OVERVIEW OF THE PROPERTY DEVELOPMENT PROCESS

Abigail Harding
November 2011

CONTENTS
Introduction ........................................................................................................................................................................ 1
Phases of Property Development ....................................................................................................................................... 1
Phase 1: Evaluation ........................................................................................................................................................ 2
Phase 2: Acquisition ....................................................................................................................................................... 2
Phase 3: Procurement .................................................................................................................................................... 2
Phase 4: Disposal ........................................................................................................................................................... 2
The Actors ........................................................................................................................................................................... 2
The Evaluation Phase .......................................................................................................................................................... 3
A. Opportunity/Site Identification ................................................................................................................................. 3
B. Market Analysis.......................................................................................................................................................... 3
C. Site Investigation........................................................................................................................................................ 4
D. Feasibility Study ......................................................................................................................................................... 4
Due Diligence ...................................................................................................................................................................... 5
Works Cited ........................................................................................................................................................................ 5

INTRODUCTION
Property development is a complex activity, with a series of stages involving many actors with differing objectives, all
operating within the building cycle context and its interaction with business and credit cycles. Before developers
commit to acquiring land and signing a building contract, they first evaluate the market to establish a projects
viability, and secure finance and planning consents (Wilkinson & Reed, 2008).
The purpose of this document is to gain insight into the nature of the property development process to inform a later
stage of this research that will pursue greater understanding of the factors that will encourage developers to embark
on dense residential and commercial developments around transit hubs in New Zealand. In this short paper a brief
overview of the phases of property development is provided. The initial evaluation phase is then explored in greater
depth.

PHASES OF PROPERTY DEVELOPMENT

There are a number of similar typologies to describe the property development process. The four phases of property
development outlined by Birrel and Bin (1997) is adopted for the remainder of this paper. The phases are: (1)
evaluation, (2) acquisition, (3) procurement, and (4) disposal. The steps involved in each phase are not necessarily
sequential and the steps often overlap or repeat. For example, if a development is pre-sold, parts of phase 4 will occur
with parts of phases 1 and 2. Regardless of the sequence of steps peculiar to a particular development, as the project
progresses the developer is exposed to greater risk because flexibility is reduced and commitment is increased
(Wilkinson & Reed, 2008).
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PHASE 1: EVALUATION
The evaluation phase considers the marketplace and potential development opportunities therein. It also involves
physical evaluation of the site/s and a feasibility study. This phase specifically involves:
A.
B.
C.
D.

Opportunity/site identification
Market analysis
Site investigation
Feasibility study (Birrell & Bin, 1997)

PHASE 2: ACQUISITION
The acquisition phase involves the gathering of resources, including experts, debt and equity finance to support the
investment, acquiring planning permission via resource consent/s, and purchasing the site where applicable. This
phase specifically involves:
E.
F.
G.
H.

Professional appointments
Financing
Planning application
Site assembly/purchase (Birrell & Bin, 1997)

PHASE 3: PROCUREMENT
The procurement phase involves defining the new building in response to the feasibility study (Phase 1), especially in
response to the target marketplace. The price of construction is set, and contractors are hired and managed to deliver
the construction process within the planned time and budget. This phase specifically involves:
I.
J.
K.

Design
Tendering/contracting
Construction (Birrell & Bin, 1997)

PHASE 4: DISPOSAL
This phase is about convincing people to rent or buy the new/retrofitted property and making as much profit as
possible. This phase specifically involves:
L. Promotion
M. Letting
N. Sale (Birrell & Bin, 1997)

THE ACTORS
The main actors in the property development process as outlined by Wilkinson and Reed (2008) are:
1. Landowners
2. Developers
3. Public sector and government agencies
4. Planners
5. Financial institutions
6. Building contractors
7. Agents
8. The professional team (planning consultants, architects, engineers, project managers, solicitors, accountants)
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9. Objectors
10. Occupiers

THE EVALUATION PHASE

For the purposes of this research, the focus of interest is the evaluation phase of a development in which the decision
is made to pursue a property development project. Here, the four key steps in the evaluation phase are described in
more detail.

