In part six of an eight-part series on development, Tracey Cook explores what tools are used in the industry to manage the inevitable risk that comes with development projects.
DELAYED council approvals, lack of market acceptance, global economic downturns and unforeseen site problems are among the many factors that can blow out a property developer’s project and turn a profit into a loss.
Given that most major development projects take at least two to three years to be completed, a significant degree of crystal ball gazing is required to predict changes to construction costs, economic health, property demand and market preference for building design and development schemes.
Risk is part of developing, however, it is something smart developers expend a great deal of energy trying to ameliorate.
The $700 million Burswood Lakes project, a joint venture between Mirvac Fini and Burswood Limited, is one of the biggest residential developments in Perth and one that Mirvac Fini has been working on for years.
Mirvac Fini senior development manager Paul Lakey said that due to the long gestation period of the project, a lot of crystal gazing was required.
He said Mirvac Fini overcame the inherent risk of such a large project by conducting comprehensive research.
Comparison charts, market research and critical analysis are risk management tools the development conglomerate wields over all of its developments.
Mr Lakey said that while predicted market trends and the effects of the global economy on Perth were vital factors to be taken into account, the final decision was based on sound market research.
Site location is pivotal to a development’s success and in the Perth property market developers face stiff competition to secure good quality development sites.
“Buying up prime locations by the water or with a point of difference reduces risk,” Mr Lakey said.
“The Burswood lake site has so many points of difference that it is hard to see how it can’t work.”
One of the biggest risks for the developer is delay.
“It all goes back to timeframe. It is the killer with finance,” Mr Lakey told WA Business News.
“Construction cost is the other big risk. You are crystal balling again how the future economy will affect costs of materials and labour.”
Getting the desired development approval is another risk when purchasing property.
Mirvac Fini has spent two years getting development approval and has had to spend millions of dollars on a site clean up.
Mr Lakey said getting approval was a managed risk that could be controlled by building up good working relations with all parties involved.
Niche development management and marketing company Asset Special Projects senior manager Gianpaolo Crugnale said he preferred to look at development risk in terms of solutions rather than problems.
He said that sometimes you had to think out of the box and make a site work.
“The time between buying land and constructing is the most uncertain,” Mr Crugnale said.
He said his company was there as the developer’s friend and did not just react to the market but moved with it.
“Lots of people get on a site and develop it, then run into trouble,” Mr Crugnale said.
“The greatest risk is when things aren’t organised or are not done properly.”
Mr Crugnale said conducting a thorough site investigation prior to purchase, market research and building up good networks and alliances with builders, architects and councillors was important.
However, the harsh reality is that there is often some risk in property development that cannot always be managed.
“In risk management there is always an unknown quantity and you can only do a certain amount of due diligence,” Mr Crugnale said.
“Sometimes you work on a project for a year, spend $100,000 getting there then you have to walk away from it.”
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