Property Development-is it still possible

What is Property Development?

Property development involves the purchase of land with the intent to sell the land for profit after changing, enhancing or intensifying the land’s use and occupation by building on the land, for example:

• Residential dwellings, such as homes, units or townhouses;
• Factories and warehouses;
• Offices or retail premises, or
• Subdividing the land for sale or construction.

Property development involves the combination of various inputs to achieve an output or product, which is a change of land use, a new or altered building that combines land, labour, materials and finance.

Critical Success Factors

The critical element is the identification, evaluation and acquisition of the most suitable parcel of land underpinned by a detailed investigation as to existing infrastructure, design concepts, costings, location, building requirements and obligations, labour, funding, taxation and legal requirements, the ability to obtain professional support services and having a plan on the future management or direction of the development after completion. In addition, it is necessary to know the environmental, political, social and economic forces that can affect success.

Knowledge and experience

Knowledge and experience is a fundamental skillset required to understand the market, the length of time required to complete the project and how to manage the process of developing the land. Developments hold high level risks, which can be either profitable or a financial loss. It is likely that assumptions made at the start of the development will change during the development and by the time the project reaches completion and for the inexperienced, reliance on the wrong risk and financial assumptions can be fatal.

Stages of development

1. Identifying the parcel of land and evaluating the financial viability and the estimated value of the land with the completed development;
2. Purchase and all investigations, such as legal, environmental, contamination, allowed use for the proposed use by the developer, services and ability to use and connect to the services. The investigations should highlight the existence of underground problems such as geological faults, filled ground, together with the presence of any indigenous claims, underground services and storage tanks. A site survey establish the measurement and configuration of the land;
3. Design of the proposed construction and its costing, which will require funding for the purchase, holding costs and construction costs of the development. Lenders will require detailed plans and specifications, preliminary feasibilities and discounted cash flows, sales evidence and convincing evidence of the ability of the developer, and the soundness of the preparation and appraisal of the development. The designs should have detailed information to enable the quantity surveyor to prepare an initial cost estimate; which the developer needs to prepare the financial evaluation.
4. Legal issues and compliance for any development, which involves a change of use or a building operation, requires planning permission from the local planning authority before commencement this can take from 2 months for an uncontested application up to 12 months where there is strong opposition to the application. A detailed application will involve the submission to the planning authority of detailed drawings and information stating, means of access, design, use, external appearance and landscaping. Where permission is refused by the local planning authority the developer may appeal to VCAT. The developer will need to obtain many legal consents before being able to start, which include the right to alter or demolish; the diversion or closure of a right of way; agreements to secure the provision of the necessary services and infrastructure; and, in all cases where building operations are involved, building regulation approval.
5. Project management and construction starts after the developer has committed to the land and to the construction. The project manager must ensure that the development is completed within the time and budget set out in the evaluation, without comprising quality. The project manager and the developer must anticipate problems and make prompt informed decisions to minimize delays and extra costs.
6. A successful development is dependent on timely completion and either the ongoing property management of tenants or the sale of the land. This choice of which strategy to adopt should be done at the start of the development and during the evaluation stage when determining financial viability or by lenders placing conditions in their funding arrangements.

In the Best Interests of…

Anyone can become a developer, however, not everyone will be a successful developer. Those who have been interested in developing and have relied on knowledgeable and experienced advisors have been more successful than those that lacked those essential attributes.

Bearing in mind the high risks associated with these ventures anyone interested in developing property should seek out professional advice.