Continued from…
Improve Your Development Game with Development Economics [Part 1-2]
The impact of financing on the cost of Property development
Banks want to make as much money as possible for their investors. The policies and practices of lending institutions vary greatly. Some lenders would not even consider a proposal acceptable to a different lender.
A developer’s success will be determined by his understanding of various lending institutions’ policies, methods, and procedures and the many financing options accessible. Ignorance of these issues can cost money and damage a project’s profitability.
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With so many credit institutions vying for business, the developer should shop around for the most important financial deal. If a loan is approved by the finest two or three institutions, the developer should evaluate each loan offer.
Because each institution is unique, examine the terms and circumstances of each offer to see which one best meets the project’s requirements. Consider the following factors that may impact the cost of your project.
Rates of interest
Interest rates differ between banks, and even the slightest difference might affect a project’s profitability, especially if the construction time is long and drawn out. A rate decrease may be considered if a developer is a good customer with a strong track record.
What if the developer is working with a different lender? In that instance, it is good to spend money upfront on a well-documented project presentation.
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Bank charges
The word “bank charge” refers to all fees and levies imposed on its customers. Many banks charge small fees for services such as requesting a deposit slip or a counter check, as well as notarising a document.
Bank fees account for a significant component of bank revenue. These fees can take a variety of forms, including:
- Fees for applying for a loan
- Fees for appraisals
- Mortgage insurance
- Legal representation fees
Check the price of each of these charges and, if possible, try to negotiate a lower price.
Fees for financial brokerage
Using a finance broker to secure development money for your project might be advantageous since they can locate lenders interested in the type of project being developed.
They will also know which lender offers the best rates, fees, and conditions. However, check the broker’s fees before hiring them, which may include the following:
Mandate fee: Some brokers will not begin working until legally appointed.
Monthly retainer cost: Some may require this price, but it is not suggested unless they offer continuing or corporate guidance.
Success/brokerage fee: These fees can range from 2.5 to 5% for seed and equity funding and 0.5 to 1% for debt, but make sure the lender does not cover them.
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Authorities’ influence on development costs
It should become a habit for a developer to review all fees covered throughout the early phases of the property development process as part of their site due diligence.
The following is a list of possible costs imposed by local governments and other government agencies. Each jurisdiction has its own set of fees, so it’s essential to determine which agencies have authority over the development site and what fees will be assessed.
Headworks
The word “headworks” comes from the old method of diverting water at the beginning of an irrigation network and positioning these procedures at the “head of the works.”
Increased growth pressures and the maintenance of infrastructure standards in the community necessitate the imposition of headworks levies. Contributions to Headworks are a one-time fee for providing water and wastewater services to your development.
These contributions, also known as standard infrastructure contributions (SICs), are GST-free and payable for works on a property up to the connection point, increasing the potential demand for existing water, wastewater, or drainage systems.
Fees for submissions
Examples are payments to the local council for development approval and fees to the state government if the development site is amalgamated or subdivided.
Building licence fees are usually included in the builder’s contract price, and they are paid directly through their builder’s registration number/licence.
Fees for additional approvals
Other fees may be levied by government authorities in addition to the fees already listed, so verify with your local council’s planning department and your development team. Additional charges may include:
- Fees for city inspections
- Electrical power
- The state planning commission
- Fees for estate fence
- Destruction costs
- Council maintenance.
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When plans go over budget
While we have discussed the fundamentals of property development economics with the above points, there will always be cases when the most fabulous planning is not enough to avoid a catastrophe.
Suppose you discover that the overall construction cost has exceeded the budget set in your feasibility study after completing the project design and paperwork and the final quotes from the builders arrive. So, what exactly do you do?
Do you put the project on hold, or do you and your team go over the plans again and search for other ways to save costs?
What I experienced in my property development journey is not all tenders received are within 100% of the budget; some are 10% above or below the stated value, while others are far more than planned.
As a result, if the prices are out of your pricing range, you and your development team must examine every design component for possible suggestions. These suggestions will be re-priced and provided for feedback.
The entire development team will then weigh in on the consequences of each decision. Here are some cost-cutting suggestions.
