Risks in Property Development

Risks in Property Development

Property development can be a very profitable business, but it is also inherently risky. Many unforeseen circumstances can arise during a project, potentially derailing your plans and causing financial losses.

This article will explore the three main categories of potential risks that can impact your project: financial risks, planning and appraisal risks, and construction risks. Additionally, we will offer effective strategies for mitigating these risks.

Financial Risks

Interest Rate Fluctuations

Securing financing is essential for most property development projects. However, borrowing money also exposes you to rising interest rates. If interest rates increase significantly during the development process, your holding costs can increase considerably. This can squeeze your profit margins or even push the project into the red.

Unforeseen Cost Increases

Unforeseen development cost increases are another major financial risk. Construction costs are not always fixed. The price of building materials and labour can fluctuate, and unexpected issues can lead to a risk of cost overruns. You could face a financial shortfall if you don't have a buffer built into your budget to account for these contingencies.

Market Conditions

The property market also experiences boom and bust cycles. If a downturn occurs during your development project, it can be difficult to sell your properties at the price you anticipated. This can significantly impact your profit or even result in a loss.

Additional reading: How to finance a property development

Strategies for Mitigating Financial Risks

Careful Budgeting

One of the most important things you can do to mitigate financial risk is to carefully budget for your project. This includes factoring in all of the potential costs, including land acquisition, construction, financing, marketing, and professional fees. It is also important to build a buffer for unexpected costs.

Locking in Interest Rates

If you borrow money to finance your project, consider locking in your interest rates. This will help to protect you from rising interest rates that could eat into your profits.

Market Research

Before you begin a development project, it is important to conduct thorough market research. This will help you to understand the current state of the property market and the potential demand for your development. By understanding the market, you can make more informed decisions about your project, such as the type of property to develop, the pricing strategy, and the marketing plan.

Planning and Approval Risks

Complexity of Planning and Approval Process

Property development projects often require various permits and approvals from local government authorities. These processes can involve navigating through complex regulations, submitting numerous documents, and attending meetings or hearings.

Risk of Unexpected Delays

Despite careful planning, unexpected delays can occur during the permit and approval process. These delays may stem from factors such as regulatory changes, requests for additional documentation, or administrative backlogs within the regulatory authorities. Each delay adds to the project's timeline and can impact its overall schedule and budget.

Compliance with Regulations

Project design must comply with various building codes, zoning regulations, environmental standards, and other legal requirements. Failure to meet these regulations can result in rejection of permit applications or costly redesigns. It's essential to thoroughly understand and adhere to all relevant regulations throughout the planning and approval process.

Strategies for Mitigating Planning and Approval Risks

Early Engagement with Regulatory Authorities

Initiating discussions with local government authorities and regulatory bodies as early as possible in the planning phase is crucial. By seeking clarity on the specific requirements, timelines, and procedures for obtaining permits and approvals, developers can better anticipate potential hurdles and plan accordingly.

Comprehensive Due Diligence

Conducting thorough research to understand the regulatory landscape, zoning laws, environmental regulations, and other legal requirements applicable to the project site is essential. Identifying any potential obstacles or challenges that may arise during the approval process enables developers to develop contingency plans to address them effectively.

Proactive Risk Assessment

Anticipating potential delays and hurdles that may arise during the planning and approval stages is vital. By assessing the likelihood and impact of each risk scenario on the project timeline and budget, developers can develop mitigation strategies tailored to address specific risks, such as alternative permit pathways or preemptive documentation preparation.

Construction Risks

Construction projects are complex undertakings, and there are many things that can go wrong. Poor workmanship, bad weather, and accidents can all lead to delays and cost overruns.

Specific Construction Risks:

  • Subcontractor and Labour Issues: Unexpected issues can arise with subcontractors or the main contractor's workforce. These could include:
    • Labour Shortages: A lack of skilled labour in the construction industry can lead to delays and increased costs as competition for workers drives up wages.
    • Subcontractor Disputes: Disagreements between you, the main contractor, and subcontractors can lead to project delays and even litigation.
  • Material Shortages and Price Fluctuations: The availability and cost of building materials can be unpredictable.
  • Design Flaws and Changes: Unforeseen design flaws discovered during construction or changes requested by the developer can be costly and time-consuming to rectify.
  • Poor Weather Conditions: Severe weather events like storms, floods, or extreme heat can disrupt construction schedules and damage materials.
  • Accidents and Injuries: Construction sites are inherently hazardous places, and accidents can lead to worker injuries, project delays, and potential lawsuits.

Strategies for Mitigating Construction Risks

Hire a Reputable Contractor

One of the most important things you can do to mitigate construction risk is to hire a reputable contractor with a proven track record. Be sure to get references and check the contractor's insurance coverage before you hire them.

Have a Clear Contract

Your contract with your contractor should be clear and concise. It should outline the scope of work, the timeline for completion, and the payment schedule. The contract should also include provisions for liquidated damages in case the contractor does not complete the project on time or on budget.

Regular Inspections

It is important to conduct regular inspections of the construction site to ensure that the work is being done according to the plans and specifications. This will help to identify any potential problems early on so that they can be corrected before they cause delays or cost overruns.

 

By understanding and mitigating the risks involved in property development, you can increase your chances of success. By following the tips above, you can help to ensure that your property development project is a success.

For additional tips on mitigating property development risks, contact Assured Management.

About Assured Management

Assured Management (AML) is a flexible, non-bank lender with the ability and expertise to work directly with property developers to complete projects in a timely and profitable manner.

We provide tailored construction finance solutions and property development loans for:

Curious about non-bank lenders? See our article here explaining how non-bank lenders operate.

Seek advice on your development finance needs. Contact Assured Management today on 1800 028 885.