Property Development Feasibility Study: A Step-by-Step Guide

https://youtu.be/iCBp4Qv0cwU

The Cruncher™ is a professional property development feasibility calculator by Little Fish Property, built to help property developers assess whether a potential development makes financial sense before moving forward.

In this video, I’ll walk you through The Cruncher™ step by step, showing you how to complete a property development feasibility study, what information you need to enter, and how each section helps you assess the financial viability of a development opportunity.

At Little Fish Property, we specialise in residential property development, including townhouse, dual occupancy and duplex developments. The Cruncher™ is built around the costs, assumptions and feasibility considerations we assess when looking at real development opportunities.

For this example, I’ve chosen a site in Bentleigh East, Victoria. It’s a very standard site: nice and square, nice and flat, and a good standard dual occupancy site that we can use to demonstrate how the calculator works.

Page 1: Site Details

Starting on page one, we enter the site details.

This includes the property address, followed by the purchase date and feasibility date. They are both defaulted, but you can overwrite them if you choose.

Then we have the site acquisition deposit, which is defaulted to 10%, but you can update that if needed.

The settlement period is entered in days. We’ve got that set at 90 days as a default, but I’ve changed it to 120 days for this example.

Below that, we have the development design. That’s simply a brief description of what you intend on building on the site.

Page 2: Land Assessment and Site Coverage

Page two is where we start looking at the site details, beginning with the land assessment.

For this example, we have:

• Total land area: 620 square metres
• Frontage: 15.6 metres
• Depth: 40 metres

This is based on a rectangular site.

We then look at the site coverage available for construction. What we’re doing here is calculating the maximum ground-floor footprint for the entire development.

This is going to vary from state to state and site to site depending on the residential zone and other planning factors, so The Cruncher™ breaks this down into two options.

Option 1: Site Coverage Percentage

The first option is the coverage percentage.

This is based on the zoning of the land and can vary depending on the state and area you’re developing in.

Here in Victoria, it’s very common to have 60% site coverage, so we’ve defaulted the calculator to that. However, you can change the percentage depending on the zoning and planning requirements for your particular site.

For this example, the calculation gives us a coverage area of 375 square metres available for the ground-floor footprint.

Option 2: Available Building Envelope

The second option is the available building envelope.

This is calculated by considering the garden area or open-space requirement.

Again, here in Victoria, this is generally a standard percentage. It could be 20%, 30% or 35%, depending on the size of the land. That will default automatically in this particular spreadsheet, but you can override it depending on your site details.

You then need to calculate the hard-surface area, which would typically include something like the driveway.

For a dual occupancy development, I would assume that would be close to 80 square metres.

Once we’ve calculated the garden or open-space requirement and the driveway area, the second option gives us 358 square metres.

The calculator then takes the lower of those two options and automatically enters it into the green section at the bottom.

In this example, that figure is 358 square metres.

That means 358 square metres is the maximum ground-floor footprint we can potentially put on this site.

Calculating the Dwelling Sizes

Now that we know the maximum coverage available for the footprint of the dwellings, we can calculate the potential dwelling sizes.

We start by entering the number of dwellings proposed for the site. In this example, there are two.

The Cruncher™ then converts the 358 square metres into an approximate footprint per dwelling and also converts that area into building squares.

We use building squares more commonly in the office, and real estate agents and builders are also very familiar with talking in building squares. However, you can convert that back to square metres if you choose.

Now that we have the maximum possible footprint per dwelling, we need to take the first-floor area into account.

Typically, the first-floor area will be somewhere between 80% and 90% of the ground-floor area.

Once we do that calculation, the calculator gives us a possible total dwelling size of 36.6 squares.

You’ll notice that the maximum dwelling size is automatically populated in the bottom cell. However, for this particular project, we want our townhouses to be 30 squares each, so I’ll override that figure and enter 30 squares per dwelling.

Page 3: Acquisition Costs

Now that we have the site details and dwelling sizes in the feasibility, we can start looking at the costs.

This begins with the acquisition costs, including:

• Purchase price
• Stamp duty
• Fees and adjustments
• Legal and conveyancing costs
• Buyer’s agent fees, if applicable

The stamp duty is automatically calculated, but you can override this depending on your state and circumstances.

I’ve included a nominal figure of $5,000 for fees and adjustments and around $1,500 for conveyancing and legal costs, but you can enter whatever your conveyancer is actually charging you.

I’ve also included a line item for a buyer’s agent fee. If you have a buyer’s advocate working with you, you can enter the amount you’ve agreed with them in that cell.

For this example, the total acquisition costs come to approximately $1.9 million.

Project and Development Costs

The next section covers the project costs.

This includes your consultants, council costs, contractors, demolition and design costs.

For a custom dual occupancy development, I would suggest allowing around $110,000 for these costs as a starting point.

We then have a separate line item for project management. If you’re engaging a consultant such as Little Fish Property to manage the development, you can enter the project management fee in that cell.

Below that, if you’re building three or more dwellings, the open-space contribution can be added as a percentage of the land valuation. This will depend on your location and council.

For this example, the total project costs come to approximately $110,000.

Page 6: Construction Costs

We now move on to page six, which calculates the construction cost for the development.

