Course: REM4 Real Estate Consulting.

Objective: To introduce to students with the basic knowledge on the Real Estate
Consulting practice and provides understanding on its role and its opportunity in the
industry.
Module: 1
Week: 3

PART II THE REAL ESTATE CONSULTING PRACTICE

Property Development Assessment

A Property Development Assessment is like a business plan. It helps you deconstruct
complex projects and execute them in a manageable and timely manner – with as few
surprises as possible.

Your plan will help you reduce risks, forecast the investment required, manage
timelines, get legal and regulatory approvals and prevent bottlenecks.
Just as a business plan plays a crucial role in getting various stakeholders „on-board‟
with a business‟ vision, so too will your Property Development Assessment and
Feasibility Study. From bankers to builders and beyond – their understanding and
support for your project will prove invaluable.

What’s In It For You?

Preparing a comprehensive study takes a considerable amount of time and effort, but
once completed, serves as a project guide, not only for the developer but also for the
development team.
In preparing the property development feasibility study you will gain the following
benefits:
 Preliminary property development feasibility study – This is the most important
aspect and it is imperative that you are able to ascertain if your deal stacks up. This pre
property development assessment will determine an approximate profit and will save
you from wasting your time, efforts and money.

 Concept Testing – Cost overruns can cripple a property development project. A

systematic property development assessment allows you to make mistakes on paper,
rather than when the project is completed.

 Confidence – A thorough feasibility study will increase the developer‟s confidence in

his or her ability to proceed with the development. Sometimes, it may even compensate
for a lack of experience if the concept is sound and there is good demand for the end
product you are developing.

 Finance – Property development feasibility show the level of finance required and for
how long. Under capitalisation and early cash flow problems in a project are two major
reasons new developments fail. Feasibility analysis also allows you to convey your
ideas to bankers & potential investors, and help them to understand and appreciate the
reasoning behind these ideas.

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Property Development Feasibility Study
The goal of every property developer is to achieve the maximum potential or highest
best possible use for the development. In other words, realising the best possible profit
they can extract from a development site.
In order to make sure that the development project provides a certain level of profit, a
financial feasibility study is undertaken during the initial due diligence phase. The sole
purpose of this study is to determine the numbers and to evaluate a return from the
development.
It looks into cash flow (the amount of money left after all expenses and costs have been
paid) and equity (developer‟s money left remaining after paying interests and
borrowings).
Usually a preliminary property development feasibility study is done on a „per lot / per
unit‟ basis where by the profits and expenses are bifurcated on individual property
basis.
For example, when deciding to purchase the site for a ten-townhouse development for
$2 million, $200,000 will be thought of as the price paid for land content for each
townhouse.
Let‟s look at various property development costs that must be accounted and allowed
for when undertaking a financial feasibility.

Costs/Expenses
Land Purchase & Acquisition Costs
Thisi ncludes all costs associated with acquiring the development property/site. For
instance, Land value, stamp duty, legals (for example lawyers fees / conveyancing
fees), rates and tax adjustments.

Finance Costs
Can come in two parts, for example, you may want to settle for the development site
first and you later on you may decide to develop the site. In this scenario you can get a
retail loan first to settle for the land. Once you are ready with your development
approval or planning permit, you can then get a construction loan.
Other fees that become part of finance costs include, application fees (usually 1% of the
loan amount (different banks charge different application fees and they can be
negotiated), establishment fees, bank valuations and legals. Some brokers may charge
a raising fee for arranging the loan. All ongoing interest charges starting from the first
bank drawdown are also part of finance costs.

Professional Fees
These fees must include all fees charged by consultants and professionals. Not all
consultants and professionals are used on every project. Professional fees vary
depending upon the size of the project.
Some of the professionals required for property development are: architects, building
designer, xivil engineer, Hydraulics Engineer, Structural engineer.

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Council Contributions
Councils charge for a lot of things. To start with there are two main application fees for
residential property development – Development Approval or planning submission fees
and building permit fees. Depending upon what you are developing there could be fees
for land subdivision, strata title and rezoning. Councils also charge a council
contribution fee also known as development contribution. These fees basically offset the
extra load or new load on council infrastructure.

Utility Connection Fees

There is a fee involved when connecting utilities to a development site including water,
electricity, drainage, storm water, telecommunication and gas.

Construction Costs
Are calculated on the basis of the design or the size of the town house / dwelling that
you are developing. For example, construction costs can be calculated as a per square
metre rate or a per square rate (in Victoria) a per square rate is usually the norm (1
square = 9.290304 square meters).
It is important that these figures are REAL when putting together a property
development feasibility study, as they can also kill a deal if your figures are off or you
can get caught out if you have the wrong fees.