A. OPPORTUNITY/SITE IDENTIFICATION
A potential development is initiated through the anticipation of demand for a particular type of development, or the
anticipation of a potentially higher value use for an existing site. The demand for such might be facilitated by changing
demographics, economic, social, physical or other circumstances (Birrell & Bin, 1997; Wilkinson & Reed, 2008). In
order to identify the most appropriate use, the market and the potential to obtain the necessary statutory planning
consent for the change of use must be assessed. The original initiator of the property development may not
necessarily be involved in the rest of the development process, depending on their motive or objective (Wilkinson &
Reed, 2008). Typically, the developer prepares a statement of objectives and requirements for the property
development that will be refined and tested against detailed information in the market analysis stage (Birrell & Bin,
1997).

B. MARKET ANALYSIS
Market analysis is undertaken to match a potential development with market needs. In order to establish the
potential and desired characteristics for the proposed project, property developers need to understand the
marketplace for the project, supply of competitive properties, and demand for different types of property. This can
provide the developer with an indication of demand strength for a particular building in a particular location at a
particular time (Birrell & Bin, 1997). The local economic context helps to determine the market for an individual
scheme, and the wider economy affects general property market conditions and the confidence of occupiers,
investors and developers (Wilkinson & Reed, 2008). It is also important to understand the regulatory and socioeconomical environment, and, most importantly, potential clients (Costello & Preller, 2010).
Market analysis needs to be continually re-examined and integrated with all other components of the property
development process (Costello & Preller, 2010). In practice, three levels are involved in market analysis: (i)
consideration of the present and future national and regional property market picture, (ii) consideration of the
economic potential of the site and its locality, and (iii) recommendations based on the conclusions of these analyses
(Birrell & Bin, 1997).
A clear distinction should be made between market research and marketing research. Market research explores
existing and potential market demand for a property type at the proposed location; marketing research investigates
how to develop sources of demand for the concept and is concerned with product design, pricing, and sales
techniques. In analysing local economies (the fundamental determinants of demand for real estate) and markets (the
demand for and supply of a particular property type in the market) property developers acquire the information to
make effective marketing decisions (Costello & Preller, 2010).
In a survey of property developers in Queensland, Australia, Costello and Preller (2010) found that the sources of
information valued most significantly for market research were demographic data sources, property values,
newspapers and magazines, and market research companies.

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C. SITE INVESTIGATION
The purpose of the site investigation is to examine the site conditions before the developer enters into a commitment
to acquire a particular site. It is important to clarify the physical and legal conditions of the site as unrecognized risks
might incur expense/delay or even deter property development at a later stage. The physical site conditions that
should be investigated include the site's load-bearing capacity, ease of access, site drainage, the connection with
appropriate utility services, infrastructure provision, and any likely underground problems or contaminants. The legal
considerations include the site's ownership and possession, easements, restrictive covenants, the planning status of
the site and, consequently, what type/s of building can be built on that site (Birrell & Bin, 1997).
In a survey of property developers in Queensland, Australia, Costello and Preller (2010) found the most frequently
analysed site specific factors to include the legal documentation and physical features discussed above, as well as real
estate market trends and parking provisions. Factors considered least important were proximity to amenities and
services, social characteristics, and links with other industries.