On page two, we nominated 30 squares per dwelling. You’ll therefore see that the total building area of 60 squares has automatically carried across.

Next, we enter the build rate.

For this example, I’ve nominated $28,000 per building square, which gives us our base construction cost.

I’ve then included a line item for additional earthworks if there is any slope or fall on the site. For this example, I’ve allowed an additional $30,000.

Below that is another line for other construction costs. This might include pools or anything else outside the main building contract.

We then have a construction contingency. For this project, I’ve allowed 5%, but you should speak to your lender about their particular contingency requirements.

This gives us a total construction cost of approximately $1.8 million.

Calculating Development Holding Costs

Now that we know the construction cost, we can calculate the holding costs.

The Cruncher™ separates these into two sections.

Land Holding Costs

Firstly, we have the land holding cost.

This is calculated based on the entire project program. For a townhouse development, we would generally suggest allowing around 24 months.

You’ll see the term in the calculator is set at 20 months. That represents the 24-month development period less the four-month settlement period.

You can also enter your deposit percentage and interest rate.

The calculator then provides the total loan value and estimated holding cost for the entire land holding period.

Construction Holding Costs

The second section calculates the construction holding costs.

This is treated separately because construction finance is progressively drawn down based on the stages of the construction contract.

We generally find that the appropriate ratio is around 65%, but you should speak to your lender to determine whether they require something different and update the calculator accordingly.

For this example, the total holding cost comes to approximately $216,000.

If we scroll to the bottom of the page, we can now see that the total project cost is just under $4 million.

Sales, GRV and Development Profit

The next section is the part we like: sales and outcome.

This is where we enter the forecast revenue for the development.

For this example, we’ve entered a realistic resale value of $2.4 million per dwelling.

You can also see pessimistic and optimistic columns.

These figures are based on the scenario variance entered above. For this example, I’ll enter a variance of $150,000, and the calculator automatically generates the pessimistic and optimistic sales scenarios.

Based on the realistic sales figures, our total Gross Realisation Value (GRV) for the development is $4.8 million.

From the GRV, The Cruncher™ subtracts the project costs and real estate agent fees based on the percentage entered into the relevant cell.

GST and the Margin Scheme

We then look at the GST calculation based on the margin scheme.

There are three rows to consider:

1. Total GST payable
2. GST claimable on project costs
3. GST balance payable at the end of the project

The GST you can claim back throughout the course of the project can assist with cash flow, but ultimately the final GST liability needs to be accounted for when assessing the project’s profitability.

For this particular example, the remaining GST payable at the end of the project is approximately $92,000.

Net Profit, Return on Cost and Return on Equity

With all of that information entered, The Cruncher™ can now generate the estimated financial outcome for the development.

For this example, we have:

• Net profit: approximately $600,000
• Net return on investment / return on cost: approximately 15%
• Net return on equity / return on cash: approximately 52%

These figures give us a much clearer picture of whether the proposed development makes financial sense before committing to the project.

Page 7: Equity and Investor Summary

Page seven provides two charts.

The first is an equity chart, which outlines the cash required for the development at each stage of the project.

The second is an investor summary chart.

This is useful if you have a partner, investor or family member you want to undertake the development with.

You can enter the number of investors involved, and The Cruncher™ will provide the estimated cash required from each investor as well as the estimated net outcome for each investor.

Page 8: Property Development Feasibility Report

Page eight provides a complete property development feasibility report, summarising the project costs, revenue and estimated outcome.

This brings together the major figures from throughout the feasibility so you can review the proposed development as a whole rather than looking at individual costs in isolation.

At the bottom of the page, you can also click the link to download a PDF feasibility report.

The PDF provides a clear summary of:

• Acquisition costs
• Soft and project costs
• Construction costs
• Holding costs
• Forecast sales revenue
• Realistic outcome
• Optimistic outcome
• Pessimistic outcome

Page two of the PDF report also provides a summary of the equity requirements and investor outcomes.

Using The Cruncher™ to Complete a Development Feasibility Study

That’s a quick example of how to use The Cruncher™.

We developed The Cruncher™ as a practical property development feasibility calculator to help property developers bring the major assumptions for a potential project together in one place and test the site, acquisition costs, development costs, construction costs, holding costs, revenue, cash requirements and potential profit before moving forward.

The numbers you enter will obviously vary from project to project, but completing a detailed development feasibility analysis early gives you a much clearer understanding of whether a development opportunity actually stacks up.

If you’re thinking about undertaking a development and want help beyond the feasibility, Little Fish Property can support you in a few different ways. Our property development project management service can manage the entire development for you from feasibility through to completion, while our one-on-one property development mentoring gives you ongoing support and guidance if you want to manage the project yourself. We also offer property development courses for developers who want to build their knowledge and better understand the development process.

You can also speak with an experienced property development consultant about your site, strategy and next steps.

If you’d like to discuss your project or need help figuring out the best path forward, book a free consultation with our team. We’d love the opportunity to show you how we can help. And if you have questions about using The Cruncher™, you can also reach out to me on the Little Fish Network, our free property developer network.

Filled under: All Developer Insights Education Finance