Real estate feasibility: build a case you can test

Start with the decision the study must support

Buying a site, selecting a design and approving construction require different evidence. An early appraisal might compare three uses for a parcel. A later one might test a contractor price against an agreed funding facility. Write the decision, the alternatives and the approval date at the top of the brief. Otherwise a detailed model can answer a question nobody is currently deciding.

Financial modelling is one part of feasibility. Demand, deliverability, permissions, infrastructure and environmental constraints can change the proposal before a return is calculated. UNIDO includes these wider considerations in its feasibility work for industrial parks. The same discipline is useful when scoping a property study: identify which questions the financial model can answer and which require separate evidence.

Sources: UNIDO Sustainable Industrial Park Platform: Feasibility Studies

Connect the physical proposal to the financial model

Begin with a reconciled area and unit schedule. A construction rate applied to gross floor area and a sale price applied to net saleable area use different quantities. Record those definitions explicitly. A change in efficiency can alter revenue without changing the building size, while extra floors can change both construction cost and the delivery programme.

For each major input, establish the amount, calculation basis and timing. Avoid a single catch-all allowance that makes several assumptions impossible to inspect. Keep costs incurred at acquisition separate from costs incurred as work progresses, and distinguish contracted sales from the cash expected from those sales.

Give each important assumption a source

A useful assumption register records the input, unit, source document, date, responsible person and remaining uncertainty. A signed contract, a current quotation and an analyst estimate should not look interchangeable. Where comparable transactions support a price, retain the adjustments that make those comparables relevant to this scheme.

Record exclusions as carefully as included amounts. A cost estimate may exclude abnormal foundations, utility upgrades or tenant fit-out. A revenue estimate may assume incentives have already been deducted. Check these boundaries before adding contingencies or further deductions. More detail helps only when the figures reconcile to a consistent project scope.

For an early estimate, use a range that can be explained. A round percentage chosen to make the model appear cautious is difficult to defend. Explain what evidence would narrow the range and who will obtain it.

Use a simple calculation to expose the questions

Consider an invented development with sales receipts of 30 million currency units and project costs of 25 million, including land. This deliberately simple, undiscounted screen excludes finance and tax. It produces a surplus of 5 million and profit on cost of 20%. These are arithmetic results for the example, not recommended investment targets.

Now reduce receipts by 5% and increase costs by 5%. Receipts become 28.50 million, costs become 26.25 million and the surplus falls to 2.25 million. Profit on cost falls to 8.57%. Two modest input changes have reduced the initial surplus by 55%. The exercise identifies sensitivity; it does not say how likely either change is.

Check whether the project can reach its final receipt

The screen above says nothing about when the money moves. If most costs precede collections, the project needs capital to cover that gap. Plot cumulative cash flow and identify the lowest balance before funding. Then model actual facilities and equity contributions rather than assuming the forecast deficit will automatically be financed.

Check draw conditions, available amounts, repayment dates and any cash that cannot immediately be used. A profitable project can still have an unfunded period. Conversely, early customer collections can improve the cash profile without improving the total surplus. These effects need separate explanations in the review.

A dated appraisal adds another question: what return is earned for the time capital is committed? State whether results describe the project before financing or the equity investor after financing. Comparing one basis with the other can obscure the economics.

Be clear about what the result represents

An appraisal using a particular developer's costs, financing and return requirement is not automatically a market valuation of the land. RICS distinguishes development appraisal outputs from valuation considerations and places development property within its valuation standards. If a formal valuation is needed, establish the required basis and professional scope separately.

Keep the model's purpose visible when presenting a residual land amount or a return. Explain the proposal assumed, the information date and any unconfirmed planning or delivery conditions. A precise number does not remove uncertainty in those inputs.

Sources: RICS: Valuation of development property

Finish with a decision record people can revisit

Present the recommendation alongside the reasons it could change. Preserve the version of the assumptions behind the decision, and identify the next evidence or approval required. This gives later reviews a useful comparison point when a tender, programme or sales forecast changes.

• State the proposal and the alternatives considered.
• Show surplus, dated returns and the funding requirement on clearly labelled bases.
• Explain the most influential changes tested and their implications.
• Name unresolved assumptions, their owners and the next review date.