overview of the property development process

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OVERVIEW OF THE PROPERTY DEVELOPMENT PROCESS

Abigail Harding

November 2011

CONTENTS Introduction ........................................................................................................................................................................ 1

Phases of Property Development ....................................................................................................................................... 1

Phase 1: Evaluation ........................................................................................................................................................ 2

Phase 2: Acquisition ....................................................................................................................................................... 2

Phase 3: Procurement ...................................................... ................................................................. ............................. 2

Phase 4: Disposal ........................................................................................................................................................... 2

The Actors ........................................................................................................................................................................... 2

The Evaluation Phase ............................................................ ................................................................. ............................. 3

A. Opportunity/Site Identification ................................................................................................................................. 3

B. Market Analysis.......................................................................................................................................................... 3

C. Site Investigation........................................................................................................................................................ 4

D. Feasibility Study ......................................................................................................................................................... 4

Due Diligence ...................................................................................................................................................................... 5

Works Cited ........................................................................................................................................................................ 5

INTRODUCTION

Property development is a complex activity, with a series of stages involving many actors with differing objectives, all

operating within the building cycle context and its interaction with business and credit cycles. Before developers

commit to acquiring land and signing a building contract, they first evaluate the market to establish a project’s

viability, and secure finance and planning consents (Wilkinson & Reed, 2008).

The purpose of this document is to gain insight into the nature of the property development process to inform a later

stage of this research that will pursue greater understanding of the factors that will encourage developers to embark

on dense residential and commercial developments around transit hubs in New Zealand. In this short paper a brief

overview of the phases of property development is provided. The initial evaluation phase is then explored in greater

depth.

PHASES OF PROPERTY DEVELOPMENT

There are a number of similar typologies to describe the property development process. The four phases of property

development outlined by Birrel and Bin (1997) is adopted for the remainder of this paper. The phases are: (1)

evaluation, (2) acquisition, (3) procurement, and (4) disposal. The steps involved in each phase are not necessarily

sequential and the steps often overlap or repeat. For example, if a development is pre-sold, parts of phase 4 will occur

with parts of phases 1 and 2. Regardless of the sequence of steps peculiar to a particular development, as the project

progresses the developer is exposed to greater risk because flexibility is reduced and commitment is increased

(Wilkinson & Reed, 2008).


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PHASE 1: EVALUATION

The evaluation phase considers the marketplace and potential development opportunities therein. It also involves

physical evaluation of the site/s and a feasibility study. This phase specifically involves:

A.

Opportunity/site identification

B.

Market analysis

C.

Site investigation

D.

Feasibility study (Birrell & Bin, 1997)

PHASE 2: ACQUISITION

The acquisition phase involves the gathering of resources, including experts, debt and equity finance to support the

investment, acquiring planning permission via resource consent/s, and purchasing the site where applicable. This

phase specifically involves:

E.

Professional appointments

F.

FinancingG.

Planning application

H.

Site assembly/purchase (Birrell & Bin, 1997)

PHASE 3: PROCUREMENT

The procurement phase involves defining the new building in response to the feasibility study (Phase 1), especially in

response to the target marketplace. The price of construction is set, and contractors are hired and managed to deliver

the construction process within the planned time and budget. This phase specifically involves:

I.

Design

J.

Tendering/contractingK. Construction (Birrell & Bin, 1997)

PHASE 4: DISPOSAL

This phase is about convincing people to rent or buy the new/retrofitted property and making as much profit as

possible. This phase specifically involves:

L.

Promotion

M. Letting

N.

Sale (Birrell & Bin, 1997)

THE ACTORS

The main actors in the property development process as outlined by Wilkinson and Reed (2008) are:

1.

Landowners

2. Developers

3.

Public sector and government agencies

4.

Planners

5.

Financial institutions

6.

Building contractors

7.

Agents

8.

The professional team (planning consultants, architects, engineers, project managers, solicitors, accountants)


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9.

Objectors

10. Occupiers

THE EVALUATION PHASE

For the purposes of this research, the focus of interest is the evaluation phase of a development in which the decision

is made to pursue a property development project. Here, the four key steps in the evaluation phase are described in

more detail.

