In our opinion, good computer software for the financial feasibility for property developments is, among other things, capable of generating an appropriate variety of comprehensive feasibility reports to help one determine whether one should purchase a particular property for development for profit. In this article, our main focus concerns the importance of reviewing the cashflow reports for the feasibility of property development proposals in our company’s Feastudy software but first, for some context, I will mention what we regard as the most critical report in that software.
Picture this scenario: you have spent a considerable amount of time looking for and finding a suitable residential property to develop. You then enter into your development feasibility software all the data that are relevant to what you believe is the most financially feasible development proposal for the property. From studying your software’s Profit and Loss report, you find that there is possibly a sufficient level of profit from undertaking that proposal. What other considerations need to be satisfied before making an offer to buy the property?
There are certain specific GST laws with which property developers and other vendors of Australian real estate must comply when they sell residential property and/or land that has the potential to become residential land to purchasers; and this article has a focus on the effect of the Australian “GST at Settlement” laws on property developers and the feasibility of their developments.
Of great importance and interest to most professional property developers and financiers, when they consider the financial feasibility study of a property development proposal, are the financial metrics, internal rate of return (IRR) and internal rate of return on equity (IRRoE).
An important feature of Feastudy is its ability to calculate, in one of several ways, projected recurrent property rates and taxes charges for a developer during the estimated period that a development property, or part of it, is held by that developer as the real estate’s registered proprietor. For a Development feasibility file, Feastudy assumes that amounts for Rates and Taxes items are calculated for the period that starts from the earliest date of settlement in the Land Cost items and finishes on the last end date of the Sell-On Income items.
The Australian Goods & Services Tax (GST) has a very significant effect on the cashflows of Australian property development projects because – apart from government charges (like stamp duty and planning approval fees), rates and taxes, and finance costs – nearly every cost or income item involved in a development that is undertaken for profit-making purposes has a GST element. The timing of GST cashflows can have a substantial effect on interest costs, especially with respect to: the Australian government’s “GST at Settlement” laws for “new Residential property”, and input tax credits on creditable real estate purchases.
A critical part of a developer being able to undertake and complete a property development is having the financial wherewithal to obtain 100% of the funds that are necessary for it.
Financing a development involves: the injection of equity (via the developer’s internal cash funds and/or real estate assets used a security); and/or debt funding (external debt finance).
In addition to property developers having a naturally keen interest in determining how financially feasible a proposal to develop a property for profit might be, most if not all of them are also interested to know how viable it will be to hold that development as an investment for themselves. Compared with ‘developing for profit’, ‘developing and holding’ is more likely to enable one to maximise the sale price of the property that is developed because one can sell it more readily when there is a peak demand for income-producing property if one is prepared and able to hold the property for an extended period.
You can have a wonderful dream for a development concept for a piece of real estate but if that concept is actually financially unfeasible to implement, then you could lose a great deal of time and money by pursuing that idea. In other words, implementing your gut feeling about the viability of a property development proposal, without having comprehensive, objective and corroborating evidence for the validity of your intestinal opinion, could be dangerous for your financial and mental well-being!