Working for large corporates I learned fairly quickly that profit was the overarching objective in the development game. In fact the corporates would analyse and reanalyse again and again and then when they were ready to make a decision, given the length of time that had passed, they would reanalyse the reanalysis before the relevant credit committee would review the project.
With this process going on, one becomes very proficient at finding and putting together projects with strong commercial fundamentals, assessing project risk effectively and “selling” them to the credit committee so that the pipeline of work is kept full.
Once a project is underway, the project feasibility that was established in the initial phase becomes the budget that all decisions are measured against. I have seen many people struggle with this concept over the years thinking that a feasibility is a spread sheet and these are for propeller heads working in the back rooms. This couldn’t be further from the truth, it’s a vital day to day tool at the coal face
Since starting our consulting business in 2008, we have been fortunate to work with clients at all scales of the development industry. During this time, one of the most surprising trends that we have noticed is the way in which projects are conceived and then designed well before the real commerce is considered.
A typical method seems to be:
(1) find a site and offer just under what properties are selling for;
(2) talk to the town planner about how much building can fit on the site under the local plan;
(3) appoint an architect to start drawing the biggest building possible to fit into the envelope; and
(4) get a DA ready to lodge as soon as possible.
On many occasions we see this happening without any major review of the potential revenue that the project will achieve or the total development cost to deliver the proposed project.
Ask any property developer or investor what is their main objective in a property development or investment. In most cases it is to make a good return. There are secondary reasons such as delivering quality design, leaving a legacy or even social and community related objectives but profit is almost ways to overriding factor. This is even true for government led development where the private sector is often used as the vehicle to deliver the project and the government looks to participate in the profit of the venture.
Put simply, profitable projects get funded. Since the GFC funding is the biggest issue impacting on the ability to develop projects. Without commerce as the focus, funding will be difficult or impossible and unless your developing in a strongly rising market (unfortunately those days are gone for now) then the risk of losing this focus is a commercial disaster!
A tried and tested approach to development to maximise the potential to make a profit are:
- Find a site or a potential project that you think has merit
- Define the vision and scale of the project through sketches and a quick review of the town plan
- Develop a project feasibility using a tried and trusted standard model or template (such as Estate Master) or engage a development professional to assist. This will involve using high level numbers and inputs to determine a high level forecast of the project – and most of these are known or readily available pieces often published openly at no cost to the user
- Only once the commerce of the project has been confirmed and it appears to achieve the required financial targets, should an architect and other relevant consultants be engaged to commence design and to prepare a development application for lodgement.
The feasibility is a live tool that is more than a pile of numbers on a page. Managed well, this is a window into the commercial viability and health of the project and should always remain at the centre until the project is delivered and closed out.