Marketing or Selling Costs

If an estate agent is hired to market and sell property, their fees have to be taken into
account. Normally a sales agent commission ranges between 1%-2.75%. What you do
need to know is that by law, these commissions are allowed to be negotiable.

Insurances
A necessary expense but not always welcomed. In property development there are
always risks involved due to a large number of people being involved. It is important to
insure that all parties involved starting from consultants, your own entity, professionals,
builders and their contractors have insurance to cover the project.
As a property developer you will be liable for insurance when the buildings are handed
over, including public liability and insurances against fire, storms etc.

GST – Goods and Services Tax

When you do the accounting for a property development project, you usually file BAS
(Business Activity Statement) monthly. This way you can claim your input tax credits
monthly and it keeps your cash flow healthy. However, you have to pay the GST on the
sales of the developed property or townhouses at the end of the project.

Contingency
Like all developments there are always cost over runs or challenges that are faced by
developers. This is a percentage of construction costs that a developer allows for,
usually ranging between 5-10%. This percentage is to cover costs that you don‟t know
about.

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 A classic example could be a delay in obtaining a building permit, which increases
holding costs or a tribunal hearing required to deal with objections.

Income & Profit

After your development project is complete and your investment properties available for
sale or rent, your profit / income is dependent upon your strategy to sell or hold them.
These decisions are taken even before you get in the project, however, there‟s no hard
and fast rule, should your financial position change by the time your developed product
comes to market.

Rental Income
Should you decide to rent out your developed properties, you would have to ascertain
the rent per week your developed property can fetch you.
Gross Sales or GRV (Gross Realization Value)
Is the sum total of cash that you receive after you have sold all your properties. This
value is a major component of your income, as this is what you are left with after selling
all your development properties. Banks also use this value to calculate a percentage
that they can safely lend against the project. The end sale value of the project is
ascertained by bank‟s/commercial valuation.
Other sources of Income (BONUS)

Are there any other ways of extracting cash from your development site? Let‟s look at
some cash generation strategies from a development site.
1. Existing Trees– does the existing development site have trees on them? For example,
if your site has Palm trees they can be sold in the market for up to $1000 each. So if the
development site has 10 trees, you are up for $10,000 in extra profit.

2. Removing Existing Property– Old and run down houses present on many
development sites offer potential source of cash. There is a wide market for second
hand houses and your existing property if it matches a certain criteria can help you
generate cash. Relocating an old home can give you anywhere between $15000 –
$65000.

3. Timber Houses– Old houses made of timber can fetch you thousands of dollars to the
tune of $10,000-$15,000. You can easily generate this cash by selling just the timber in
the old property.

4. Some other ways to generate cash is by selling existing bush rocks, grass turf, soil and
other resources present on the property.

5. Interim rent – Your property development site can be rented, in case you have to wait to
get the town planning permits for the property.
All of the above will be accounted for when calculating income and profits for a
development project.

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Do The Numbers Stack Up?
If you‟re yet to get started on a project or you‟re only at the very early stage of vetting a
development opportunity and you don‟t have hard figures for everything listed above,
don‟t worry.
Financial feasibilities are an evolutionary process. It is extremely rare for the initial
financial feasibility to exactly mirror the final outcome. There are many variables in
property development and to keep the financial feasibility current it needs to be updated
every time a variable changes.
The most important part is to learn from what the numbers are telling you. As tempting
as it may be to reflect your ideal outcomes through your figures, the short term
momentum you‟ll gain from doing so will only create long term pain which could have
seriously detrimental financial implications for you and others involved in your project.
Remember, your Property Development Assessment And Feasibility Study is an
extremely valuable asset for the lifetime of your development project.
In addition to the obvious concept testing to ensure you‟re profitability, this report will
boost your own personal confidence and has the potential to open doors for additional
finance, approvals and support from important stakeholders.

Considerations in Subdivision Development

What is subdivision development?

§ It is the conversion of unimproved rawland into a site that will be capable of supporting
a desired activity and intended usage, which may be for residential, commercial, or
industrial purposes.
§ Subdivision development is a very complex undertaking. It usually needs the services
of different professionals such as, but not limited to, civil engineers, landscape artists,
geodetic engineers, architects, real estate brokers and marketing specialists working as
a team. Other team members may include ecologists, financing specialists, taxation
experts, and many more with other areas of expertise.

What is subdivision?
§ It is a division of a tract or parcel of land into two or more lots, sites or other divisions
for the purpose, whether immediate or future, of a sale or building development. It also
includes re-subdivision.

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What is land subdivision?

§ It refers to the creative “manufacturing” process of converting a large parcel of “raw”

land or consolidating several adjoining parcels of various sizes and shapes, subdividing
the consolidated land tract into lots of desired size and dimension in an orderly pattern
and providing access roads to each of the lots, together with such utilities, facilities and
amenities as may be necessary for the particular project.
§ It should be noted that while “subdivision” technically refers to the mere partitioning of

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land, and “development” means the subdivision and the setting up of essential
community facilities, the words, are, in practice interchangeable.

