19 Apr Feasibility Studies – a starting off point
This week we were presented with a new scenario by a couple interested in embarking on their first development. We’ll call them John and Emily for the purposes of this article.
“Well, that’s nice”, you may be thinking, but what makes John and Emily stand out is the level of care and attention they have undertaken with their research into property development. They aren’t rushing in. They don’t presume to have all the answers. They are willing to listen, learn and ask for help.
When John and Emily first called through, they immediately said: “We’ve never done this before, we are learning as we go, and we don’t know what we don’t know.”
Wowsers. That’s a big statement to make, and they owned it.
We chatted for a while about their expectations, the research they had completed to date, and identified any friends or family who might be able to assist etc. Most of their research had been specifically around the property they wanted to develop, which is a great start. They had spoken with council to understand the zoning and how the block and the area fit in with the town plan moving forward, and the types of development they could undertake.
John and Emily knew there would be a builder, town planner and architect involved at least, but weren’t sure how to source one and what they should be asking of each. They weren’t in a rush, they wanted to take their time, learn and create a brilliant first project.
We talked with John and Emily about the importance of a feasibility document, something they could start completing now that would be built on as they progressed through the development process. The Feasibility Study and Analysis is the cornerstone of any property development. It is a living document that takes you through the stages of planning your development, through to completion of your development. By definition, it is an “assessment of the practicality of a proposed plan or method”.
We put John and Emily in touch with a few key people in our network, people we’ve worked with and who know their stuff. When they are ready, we’ll talk about finance and how to best structure their proposal.
We know they are on the right track and are excited for them as they undertake their first project.
So what is a feasibility study, and why do you need one?
A feasibility study (or feaso/’s, because I’m a lazy typist….), in its first iteration is a quick jotting down of numbers to see if, at a very high level, the project makes commercial sense.
Generally, a feaso takes into account the economic, technical, scheduling and legal factors, ensuring the project has some legs before any serious financial commitment is made.
A feaso helps:
- To understand all aspects of the project
- To create awareness of any potential problems that could occur throughout the project
- To determine if the project is viable and worth undertaking
Maintaining your feasibility study as an ongoing and living document helps to plan for and mitigate issues and losses along the way. A document that provides a real time update helps to keep contractors on time, allows for accurate scheduling and accommodates any dramatic changes to the market.
Your feasibility study should include the following:
Scope of work
Briefly, this is a who does what, when, for a specific end goal. The scope of work covers the timeline, deliverables, milestones and any reports that are required.
Market
Is there a market for your project? There is no point trying to develop a 300-residence apartment block in the back o’ Burke. The population doesn’t support it.
What is the industry like as a whole? Are there too many players causing a glut of what I’m trying to sell? Who am I competing with? What are they offering that is more/better/different/less than my offering?
Technical
What are the resources required to complete the project? Can you obtain them easily? Is there a backup option? At what cost?
Fees
What will be the total cost fee wise? You will need to factor in architects, council, QS, lending fees etc. Be really really clear and specific, you don’t want to go into your project with an unrealistic view on what this is going to cost.
Commercial
Am I going to make money off this? Once all is said and done, am I walking away with a profit? How much of my own money do I need to contribute? Where will the rest of the capital come from?
Full project life cycle/ecosystem
This is, in effect, a timeline of the project. What are the key milestones, when do they need to be met. It’s important to include your financial milestones in here too, things like pre-sales percentages to be met by specific dates to keep your sales team on top of it and your marketing costs constrained.
Constraints
Are there any restrictions we are working with? This could be things like a heritage overlay, council noise restrictions etc.
Control cost centre
Keep your costs an active part of your feaso. Update it regularly, keep it current. This will give you, at a glance, where things are at without you having to wait for your next QS report.
Team
Who is on my team? What are their contact details? Having an up to date contact list makes it easy for team members to communicate quickly and easily. Everyone knows who everyone is and what they are contributing to the project. Required staffing and an organisational chart to make it clear who the decision makers are and the parameters they can operate within.
What else can my feaso do?
Your feasibility study can assist you with information gathering and analysis in an organised and methodical fashion.
You can:
- Obtain feedback from stakeholders
- Analyze your data to make sure it has legs
- Conduct market research to ensure your project is meeting an actual need for your proposed demographic
- Write an organizational, operational, or a business plan
- Prepare a projected income statement
- Understanding your propensity for risk and making decisions about proceeding with the plan
- Identification of potential obstacles that may impede operations
When it’s all said and done….
You have to have a feaso. Taking the time to get it right will save you time and money in the long run. Being organised and prepared means a lender can make a quick decision about whether to lend to you, gives you comfort over the parameters of the project and clearly lays out who is responsible for what, every step of the way.
When you are ready, drop us a line [email protected] and we’ll help you source your funding.
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