What puts a property development site in distress?

Advisory and Consulting

Advisory and Consulting
Australia is still experiencing a flurry of construction activity as new buildings are developed to meet demands across the healthcare, education, retirement living and residential sectors (to name a few). As new developments are progressed, developers need to complete detailed due diligence and planning to avoid the risk of the project ending up in a situation where costs have spiralled to a point where the project is unviable before it begins OR construction has commenced however the builder is unable to complete due to cost escalation with suppliers and subcontractors. This has unfortunately been witnessed on many occasions over the last few years, all over the country as even larger companies have found themselves facing receivership. As experts in the property development space, the team at Impact Group understand the key errors that lead to a development project ending up in distress. Often, these errors are caused by the decisions that are made (or not made) in the planning and pre-construction stages.

 

Here are the key areas where property development projects go wrong, and end up in distress:

Feasibility Analysis
One of the fundamental mistakes that can jeopardise a development project is the failure to complete thorough feasibility analysis. Feasibility studies are the cornerstone of successful property development because they provide an in-depth analysis of the project's viability.
Glossing over details or relying on someone who has very little experience during this phase will result in unforeseen challenges such as inaccurate cost estimates, unrealistic timelines, and misaligned financials.
It’s not all about costs; feasibility will also look into the future of the area in terms of available infrastructure, review any potential roadblocks in terms of heritage or environmental constraints, and consider the cohesion of the project with the local community.

Market understanding
Understanding the market is crucial for a property development venture.
A well-planned development, whether it is commercial or residential, is created with an understanding of current and forecast demand of potential purchasers/end-users as well as pricing strategies based on up-to-date data and an understanding of the needs of the target demographic.

Finance and interest rates
As mentioned, equity contributions and cashflow have to be a priority throughout a development project. The correct calculations need to be made upfront, and financial buffers need to be in place in order to achieve this.
There has to be a buffer for increased costs caused by high interest rates as there is no certainty the Reserve Bank won’t lift interest rates and add to costs in 2024. Financial forecasting and risk mitigation is essential to ensure the project does not end up in distress. Your project team also needs to have a good relationship with lenders and a clear understanding of borrowing potential and limits.
Construction costs are another critical factor. The price of materials and labour has been volatile since the pandemic due to supply chain issues and worker shortages and while costs are beginning to settle, meticulous planning is required to avoid budget issues.
Contractor Procurement
Selection of a building contractor is no longer based purely on price. Due diligence is required regarding their financial stability, including balance sheet and working capital, project team nomination, experience, methodology, programme and quality of recent works. Appropriate allocation of risk in the formal instrument of contract is also vitally important. A robust procurement process involving interview, negotiation and documentation must be implemented to give the project the best chance to succeed.

Value engineering
Value engineering means finding ways to optimise efficiency, reduce costs and maximise financial outcomes.
A savvy, experienced team of advisors and consultants can identify ways to improve the overall value of a project. Along the way, your consultant can loop in contractors, to consider their insights into how the project can be streamlined, or talk to strata managers/venue operators etc to uncover ways to add to the final value of a project.
Defects and poor workmanship
As many people find out the hard way, ‘done’ doesn’t always mean ‘done’ when it comes to property development. Your project needs quality materials and a high standard of workmanship, not to mention compliance in order to avoid the issue of latent defects.
Stringent supervision to ensure work is carried out correctly and in accordance with the codes and standards is essential. This will help avoid costly repair jobs and legal issues that can undermine not only financial stability but developer reputation.

Overall, to avoid the situation where a development site is in distress and stakeholders are losing money, it’s important to work with a highly experienced team from day one. Advanced expertise delivers outstanding results and you need the help of Impact Group with sector knowledge as well as development industry experience to create a smoother path from feasibility to handover.

Avoid the risk of a distressed development site. Contact Impact Group to speak with Alyssa Lanning on alyssal@impactgroup.com.au or phone 1300 630 063 for a no-obligation discussion.

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