Property Development, Getting the Numbers Right
Having the right tools to interpret financial information is critical to any business. This is of particular importance to the property industry in planning developments or considering alternative investments. Cash flow forecasting models need to be reliable, appropriate in size and complexity and cater for a multitude of needs.
Now more than ever it is imperative that property developers undertake a robust feasibility and cash flow analysis of their proposed developments. This analysis not only benefits the developer, it also provides comfort to financiers.
A typical cash flow model for a property developer should enable the user to quickly change key variables and instantly determine the impact this has on their development.
As a minimum the template should cater for sensitivity analysis centered on the following key variables:
- Construction costs
- Construction time table
- Equity requirements
- Bank interest rates (margins, line fees and establishment fees)
- Mezzanine finance
- Taxation considerations
The above variables should be altered to perform a stress test on the development. This analysis may then form the basis for presentations to potential financiers and investors.
Many finance proposals fail to secure funding due to an inability to accurately forecast the total debt requirements. An accurate forecasting model will help to identify options to reduce the debt required thereby increasing the chances of successfully procuring finance. Having reliable data readily available that has been rigorously tested is crucial to obtaining the trust and confidence of financers and investors in difficult times.
Comparing one investment to another not only involves estimating the quantum of the returns but also the timing of the cash flows. Internal Rate of Return (IRR) assists in comparing investments of varying amounts and timing.
Investors seeking to take a direct holding in a property asset should undertake a rigorous assessment of the potential IRR the investment will provide. This IRR should be benchmarked against other potential investments to determine the most profitable application of the investor’s funds.
Many factors will impact on a property’s return and as such an investor should be able to quickly analyse key variables to determine the impact they will have on the IRR. Such variables should include but are not limited to:
- Purchase price
- Bank interest rates
- Discount rates
- Rental reviews
- Taxation considerations
- Disposal price
The financial model used by the investor should allow for each variable to be quickly altered and provide an accurate result.
Pitcher Partners has worked extensively with property developers and investors to develop forecasting models that are cost effective, accurate, reliable and easy to use.