D. FEASIBILITY STUDY
The feasibility study assesses the viability of the project by building on the results from preceding analyses and
investigations to arrive at a realistic appraisal of all costs and benefits involved in the proposal, including the profit
margin, required capital investment, and appraisal of risks. The profit margin result must be subject to sensitivity and
risk analysis, which may result in adjustments to the original descriptive proposal (Birrell & Bin, 1997; Costello &
Preller, 2010). This stage of the process will establish the value of the site and should be undertaken prior to any
acquisition commitment (Wilkinson & Reed, 2008).
According to Cloet (cited in Costello & Preller, 2010, p. 177), the financial feasibility study consists of five steps:
1. Estimate total capital outlay for the project
2. Estimate total net project income
3. Develop a cash flow for the development period
4. Estimate the profitability of the project and evaluate against investment objectives
5. Complete a risk analysis on the proposed project
These steps usually require the detailed input of consultants and other experts, but the decision to proceed and
shoulder the risks rests ultimately with the developer (Wilkinson & Reed, 2008; McDonagh, 2009). The outputs from
this phase should include (a) a decision to develop or not, and (b) if the decision is to develop, a clear description of
what to develop, how to develop it, and when the development should be complete (Birrell & Bin, 1997).
Costello and Preller (2010) note that:
Feasibility never demonstrates certainty; a project is feasible when it is likely to meet its goals
Feasibility is determined by satisfying objectives that must be identified prior to commencement and
acknowledged by all participants in the development process
Logistics, timing, legal and physical constraints are all important to the selected course of action
Risk is one of the key factors influencing property investment decisions. The potential site risks explored usually
include soil problems, environmental and ecological complications, seismic concerns, hydrological concerns, and
anthropological and historical sensitivities. Viruly (cited in Costello & Preller, 2010 p.178) identifies the following
typology of risks of relevance to property developers:
Business risk: risk due to fluctuations in economic activity and factors affecting the variability of income
produced by a property
Financial risk: the use of debt financing and risks attached to excessive gearing
Liquidity risk: the risk when there is a lack of consistent and continuous buoyancy in the marketplace
Inflation risk: income from the property must increase sufficiently to counter upward trends in inflation
Management risk: all properties need to be managed properly
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Legislative risk: amendments to numerous regulations, taxes, zonings and other restrictions imposed by
government can adversely jeopardize property developments
Environmental risk: the value of real estate can be affected by changes in the environment or sudden
awareness that the existing environment is potentially hazardous
In a survey of property developers in Queensland, Australia, Costello and Preller (2020) found that all of the
respondents followed an integrated feasibility analysis framework to determine the viability of projects and in
formulating strategies for property development. The majority of companies focused on undertaking analysis of
physical and design factors, financial feasibility, and risk for land-use decisions. The least used type of analysis was
socio-political feasibility. The evaluation criterion most widely used was the Internal Rate of Return (IRR) followed by
the Development Yield. The two least used criteria were the Operating Efficiency Ratio (OER) and Gross Rent
Multiplier (GRM).

DUE DILIGENCE
In New Zealand, the evaluation phase is largely synonymous with the term due diligence, which addresses the
aforementioned steps. In a survey of 21 shareholders, managers and consultants associated with a New Zealand
residential property development company, McDonagh (2009) found that the following factors were investigated
during the due diligence stage:
General compliance with local and regional authorities standards for development, including an assessment
of the likelihood of gaining consent
Services and utilities, infrastructure, upgrades
A preliminary scheme plan including the potential number of sections
Potential site contamination issues
Development costs including earthworks, roading, and services
Risk assessment
Thorough financial feasibility analysis (including sensitivity analysis)
Negotiations with neighbours to ensure access to the property
Other accessibility considerations
Traffic reports
Market evaluation
The same study also identified factors that required more investigation to maximise time and cost efficiency in
greenfield residential development:
Assessment of risk associated with having a significant number of adjoining owners likely to object
Additional discussions with the local authority during preliminary stages
Greater understanding of the market and the sensitivity of pricing, including the likely sale price
Additional geotechnical analysis to identify the presence of unsuitable soil (McDonagh, 2009).

WORKS CITED
Birrell, G., & Bin, G. S. (1997). The UK property development process: Its phases and their degree of importance to
profitability. London: RICS Research.
Costello, G., & Preller, F. (2010). Property development principles and process - an industry analysis. Pacific Rim
Propoerty Research Journal , 16 (2), 171-189.
McDonagh, J. (2009). Critical success factors in land development in New Zealand: Part 1. Proceedings from 15th
annual conference of the Pacific Rim Real Estate Society, Sydney, Australia, 18-21 January 2009.
Wilkinson, S., & Reed, R. (2008). Property Development (5th ed.). London: Routeledge.

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