How Good Risk Management Can Protect Your Investment
|By Development Finance Partners / Matthew Royal|
At this particular time in 2013 we have two clashing scenarios going on. On the one hand, with our current low interest rates, the time is ripe for investing in property developments. However on the other hand, the banks are tightening up their lending criteria, making it difficult for cash-strapped property developers to source the required capital.
This is leading to a rise in private discretionary money or senior debt lending to provide the funds required for development projects. Short-term, relatively high-interest loans are filling a gap in enabling property developers to get their projects underway, often lending a higher percentage of the project cost than traditional banks. In addition, in some instances, developers are utilising preferential equity funds to fill the gap between bank funding and the amount of cash they are willing to contribute to the project themselves.
It’s just a fact of life in property development that large sums of money frequently change hands. The vital element in any development project is sound risk management and excellent project control, to protect the investment and all interested parties involved. Only through good management will the investment deliver the expected return and match the numbers presented in the initial feasibility study as closely as possible.
Good risk management has to start at the beginning
Development projects can fail for a number of reasons. This includes poor timing of a project, mismatched supply and demand, changes in economic conditions, cost overruns, and project or financial mismanagement.
Risk analysis / management must start with the feasibility study stage. The finalised study acts as a project guide and needs to include all cost elements, and to factor in the possibility of changes that could occur during the life of the project – such as increases in labour costs, time delays, zoning alterations, or changes to land tax or capital gains legislation. The feasibility study should be as rigorous as possible, allowing for worst-case scenarios during the life of the project. It should involve sound market research to minimise the risk of supply not matching demand.
Some of the considerations of property development at this early stage – whether domestic or commercial – include site location, availability of utilities, proximity to services such as hospitals and schools, the physical characteristics of the site, stormwater issues, development and building permits, acquisition costs, professional fees, construction costs, insurance, GST, and expected monetary returns.
Managing risk through the project
Good management requires expertise. The services of professionals such as quantity surveyors and project or development managers help to keep the project under control and developers achieve their investment goals. A good quantity surveyor will aim to keep the project within budget, finding the most cost-effective means to finish the development.
Project or development managers are involved in the practical detail of the project, managing resources such as materials and labour to efficiently complete the build, and consulting with the developer on ways that he or she can avoid losses and minimise risk exposure.
Good project management is about having as many bases covered as possible. The saying ‘the devil is in the detail’ applies here – throughout the life of the project risk management should be as thorough as possible in order to protect the investment and maximise the chance of the most favourable outcome.
If you want to talk to us about how we can help managing your risk, contact us now.
Could your next project benefit from some expert development finance? Get in touch.
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