A feasibility study is an analysis of how a property development project can be successfully completed. It is done when searching for opportunities. The aim is to get yourself in a position to appoint the right team, to deliver the right product, in the right location.
A. Real Estate Cycles
We live in a world of booms and busts – see them as changing financial seasons. The economic seasons of spring and summer are phases characterised by business expansion. It is followed with the cold winds of autumn and winter recessions. It is important to identify which stage of the cycle you are operating in and the supply and demand cycle for real estate assets.
B. Competitive Market Position
The aim is to understand what makes the area distinctive, what are the sources of dynamism in the economy and the accessibility of the location. In our student housing developments, the first money we spent was to instruct a demand report. This detailed the characteristics of the universities around the site. The number of students and whether these numbers were growing. It provided an analysis of the supply of bedrooms that would be the competition to our scheme being fully occupied.
C. Political and Regulatory Environment
There are controls on building activity by the public sector. These controls are acts of law such as the UK’s Town and Country Planning Act. This established the need for planning permission to be granted before development begin. The government require local authorities to prepare a comprehensive local plan, showing how it wants the land to be used. The USA has less national-level land use legislation with greater focus on State controls. It is the concept of zoning which is the main form of land use control.
A thorough knowledge of local government planning policy is needed. It is very difficult to make a scheme work which is in conflict with their strategy or even law. These policies are updated periodically. The skill of being able to anticipating which areas, your project may fall in, or out of favour, is key in obtaining political support and approval.
D. Development Appraisal
Then the math. You need a cash flow projection to assess the viability of the scheme. It will estimate the amount and timing of the financial return. It will need to include a breakdown of the development and construction costs to complete the project. The projections should be tested under different scenarios. Such as the construction cost increasing by 10% or values/revenue falling by 5%. The aim is to have a robust business plan.
E. Think like a Banker
You need an outline plan to fund the project, and focus on the downside protection. Have a strategy that increases certainty for a funder. A bank is concerned about available cash and payment of debt service cost. How extreme are your assumptions to make the project reach this breaking point? Have a plan to restructure the deal if it starts to go wrong. For our student housing developments, we focussed on an alternative use valuation. This involved remodelling the rooms into family apartments and selling them to pay back the debt.
F. Write the Report
There are many templates to follow when writing a feasibility study, such as SWOT. This reviews the internal strengths and weaknesses and the external threats and opportunities.