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What are the 3 main categories of subdivision development?

§ Residential subdivision- the conversion of rawland to a safe, serviceable and

affordable residence with associated facilities
§ Commercial developments- the development of strategically located property for
office, retail, wholesale and financial activities and also for general services and
travelers needs. Its viability is dependent on the purchasing power of the supporting
population within the area and its accessibility
§ Industrial developments- the development of big tract or rawland which focuses on
providing property industrial manufacturing. Its success depends upon the climate,
topography, transportation facilities, availability or sewer outlets, water sources and
future expansion potentials.

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What are the types of residential subdivision?

§ Single family development- a single unit on each building lot with direct access to a
street
§ detached
§ attached (i.e. duplex)
§ Multifamily development- more than one dwelling unit on each building lot (i.e.
multilevel housing, tenement housing)
§ Manufactured (factory built) housing development (i.e. prefabricated modular housing
units)

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What are the kinds of subdivision?

As to COMPLEXITY
§ simple- refers to a subdivision of a parcel of land located on an existing street into two
or more lots without creating any road or open space or without changing the existing
external periphery or boundary. For segregation of separate title for each subdivided lot,
the survey plan ordinarily needs to be verified and approved only by the Land
Registration Commission.
§ complex- refers to a subdivision of a parcel of land, or of several parcels of land after
consolidating them into two or more lots, with provisions for roads and/or community
spaces, or with changes in the external periphery or boundary, subdivisions of this type
require the approval of the Human Settlement Regulatory Commission, the Bureau of
Land and the Land Registration Commission

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As to USES
§ Residential- devoted to dwelling in a certain place which is used as the permanent
abode of a person or family
§ Commercial- devoted to edifies or houses in which businesses directed primarily for
profit is transacted or undertaken
§ Industrial- devoted to use by entities engaged in industrial pursuits or manufacturing
of goods for profit
§ Institutional- devoted to the use by institutions, societies, or corporations which area
charitable, educational, religious or the like in nature and character
§ Farm- devoted to agricultural purposes or the raising of domestic animals for sale or
personal use and consumption
§ Resort- a place that is frequently and customarily used for assembly and
entertainment purposes or where a person or his family friends usually go adventure
and relaxation

As to POPULATION
§ Low cost- 66-100 family/Ha
§ Economic- 21-65 family/Ha
§ Open market- 20 and below family/Ha
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What are the steps/process in subdivision development?

Financial planning
§ feasibility study
§ cash flow projection
§ sources of funds
§ tax analysis

Legal preparation
§ sales agreements
§ documentation
§ compliance with government regulations

Engineering
§ preliminary development plan
§ final development plans
§ compliance with government standards

Construction

Marketing
§ promotion
§ brokers
§ agency

xxxxx

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What are the criteria to evaluate the feasibility of subdivision development?
Location
§ surrounding development
§ access to amenities
§ access to employment

Market acceptance of subdivision layout

§ density
§ open space
§ recreational facilities
§ site plans (i.e. 2 storey or 1 story, single detached or rowhouses)
§ project design (i.e. cluster housing)
§ orientation to view (i.e. morning sun)
§ street plan

Economic factors
§ land cost
§ development cost
§ sales price
§ absorption rate
§ anticipated delays in securing permits
§ construction period
§ cost of complying with government regulations
§ special conditions for plan approval (i.e. open space ratio)
§ requirement for socialized housing component (i.e. RA7279)

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What government office issues subdivision development permit?

§ Local Government Unit (LGU)

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What government office issues the license to sell?

§ Housing and Land Use Regulatory Board (HLURB)

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References:

Novak, L. (1996). How to do a Market Analysis. Retrieve from

http://pages.uoregon.edu/rgp/PPPM613/downloads/How%20to%20do%20a%20Market
%20Analysis.pdf

Khanna, A. (2015). Property Development 101: The Feasibility Study. Property

Development System. Retrieve from
http://www.propertydevelopmentsystem.com.au/property-development-101-the-
feasibility-study/

Jawaid, (2012). Feasibility Study Template. Feasibility Pro. Retrieve from

http://feasibility.pro/feasibility-study-template-report/

Petalcorin J.(2015). FAQ in Subdivision Development. Real Estate Service Coach.

Retrieve from http://petalcorin.blogspot.com/2010/06/faq-on-residential-
subdivisions_30.html

Robinson, (2005). Feasibility Study For Development Of An 81-Unit Single-Family

Residential Subdivision. California State University. Retrieve from
http://www.csus.edu/uld/thesis-project/bank/2011/robinson.pdf