Types of Risks in Property Development
“It is impossible to live in life without taking risks, unless you live so cautiously that you might have not lived at all. In which case you failed by default.” – JK Rowling
We deal with risk in our everyday life, we manage it, we avoid it & we contain it. Property Development is no different; in fact everything about property development process is about managing and mitigating risk from the onset. There are numerous ways of risk mitigation, however, the best thing you can do is hire an experienced property development manager or a property development project manager who can help you guide through the process. Hiring a development manager for your property development endeavor is the first step in mitigating risk.
Why do projects fail?
Above are some reasons as to why property development projects fail however, when these reasons need to be looked into in greater detail in order to break them down further, so decisions can be made based on facts and research.
In a broader sense wrong location is a park of Market Risk & is heavily dependent upon the demand and supply in your chosen area of development. While researching for a location it is imperative to do a gap analysis on the supply and demand of the product that you are considering developing in that area. Positive Property Pro can analyze demand and supply for you and conduct a gap analysis to ascertain whether or not the area has a demand for your product. When conducting property development due diligence, Positive Property Pro will also include a competition analysis which will show you competing projects in the area which are expected to come on market around the same time as your product.
Bad timing stems from bad economic conditions & or getting into the development project at the wrong time. It is important to understand the economic signals and to be able ascertain the real estate value cycle aka property clock. Timing can be massive risk and shatter a perfectly lucrative development project if ignored.
Delivery Risk breaks down into 3 critical factors.
- Construction – Unforeseen cost blowouts can play havoc on project budget, profitability and can even cause losses. Any delay in construction has a direct impact on the bottom line of the project. Therefore, it is imperative to have a builder with track record and experience in building the kind of product you are building to take the job.
- Finance – It is important to have all corners covered. Finance poses a very direct risk. For instance, halfway around your project, markets turn and your funding institution decided to pull the plug on your project, it can pose a very real risk to the life of the project.
- Marketing – Selecting an average sales agent and selection a gun sales agent could make a substantial difference to getting pre-sales & off loading your project at the end of the development, when your loan is fully drawn.
Wrong Product, Wrong Target Market and Product unfit for the market – are related to getting the design of your product right. Keep in mind that you cannot sell inverted living townhouses to a demographic which is dominated retirees & you cannot sell 2 bedroom townhouses in an area where there are more families with children than young couples without children.