Some Property Developments are Stillborn – Here are 7 deadly sins some property developers commit that ensure their project doesn’t get out of the ground
By Adrian Stagg
All Property Developments involve risk, but it is the Developers that correctly identify opportunities and measure that risk and associated costs that are most successful.
A successful Property Developer needs many talents, one of which is a thorough understanding of the market they are playing in and a sharp vision and intricate understanding of all elements of that marketplace to match it. Successful property development involves bringing a project to market at a cost price that that is below what it will either sell for or value at and that has market appeal – in other words – one that people want to acquire that shows a profit.
As markets pass the peak, or at least appear to, and uncertainty emerges, the importance of correctly navigating the way through all the facets involved in property development becomes paramount to avoid loss or financial ruin.
So, what does one do? Sail on regardless or batten down the hatches? The answer will vary from one developer to another, however if you want to ‘sail on’ here are 7 issues we often come across that cause projects to falter and that you should be giving close attention to if you want to succeed in Property Development.
Property Developments Finance:
In our experience, almost all property Developers seek to leverage their own funds through obtaining finance and these days it is possibly the number one reason that many projects come to a grinding halt. When you consider that the pressures of funding restrictions impact both developers and purchasers alike, this is even more important than one might first imagine.
- Preparing your case: Financing the property developments process is becoming harder and much more onerous. Developers must be well prepared to ensure that when their deal is delivered to a potential financier that all the ‘boxes-are-ticked’. Consider engaging an experienced accountant or finance consultant early in this process so that your funding proposal meets with and answers the basic questions that your financier seeks to ask. These may not always be evident to you as you are looking at the project from your distinct perspective.
- Objectives: This raises a common mistake many property developers make which is misunderstanding your lender’s objectives with your own objectives. Yes, you may meet your lender’s stated objectives but rarely do they always state all their objectives and often these objectives can change over time, sometimes without warning. Those changes may be a result of changing market conditions or a change in the lenders appetite for such deals or a change in legislation to name just a few. So, build in a capacity and margin for change, and be flexible as what may not suit one lender may be another’s bread and butter. Don’t despair at the first knock back – you always have options.
- Pre-sales Vs Interest rate: Don’t assume that because one lender requires pre-sales that all lenders require them. Pre-sales can be very difficult and overly expensive to obtain and sometimes it is worthwhile considering a lender who requires a higher interest rate but no or fewer pre-sales, the cost of which can destroy the bottom line, not to mention the time lost obtaining them. Therefore, be prepared to consider non-bank lenders as our finance markets have changed greatly in recent years and continue to do so. Don’t forget however that all lenders will be looking for an acceptable return based on their perceived risk and will ask themselves the question “How much and how easily can we quit this for if things go wrong?”
- Equity and cash flow: This is an area that so many developers give little heed to and therefore frequently get wrong. Too often they try to maximise borrowings against the site at the outset, sometimes by giving the lenders wrong or inappropriate information. What they should be focused on is double barrelled. How much equity do I need a) to complete the project and b) at each stage of the project. A financier’s appetite to lend may change at various stages of a project. Proper consideration of the cash flow requirements all through the project is a must for success!
Value – Sales – Market:
- Valuations: Understand that development funders [as well as your buyer’s financiers] will rely heavily on valuations. Ignore them at your peril! Don’t confuse advertised sale prices or building costs with value. Don’t ignore the advice of Valuers and other property development professionals such as Project Managers and Quantity Surveyors because your lenders won’t. It’s therefore wise to engage with such professionals for advice no matter what stage of the development cycle. There is so much happening that it can be hard to be across everything.
- Market Knowledge: How many times have you heard this? Do your Due Diligence! Understanding the market is critical in ensuring all elements are finely tuned to capture the attention and confidence of your key buyer market (i.e., product mix, size, layout, branding, finishes etc) but many ‘would be’ property developers fall woefully short. Who are your market? Are they owner occupiers, downsizers, investors, first home buyers to name a few obvious ones? If so does your proposed product suit or have you simply crammed as many ‘Thingamy’s’ onto the site?
- Lack of strategy: This complements market knowledge. It is important that developers [and their sales agents] are intimately aware of what competing projects are doing. Developers and agents also need to keep abreast of information regarding any key local infrastructure works as well as project specific information to be able to firstly engage with buyers but also to give confidence in purchasing. As developer, you need to research this and make it available – include it in your branding, pricing and marketing – yes allow a healthy budget for that – to build interest and momentum in the project. Sales velocity is frequently overlooked when deliberating a project’s feasibility and therefore profitability. Holding finished product can be an expensive and debilitating process so accurate pricing is critical.
Adrian has had extensive ‘hands on’ experience in real estate spanning some 40+ years in South East Queensland. In that time, he has been a property developer, project marketer, statewide house builder, local real estate agent, enthusiastic renovator and of course home owner. His projects have varied from smaller easily managed ones through to those like ‘Hillhaven’, a 16-townhouse project in Highgate Hill, Brisbane and ‘Kondalilla Grove’ an 18-lot rural residential subdivision on the Sunshine Coast. These days he’s confined to smaller projects and consulting to others through SCM Projects – “It’s no exaggeration to say that ill-informed, wrong choices made when it comes to developing property can be very expensive – even bankrupt you – whereas correct choices can be extremely rewarding”. Adrian was originally a Sydney boy but headed north in the early 1970’s chasing his dreams & warmer weather.