For developers, it is a decision-making framework used to determine whether a project is financially viable, commercially attractive and capable of being delivered within an acceptable level of risk.
A well-prepared feasibility should answer one fundamental question:
Does the proposed development justify the land value, capital investment, time and risk required to deliver it?
1. Start with the development opportunity
Before building a financial model, establish what can realistically be developed on the site.
This requires consideration of:
Site area and dimensions
Zoning and permissible uses
Height and floor-space controls
Development standards
Minimum subdivision requirements
Access and servicing
Flood, bushfire and biodiversity constraints
Heritage and cultural heritage considerations
Environmental constraints
Infrastructure requirements
Market demand and competing supply
The objective is to establish the site’s highest and best use based on planning, physical, market and financial considerations.
2. Establish the development yield
The next step is translating the site’s potential into a realistic development scheme.
Depending on the project, this may involve determining:
Number of residential lots
Number and type of dwellings
Apartment yield and net saleable area
Commercial or retail floor area
Industrial GLA
Parking requirements
Common areas
Open space
Roads and infrastructure
Staging opportunities
Importantly, the theoretical maximum yield is not necessarily the optimal yield.
A project with a lower yield but stronger marketability, lower construction cost or simpler approval pathway can produce a superior financial outcome.
3. Determine project revenue
Revenue assumptions should be based on evidence rather than optimistic expectations.
For residential developments, this may include:
Comparable sales
Current asking prices
Achieved sales evidence
Product mix
Absorption rates
Market segmentation
Incentives and discounts
Settlement risk
For commercial, retail, industrial and mixed-use projects, revenue may involve:
Rental rates
Incentives
Capitalisation rates
Occupancy assumptions
Leasing costs
Net operating income
Exit valuation
A small change in the assumed end value can have a substantial impact on development feasibility.
4. Build a realistic development cost plan
Development costs extend well beyond construction.
A comprehensive feasibility should consider:
Acquisition
Purchase price
Stamp duty
Legal costs
Acquisition due diligence
Planning and professional
Planning
Architecture
Engineering
Surveying
Project management
Quantity surveying
Legal and specialist consultants
Statutory and infrastructure
Contributions
Authority fees
Utility connections
Roads and civil infrastructure
Other required infrastructure
Construction
Building works
Civil works
Site establishment
External works
Contingency
Finance
Interest
Establishment fees
Valuation
Monitoring
Other lender costs
Sales and marketing
Agency commissions
Advertising
Display suites
Marketing
Legal and settlement costs
The objective is not to make the feasibility look attractive.
The objective is to make it credible.
5. Calculate the residual land value
One of the most important applications of a development feasibility is determining what the site is actually worth to a developer.
The residual land value broadly represents:
Gross Development Value
– Development Costs
– Finance Costs
– Selling Costs
– Required Developer Return
= Residual Land Value
This provides a critical acquisition benchmark.
If the vendor’s asking price is materially above the residual land value, the developer needs to identify where the additional value can realistically come from.
That might involve:
Increasing yield
Improving the product mix
Obtaining a planning uplift
Reducing costs
Improving sales values
Changing the development strategy
Negotiating the acquisition price
6. Measure the developer’s return
Several metrics should be considered rather than relying on one headline percentage.
Common measures include:
Development profit
Development margin
Return on cost
Return on equity
Gross realisation
Net present value (NPV)
Internal rate of return (IRR)
Equity multiple
Each measures a different aspect of project performance.
For example, two developments may produce similar nominal profits but have very different IRRs because one requires substantially more equity or takes considerably longer to complete.
7. Model the development programme
Time is a major financial variable.
A feasibility should incorporate the expected project programme:
Site acquisition → Due diligence → Planning → Design → Approvals → Finance → Construction → Sales/Leasing → Settlement → Exit
Delays can increase:
Interest expense
Holding costs
Professional fees
Construction costs
Market exposure
Equity requirements
For this reason, development feasibility should be integrated with the project programme rather than treated as a standalone financial exercise.
8. Undertake sensitivity analysis
No feasibility should rely solely on the base case.
At minimum, test the impact of changes in:
Revenue
Sale prices
Rental values
Absorption rates
Costs
Construction costs
Infrastructure costs
Professional fees
Finance
Interest rates
Loan-to-cost
Equity requirements
Programme
Approval delays
Construction delays
Sales period
A useful feasibility should identify which assumptions actually drive the project’s outcome.
9. Consider risk-adjusted feasibility
A project can be profitable on paper while still being commercially unattractive because of excessive risk.
Typical risks include:
Planning uncertainty
Infrastructure constraints
Contamination
Flooding
Biodiversity
Bushfire
Construction escalation
Contractor risk
Financing risk
Market volatility
Sales risk
Approval delays
The key question is therefore not simply:
“How much profit can we make?”
It is:
“Is the expected return sufficient for the risks and capital required?”
10. Keep the feasibility dynamic
A feasibility should evolve as the project progresses.
The assumptions used during site acquisition will inevitably change as:
Planning advice improves
Concept design develops
Consultant investigations are completed
Construction pricing becomes available
Finance terms are confirmed
Market conditions change
Sales evidence improves
The feasibility should therefore be regularly updated and used as an active development management tool, not simply prepared once for an investment committee.
The bottom line
A strong property development feasibility combines:
Planning + Market Analysis + Design + Cost Planning + Finance + Programme + Risk + Development Strategy
The spreadsheet is only the output.
The real value lies in understanding the assumptions behind the numbers and determining whether those assumptions are achievable.
For developers, investors and landowners, a robust feasibility can help answer three critical questions:
What can we develop?
What is it worth?
Should we proceed?
At Property Development Australia, we assist clients with development feasibility, due diligence, site assessment, acquisition strategy and development management across residential, commercial, industrial and mixed-use projects.
Property Development Australia — Development & Project Management Consultants
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