Feasibility & Commercial
Property Development Feasibility: A Practical Guide
A development opportunity can look attractive on paper and still fail commercially. A property development feasibility brings the major assumptions together so you can assess whether the numbers support progressing the opportunity.
Property development feasibility is the process of testing the commercial viability of a proposed development before committing significant capital. It considers what can potentially be developed, what the project may cost, what the completed property may be worth and whether the resulting margin adequately reflects the risk involved.
A useful feasibility is not simply a construction-cost calculation. Land acquisition, planning controls, professional fees, finance, authority costs, selling costs, contingencies, construction costs and expected revenue all interact.
The central feasibility question
After allowing for the realistic cost of acquiring, approving, constructing, financing and selling the development, does the potential return justify proceeding?
What is a property development feasibility?
A property development feasibility analysis is a structured assessment of the financial assumptions associated with a proposed development.
At an early stage, the objective is not to predict the final result with absolute precision. The objective is to determine whether an opportunity appears commercially viable enough to justify further investigation and professional due diligence.
As the project progresses and better information becomes available, the feasibility should be updated with more detailed planning, design, construction, finance and market information.
The major components of development feasibility
Site acquisition
Purchase price, acquisition costs and the amount that can reasonably be paid for the land.
Development potential
The type and scale of development that may potentially be achievable on the site.
Construction
Estimated building, demolition, site and associated construction costs.
Professional & authority costs
Design, consultants, approvals, contributions, certifications and other project costs.
Finance
The cost of funding the acquisition and development over the project period.
Revenue
The potential value or sale proceeds of the completed development.
Selling costs
Marketing, sales commissions and other disposal costs.
Risk & contingency
Allowances for uncertainty, escalation and unforeseen project costs.
Start with the development potential
Before building a financial model, you need a reasonable view of what may actually be developed on the property.
Relevant considerations can include zoning, minimum lot size, frontage, floor space ratio, building height, setbacks, parking, subdivision requirements, hazards, site dimensions and the applicable approval pathway.
A site that appears large enough for a particular development may still be constrained by frontage, shape, easements, flooding, bushfire requirements, access or another planning control.
Planning potential and commercial feasibility are connected.
If the assumed development yield is unrealistic, every financial calculation that follows can also become unrealistic.
Land acquisition cost
Land is often one of the largest project costs and one of the most important variables in a development feasibility.
The feasibility should consider more than the advertised purchase price. Depending on the transaction, acquisition costs may include stamp duty, legal costs, due diligence, finance costs and other expenses associated with securing the property.
Developers commonly work backwards from the completed development value and total project costs to determine the maximum land price that still supports the required commercial return.
Construction cost assumptions
Construction costs should reflect the proposed development type, expected building area, specification and known site conditions.
Early feasibility studies often use benchmark construction rates. These can be useful for screening opportunities, but they should not be confused with a detailed construction estimate or tender.
Site-specific conditions such as demolition, difficult access, slope, retaining, excavation, services, contamination or unusual structural requirements can materially change actual construction costs.
Development costs beyond construction
A common feasibility mistake is focusing heavily on the building cost while underestimating the other costs required to deliver the project.
Depending on the development, additional costs may include:
- • architect and design fees;
- • planning consultants;
- • engineers and other technical consultants;
- • surveying;
- • approval and certification costs;
- • authority fees and contributions;
- • demolition and site preparation;
- • finance and interest;
- • insurance;
- • sales and marketing;
- • legal and accounting costs;
- • contingency allowances.
Estimating development revenue
Revenue assumptions estimate the potential value of the completed development.
Comparable sales can provide useful evidence, but the selected properties should be genuinely comparable in location, dwelling type, size, quality, age and market conditions.
An overly optimistic end value can make an otherwise marginal project appear profitable, so revenue assumptions should be tested conservatively and supported by appropriate market evidence.
Development profit and margin
Once total development costs and potential revenue have been estimated, the feasibility can assess the potential development profit and margin.
Simplified concept
Development Profit = Revenue − Total Development Cost
The resulting profit should then be considered against the capital required, project duration, complexity and development risk.
There is no single margin that automatically makes every project acceptable. Required returns vary according to the developer, project type, funding structure, market conditions and risk.
What is residual land value?
Residual land value is a useful development feasibility concept because it approaches the site from the opposite direction.
Rather than starting with the asking price and calculating the resulting profit, the developer starts with the potential completed value, deducts development costs and the required return, and determines what may remain available for the land.
Why this matters
A property can be a good development site but still be a poor acquisition if the land price is too high relative to its development potential.
Sensitivity analysis
A feasibility should not rely on a single perfect set of assumptions. Development conditions change.
Sensitivity analysis tests what happens when important variables move against the project.
A project that only works under the most optimistic assumptions may carry substantially more risk than the headline profit suggests.
A simplified feasibility example
Consider a hypothetical development opportunity with the following preliminary assumptions:
Example only. Figures are hypothetical and are not intended to represent a particular project, market or required development return.
Common development feasibility mistakes
Overestimating development yield
Assuming more dwellings or floor area than the site can realistically support.
Using optimistic sale values
Selecting the strongest comparable evidence without allowing for differences in location, product or market conditions.
Underestimating construction
Using a simple rate without adequate allowance for site conditions, specification or associated works.
Missing development costs
Ignoring professional fees, authority costs, finance, sales, contingency and other project expenses.
Paying too much for the site
Focusing on the development concept without first establishing what the project can commercially support for land.
Not testing downside scenarios
Assessing only the base case rather than understanding what happens if costs rise or revenue falls.
Preliminary feasibility versus detailed feasibility
Development feasibility becomes progressively more detailed as a project moves from opportunity screening toward acquisition, design, approval and construction.
Preliminary
Opportunity screening
Uses available planning, property, market and benchmark cost information to determine whether the opportunity warrants further investigation.
Detailed
Project due diligence
Incorporates project-specific design, consultant advice, detailed construction pricing, finance terms, authority costs and current market evidence.
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Property development feasibility FAQs
What is a property development feasibility study?
It is an assessment of the potential costs, revenue, development profit and commercial risks associated with a proposed property development.
When should a development feasibility be completed?
A preliminary feasibility can be useful during site screening and before acquisition. It should then be updated as more detailed planning, design, cost and market information becomes available.
What costs should be included in a development feasibility?
Typical considerations include land and acquisition costs, construction, consultants, approvals, authority costs, finance, selling costs, contingency and other project-specific expenses.
What is residual land value?
Residual land value estimates the amount potentially available for land after allowing for development costs and the required project return.
Does a feasibility guarantee a development profit?
No. A feasibility is based on assumptions and available information. Actual costs, approvals, timing, market values and project outcomes can differ materially.
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