August 2, 2020
3 Strategies to Manage the Risk and Impact of Market Movement on Development Profit
Rarely does the property market “stand still” through the 2-3 years it takes to complete a property development. A movement in the market of 5%-10% may supercharge or erase potential development profit.
Developers can manage the risk of potential market movement to ensure a development remains profitable and to protect invested capital.
During the site acquisition phase, a developers feasibility analysis will consider the impact of 2.5%, 5% and 10% market movement, both up and down to understand the impact on forecast profit, then consider one or more strategies to lock in an acceptable profit
- Presell a portion of the project prior to construction that will guarantee a break even outcome and then consider to sell or rent out the balance on completion, depending on the market at the time;
- Presell a portion of the project prior to construction that will lock in an acceptable level of profit, and let the balance ride the market;
- Presell 100% of the project and lock in a profit that is acceptable and take away the impact of market movement up or down.
Conservative developers only consider locations that are resilient when the broader market experiences down turns. This approach also reduces the impact of downward market movement on development profitability.
We hope you have found this insight helpful to manage market movement when planning your next development.
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