How to do financial feasibility study for a township project?

Over the past few years, the real-estate marketplace has shifted to favor purpose-built townships. Vacancy rates are dropping, average rents are rising and buildings are selling for some of the highest prices ever seen. Developers and investors have been impressed by how well the sector has performed over the past decade, and many are looking to enter the market.

However, a developer or an investor cannot assume that they can just build a new township and expect the renters to come. Developers and investors should analyze whether these high investment projects are financially feasible. A financial feasibility study is an assessment of the financial aspects. It considers many things including start-up capital, expenses, revenues, and investor income and disbursements. Thus, a township project is considered financially feasible, only when the return on the project (or investment) equals or exceeds the required return of the investor.  

A feasibility study requires researchers to look at target markets in depth and identify the best properties to invest in. A lot is riding on their skill, as developers, builders, financiers and investors need to know the answer to key questions before construction starts. Such questions include:

1. What is the depth of the market?
2. What unit mix, amenities and features are appropriate for potential renters in that market?
3. What are the highest rents that can be charged?
4. Should certain lifestyle renters be targeted?

Ultimately, an impartial feasibility will provide a potential investor whether they should build and what they should build. This way, a new township could meet the target marketplace most efficiently, generating the highest rents for the lowest cost, improving net operating income and the ultimate value of the property.

Potential developers or investors should never conduct their own feasibility study on a property. Investors who conduct their own feasibility study are too close to the investigation, nonobjective, or limited in their experience. It is too tempting to let wishful thinking drive conclusions, and a lack of experience thwarts an investor’s understanding of the nuance of the market.

An objective and thorough feasibility study is best achieved by industry experts who have no financial stake in the outcome of the project. These experts are able to take the long view and provide investors with the advice they need to hear, rather than the advice investors want to hear.

Hence, a well-chosen independent consultant will be the best person to conduct the financial feasibility. Independent consultants have access to resources that individual investors do not. In addition to long experience in the field, consultants can rely on an army of field surveyors who can visit as many of the comparable rental properties as possible.