Short on time? Here’s the summary:
- Fundamental drivers of the property market as it relates to the project
- Financial feasibility of the project
- Project delivery and execution capability
There are six fundamental drivers of the property market:
- Economics & employment — Income drives the volume of property investment and the ability to meet rental payments, so it’s important to consider the employment dynamics of an area, how many new jobs are being created and what the profile of those jobs are.
- Population growth & demographics — Certain demographics will be more inclined to invest in property or to be solid long term renters, so it’s important to consider how many people are coming in and going out of the area, and what types of people they are. For example, young couples, baby boomers, university students.
- Infrastructure investment & government spending — These things make suburbs more attractive and increase property valuations and rents, so it’s important to consider whether things like new roads, hospitals, transportation projects, schools and universities are being built in the area.
- Supply and demand — It’s important to consider how many new dwellings are being constructed in the area and what the underlying demand is. One measure of this is vacancy rates. If vacancy rates are less that 3%, it tells us that the property market is under supplied OR demand exceeds supply, which is a good sign for new development projects.
- Location & lifestyle factors — These things make suburbs more attractive and increase property valuations and rents, so it’s important to consider the proximity of parks, beaches, shopping centres, nightlife and cafe precincts to the project.
- Affordability & the availability of money — When considering affordability, the question is whether the dwellings that are proposed to be built are affordable for the demographic in the area. The final question is whether home loans and investment loans are readily available to buyers, whether interest rates are accessible or prohibitive, and whether there are government concessions and subsidies available which help to increase buyer demand.
If the physical project rates strongly on the fundamental property drivers, we then assess the financial feasibility of the project to determine whether:
- On the costs side, all of the relevant costs have been properly budgeted, the right level of contingency has been allowed and there is a fixed price building contract.
- On the revenue side, the forecast sales prices are realistic, the forecast sales rates are achievable and that the project IRR is above an acceptable threshold.
A property development project goes through the various stages of development, each of which brings a different set of risks which need to be managed by a capable team. As the project goes through these stages, risk reduces and value increases:
- At the Concept & Approvals Stage, the key risk is whether permits and approvals will be granted and if so, what will the council allow the developer to build. Securing approvals is a key value inflection point, because it provides certainty about what can be built and allows a detailed financial forecast to be developed.
- At the Presale Stage, the key risk is whether the developer can secure sufficient pre-sales, which secures future revenues and ensures construction finance can be repaid.
- At the Project Delivery Stage, the key risk is whether the builder can deliver the project on time and on budget. So having a reputable, well-funded builder is the key thing to check here. Risks such as inclement weather and industrial relations disputes can also delay projects, but these are outside the control of all parties and are inherent in all property development projects.