A. OPPORTUNITY/SITE IDENTIFICATION

A potential development is initiated through the anticipation of demand for a particular type of development, or the

anticipation of a potentially higher value use for an existing site. The demand for such might be facilitated by changing

demographics, economic, social, physical or other circumstances (Birrell & Bin, 1997; Wilkinson & Reed, 2008). In

order to identify the most appropriate use, the market and the potential to obtain the necessary statutory planning

consent for the change of use must be assessed. The original initiator of the property development may not

necessarily be involved in the rest of the development process, depending on their motive or objective (Wilkinson &

Reed, 2008). Typically, the developer prepares a statement of objectives and requirements for the property

development that will be refined and tested against detailed information in the market analysis stage (Birrell & Bin,

1997).

B. MARKET ANALYSIS

Market analysis is undertaken to match a potential development with market needs. In order to establish the

potential and desired characteristics for the proposed project, property developers need to understand the

marketplace for the project, supply of competitive properties, and demand for different types of property. This can

provide the developer with an indication of demand strength for a particular building in a particular location at aparticular time (Birrell & Bin, 1997). The local economic context helps to determine the market for an individual

scheme, and the wider economy affects general property market conditions and the confidence of occupiers,

investors and developers (Wilkinson & Reed, 2008). It is also important to understand the regulatory and socio-

economical environment, and, most importantly, potential clients (Costello & Preller, 2010).

Market analysis needs to be continually re-examined and integrated with all other components of the property

development process (Costello & Preller, 2010). In practice, three levels are involved in market analysis: (i)

consideration of the present and future national and regional property market picture, (ii) consideration of the

economic potential of the site and its locality, and (iii) recommendations based on the conclusions of these analyses

(Birrell & Bin, 1997).

A clear distinction should be made between market research and marketing research. Market research explores

existing and potential market demand for a property type at the proposed location; marketing research investigates

how to develop sources of demand for the concept and is concerned with product design, pricing, and sales

techniques. In analysing local economies (the fundamental determinants of demand for real estate) and markets (the

demand for and supply of a particular property type in the market) property developers acquire the information to

make effective marketing decisions (Costello & Preller, 2010).

In a survey of property developers in Queensland, Australia, Costello and Preller (2010) found that the sources of

information valued most significantly for market research were demographic data sources, property values,

newspapers and magazines, and market research companies.


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C. SITE INVESTIGATION

The purpose of the site investigation is to examine the site conditions before the developer enters into a commitment

to acquire a particular site. It is important to clarify the physical and legal conditions of the site as unrecognized risks

might incur expense/delay or even deter property development at a later stage. The physical site conditions that

should be investigated include the site's load-bearing capacity, ease of access, site drainage, the connection with

appropriate utility services, infrastructure provision, and any likely underground problems or contaminants. The legalconsiderations include the site's ownership and possession, easements, restrictive covenants, the planning status of

the site and, consequently, what type/s of building can be built on that site (Birrell & Bin, 1997).

In a survey of property developers in Queensland, Australia, Costello and Preller (2010) found the most frequently

analysed site specific factors to include the legal documentation and physical features discussed above, as well as real

estate market trends and parking provisions. Factors considered least important were proximity to amenities and

services, social characteristics, and links with other industries.

D. FEASIBILITY STUDY

The feasibility study assesses the viability of the project by building on the results from preceding analyses andinvestigations to arrive at a realistic appraisal of all costs and benefits involved in the proposal, including the profit

margin, required capital investment, and appraisal of risks. The profit margin result must be subject to sensitivity and

risk analysis, which may result in adjustments to the original descriptive proposal (Birrell & Bin, 1997; Costello &

Preller, 2010). This stage of the process will establish the value of the site and should be undertaken prior to any

acquisition commitment (Wilkinson & Reed, 2008).

According to Cloet (cited in Costello & Preller, 2010, p. 177), the financial feasibility study consists of five steps:

1. Estimate total capital outlay for the project

2.

Estimate total net project income

3.

