With a growing housing affordability crisis in Victoria, ensuring a steady pipeline of property development projects is essential to tackling the issue long term. Property development projects can be large and complex, requiring in-depth planning even before the foundation is laid. Enter the feasibility study, an essential first step and a crucial tool for project evaluation and management. It ensures that projects are viable, technically sound and financially practical, serving as the foundation for successful development. Given the intricacies involved and the substantial financial stakes, skipping this step can result in substantial financial losses and unforeseen challenges.
A feasibility study is a comprehensive assessment carried out at the inception of a property development project. It evaluates the project’s viability across several key areas, including its technical aspects, financial potential, legal obligations and operational requirements. This evaluation process is designed to identify the opportunities and potential risks surrounding the project, the necessary resources and the prospects for success. Click here to view an example feasibility template.
• Risk Management: Property development is fraught with uncertainties that can put a project at risk. A feasibility study identifies potential problems such as increasing construction costs and permit requirements before they become actual issues, allowing developers to strategize effectively to mitigate these risks.
• Informed Decision Making: In real estate development, accurate information is crucial, and making decisions based on flawed or inadequate data can lead to severe losses. Feasibility studies ensure that decisions are informed by reliable and regulated data sources, safeguarding the project from potential pitfalls.
• Financial Planning and Cost Management: These studies provide a clear financial forecast, helping to prevent cost overruns and ensure that the project is financially viable. By detailing the capital requirements and revenue projections, feasibility studies play a pivotal role in securing funding and managing expenses effectively.
• Legal and Regulatory Compliance: Ensuring that a project complies with all legal requirements is essential. Feasibility studies examine these aspects thoroughly, protecting developers from legal repercussions and ensuring that the project advances without regulatory headaches.
• Maximising Site Potential: A feasibility study evaluates a site’s unique characteristics and development potential, aiming to maximise profitability and ensure the most effective use of resources.
Feasibility studies in property development follow a structured three-tier process, each addressing different levels of project evaluation:
1. High-Level Feasibility
This preliminary phase assesses whether the site is suitable for the intended development. It provides an initial overview of the site’s potential and constraints, setting the stage for deeper investigation.
2. Static Feasibility
During this stage, the analysis becomes more refined. Developers consult with architects, planners and other experts to gain a detailed understanding of the site. This phase transitions from hypothetical assessments to fact-based evaluations, essential for detailed planning and design.
3. Cashflow Feasibility
The final phase focuses on the financial specifics of the project, including detailed cost analysis, revenue potential and funding strategies. It involves comprehensive data collection from consultants to finalise investment decisions, ensuring the project’s financial sustainability.
Feasibility studies are a fundamental component in the lifecycle of property development projects. They provide a critical foundation for informed decision making, strategic planning and risk management. By thoroughly assessing every aspect of a project, from site suitability to financial implications, feasibility studies enable developers to proceed with confidence and clarity. Embarking on any property development project without conducting a thorough feasibility study not only increases risk but also significantly reduces the potential for success.
Image by StartupStockPhotos from Pixabay
Andy Wong is a co-founder at PropertySensor and has more than a decade of experience diving into Finance and Construction Lending while working at Payton Capital and Australian Securities Limited.