Finance-wise Property Development – Tips on How to Stay within BudgetBookmark this
In the last article we looked at key role-players in the development process, especially the role of a Financial Planner. One of the most important considerations in any development process is the financing of the proposed development and working within a specific budget. The Developer with a clear understanding of the financial costs of the development, coupled with a sound knowledge of the area earmarked for development, is more likely to succeed in this.
By entering into a potential development ‘blind’, as it were, the Developer reduces his/her prospects of achieving financial feasibility and profitability and may not have the ability to make future predictions in terms of financial obligations – obligations which ultimately determine the success or failure of a particular development.
Top of mind for any Developer should be conducting sufficient research into the financial feasibility of any given project: the more research and questions asked upfront, the less likely the Developer is to run into trouble further down the line in the development process, often when it is too late. By answering key questions early on there is less likelihood of having to address them later or at a more critical stage of the development.
Duncan Gunn, Director of RRA Architects, stresses the importance of the Developer or Property Owner specifying the budget up front. “This way all design and structural components of the development can be planned within the given budget. This is more realistic and feasible than trying to cut down costs or come up with an unrealistic amount of financing at the end stages of the development process when it is evident that the process has run over budget. This can prove exceptionally costly, as well as detrimental to the success of the given development,” suggests Gunn.
When looking at the development process, it is not only important to keep within a stipulated budget, but in fact to actually obtain the funding in the first place. Given the large scale of capital required for a development, this process often needs to be funded by a Bank or other Financial Intermediaries. Therefore, it is vitally important for the Developer to establish sound and trustworthy relationships with these financial players.
In order to build reputable relationships with these Financiers, it is an idea to build up a portfolio of past, successful projects that can serve as the “proof/evidence” that you are a trustworthy and financially successful player in the development game with a solid reputation.
By demonstrating a good track record, you are able to instill confidence in the Lender and ultimately maximise your prospects of receiving the necessary funding from these players in the process.
We have determined that you need to budget; you need the actual funding with which to budget. As important, and not to be forgotten, is the need to draw up an achievable repayment scheme. Basically, this scheme should consist of achievable repayment targets throughout the duration of the development process.
It is important for the Developer to keep risk to a minimum and consequently timing in terms of payments is key. It is essential to spread the financial burden and consider which are the most appropriate stages of the process to keep stress and financial risk exposure to a minimum
It is evident from the above discussion that the Financial Planning of a development is an integral component in the process. Therefore, through careful consideration and by ensuring that the steps discussed above are adhered to, you can strive towards a feasible and successful development process – limiting any unforeseen events and costs as far as possible.