s going to generate a profit.

Archistar can help you conduct your feasibility study. Our platform uses data from CoreLogic and Cordell to allow you to assess sites almost instantly. And if you prefer to use your own numbers Archistar allows you to make changes.

Do you want to find out more? Book your demo today to see the power that Archistar puts at your fingertips.

This content comes courtesy of Steven Chandler of the Property Development Institute. Steve Chandler is a third generation property developer with over 35 years’ experience. He is a lecturer at two of Australia’s most recognised universities and travels Australia delivering property development training at introductory and advanced levels. Steve has also authored a number of books on building and property development.