Reducing the number of site works is a good idea
Changing the elevations to minimise rock excavation or lifting the building to avoid cut and fill reduces expenditures. It may also be beneficial to reroute highways to avoid excavation.
Another potential option is to downgrade the quality of roadway and drainage design and reroute them to save plumbing. There are some other ways too:
- Revising the balance of cut and fill calculations is another thing to consider.
- Minimising the number of retaining walls and relying on natural banking and drainage systems.
- Lowering the number of paved areas.
- Preserving as many natural areas as feasible.
- Situating buildings for the shortest distance between service connections .
- Leveraging the land’s natural contours.
Exterior construction of the building
The building contractor can help lower the construction budget by recommending alternate materials that look comparable but are less expensive. Take a look at the following as well:
- One should consider alternative finishes for the exterior facade.
- Consider many types of roofing materials.
- Instead of a flat roof and parapet walls, use a sloped roof system.
- Redesign complex elements and make them simpler to accommodate standard construction processes.
- Reduce the size and quantity of glass used.
- If gutters aren’t necessary, get rid of them or develop a cheaper solution to manage water run-off.
- Choose external construction choices that require less time to install.
- Reduce the number of exterior perimeter walls by redesigning the floor plan.
Interior construction of the building
Marketing agents should analyse the interior design of the spaces to verify that the floor plan layout possibilities are competitive in the market. The builder can look over the blueprints for structural improvements that can be made without changing the space’s arrangement.
The interior designer can look over the interior floor plans to see where less expensive finishes can be employed. Consider the following:
- Use carpet instead of wood or tiles for a more cost-effective floor finish.
- Reduce the height of the floor to the height of the ceiling.
- Make use of low-cost plumbing fixtures.
- Make use of low-cost door hardware.
- Consider adopting less expensive heating and cooling options.
- Stack plumbing devices vertically to save water and sewerage plumbing distances.
- Instead of wallpaper, use paint.
- Rearrange the floor plan to reduce the number of doors and the length of walls.
- Use a different door.
- Use blinds instead of curtains to change the window treatment.
- Replace pricey paint colours with less priced paint.
- Reducing the number of electrical outlets is a good idea.
- Select equipment that does not necessitate the use of separate electrical circuits.
- Skylights should be removed.
- Instead of custom cabinetry, use standard cabinetry.
Design of the landscape
The landscaping design will be crucial to the development’s final success since it improves curb appeal, which helps sell the finished product. You can reduce these expenditures by using fewer and smaller plants.
The landscape contractor can look through the plans and requirements while considering the installation and long-term maintenance costs. The landscaper might suggest changes that take these factors into account and the planting season.
Amenities
Amenities will always increase the development’s costs and future operation costs, yet without them, the market may not choose this development above its competitors.
The architect can look over the amenity designs for cost savings and ease of installation. In contrast, the marketing agent should look over the facilities to see whether they provide a competitive advantage.
Conclusion
In the early stages of design development, analysing and practising real estate economics can save a lot of time and money. Examining the cost after the working drawings, specifications, and tenders will lengthen the development process and, as a result, cost more in interest due to the later market delivery.
Because their experience and ingenuity will provide solutions to every challenge, the developer should effectively use team members in this process.
Due to the sensitive personalities of the designers and the team’s expectations to succeed, the developer must be an effective leader.
The architect’s duty is to give design recommendations, the quantity surveyor’s function is to keep track of costs, but the real estate developer is the one who sets the ground rules.
One can accomplish this by thoroughly understanding your actual demands and the price you are willing to pay to have them met. You’ll have a better chance of getting the development you want if you define design and cost parameters from the beginning.
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FAQs
What is property development economics?
Developers who are looking to cut expenses and increase profits should consider how property development economics can help them.
A ‘cost reducing’ mindset is usually prevalent in awful real estate developments, but a more cost-effective & cost-saving approach would be beneficial for all parties involved with the process!
Can economic growth help development?
Economic growth is the most efficient approach for decreasing poverty and raising living standards in emerging nations. As a result, solid economic growth supports human development, which encourages economic growth.
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