Develop a cash flow for the development period

4.

Estimate the profitability of the project and evaluate against investment objectives

5.

Complete a risk analysis on the proposed project

These steps usually require the detailed input of consultants and other experts, but the decision to proceed and

shoulder the risks rests ultimately with the developer (Wilkinson & Reed, 2008; McDonagh, 2009). The outputs from

this phase should include (a) a decision to develop or not, and (b) if the decision is to develop, a clear description of

what to develop, how to develop it, and when the development should be complete (Birrell & Bin, 1997).

Costello and Preller (2010) note that:

Feasibility never demonstrates certainty; a project is feasible when it is likely to meet its goals

Feasibility is determined by satisfying objectives that must be identified prior to commencement and

acknowledged by all participants in the development processLogistics, timing, legal and physical constraints are all important to the selected course of action

Risk is one of the key factors influencing property investment decisions. The potential site risks explored usually

include soil problems, environmental and ecological complications, seismic concerns, hydrological concerns, and

anthropological and historical sensitivities. Viruly (cited in Costello & Preller, 2010 p.178) identifies the following

typology of risks of relevance to property developers:

Business risk: risk due to fluctuations in economic activity and factors affecting the variability of income

produced by a property

Financial risk: the use of debt financing and risks attached to excessive gearing

Liquidity risk: the risk when there is a lack of consistent and continuous buoyancy in the marketplace

Inflation risk: income from the property must increase sufficiently to counter upward trends in inflation

Management risk: all properties need to be managed properly


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Legislative risk: amendments to numerous regulations, taxes, zonings and other restrictions imposed by

government can adversely jeopardize property developments

Environmental risk: the value of real estate can be affected by changes in the environment or sudden

awareness that the existing environment is potentially hazardous

In a survey of property developers in Queensland, Australia, Costello and Preller (2020) found that all of the

respondents followed an integrated feasibility analysis framework to determine the viability of projects and informulating strategies for property development. The majority of companies focused on undertaking analysis of

physical and design factors, financial feasibility, and risk for land-use decisions. The least used type of analysis was

socio-political feasibility. The evaluation criterion most widely used was the Internal Rate of Return (IRR) followed by

the Development Yield. The two least used criteria were the Operating Efficiency Ratio (OER) and Gross Rent

Multiplier (GRM).

DUE DILIGENCE

In New Zealand, the evaluation phase is largely synonymous with the term ‘due diligence’, which addresses the

aforementioned steps. In a survey of 21 shareholders, managers and consultants associated with a New Zealand

residential property development company, McDonagh (2009) found that the following factors were investigatedduring the due diligence stage:

General compliance with local and regional authorities’ standards for development, including an assessment

of the likelihood of gaining consent

Services and utilities, infrastructure, upgrades

A preliminary scheme plan including the potential number of sections

Potential site contamination issues

Development costs including earthworks, roading, and services

Risk assessment

Thorough financial feasibility analysis (including sensitivity analysis)

Negotiations with neighbours to ensure access to the property

Other accessibility considerations

Traffic reports

Market evaluation

The same study also identified factors that required more investigation to maximise time and cost efficiency in

greenfield residential development:

Assessment of risk associated with having a significant number of adjoining owners likely to object

Additional discussions with the local authority during preliminary stages

Greater understanding of the market and the sensitivity of pricing, including the likely sale price

Additional geotechnical analysis to identify the presence of unsuitable soil (McDonagh, 2009).

WORKS CITED

Birrell, G., & Bin, G. S. (1997). The UK property development process: Its phases and their degree of importance to

profitability. London: RICS Research.

Costello, G., & Preller, F. (2010). Property development principles and process - an industry analysis. Pacific Rim

Propoerty Research Journal , 16 (2), 171-189.

McDonagh, J. (2009). Critical success factors in land development in New Zealand: Part 1. Proceedings from 15th

annual conference of the Pacific Rim Real Estate Society, Sydney, Australia, 18-21 January 2009.

Wilkinson, S., & Reed, R. (2008). Property Development (5th ed.). London: Routeledge.

overview of the property development process

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