The Importance of Pre-Investment Phase of
Development
Concepts, Issues & Challenges
Odunayo Ojo ANIVS, MRICS
Why?
Outline
•
Integrated Approach to Development
•
The Development Process
•
Why is Pre-investment Phase Important?
•
Case Study – Jabi Lake Mall, Abuja
•
Components of Pre-investment Analysis
•
Challenges of Pre-Investment Phase
•
Conclusion
Development is like making pizza…
Development is like making pizza…
LAND
STATUTORY
LEGAL
MARKET
FINANCE
TECHNICAL
Integrated Approach to Development…
Development is the carrying out of building,
or other operations in, on, over or under land,
or the making of any material change in the use of
any building or land1
Conceptualization
Asset &
Facilities
Management
Pre-Investment
Property Development is NOT building construction.
Knowledge of construction is important, but not
enough.
Marketing,
Leasing &
Sales
Concept Design
& PreConstruction
Success in Development requires a good
understanding of the market, and various factors
impacting the location and the use of the property to
be developed.
Construction
1The
Town and Country Planning Act 1990 s55(1 ) of the United Kingdom
The Development Process
PreInvestment
Phase
Highest & Best
Use Analysis
Market
Research
Underwriting &
Due Diligence
Financing
PreConstruction
Concept
Design
Schematic
Design
Permitting
Design
Development
Tendering
Construction
Mobilization
Construction
Management
Handover
PostConstruction
Sales/Letting
Asset
Management
Facilities
Management
“For which of you, intending to build a tower, does not sit down first and
count the cost, whether he has enough to finish it; lest, after he has laid
the foundation, and is not able to finish, all who see it begin to mock him”
- Luke 14:28,29 (The Bible)
Uncompleted building on Allen Avenue, Lagos
Why is Pre-investment Phase so Important?
• Pre-investment is the roadmap to
success in development
• Investors and lenders need to be sure
of the opportunity before they commit
funds.
• Development is capital intensive; costs
of oversights and mistakes can be
enormous. Risks need to be evaluated.
• Real Estate is a long term investment
and there could be changes in the
marketplace within and during the
development cycle.
Case Study: Jabi Lake Mall, Abuja, Nigeria
Jabi Lake Mall is a 30,000 sqm GBA proposed
shopping centre located in the Jabi area of Abuja
Mall is being developed by Actis and Duval Properties.
Laurus serves as Development and Project Managers
Pre-investment phase is complete.
Construction programmed to begin November 2013
Components of Pre-Investment Analysis
•
The Market:
• Macro & micro economic data
• Demand vs Supply, economic justification for project
• Market research, demographics, income levels, business environment
•
Location/Site Analysis:
• Physical attributes of Land (shape, topography etc)
• Site constraints (terrain, access, security, traffic, parking etc)
• Soil tests
•
Statutory Requirements:
• Zoning/ town planning restrictions
• Environmental impact assessment
•
Legal Considerations:
• Title due diligence
• Ownership, land tenure
Traffic Analysis of Jabi Lake Area
Site
Hydrological Map of Jabi Lake
Components of Pre-Investment Analysis (cont’d)
•
Development Budget Breakdown:
• Construction budget
• Marketing budget
• Professional fees
• Statutory charges
• Contingency
•
Viability Studies:
• Return on Capital Invested (ROE, NPV, IRR)
• Payback Period
• Financial models, cashflow projections, sensitivity analyses
• Tax advice
•
Financing Information:
• Sources of Equity (savings, retained earnings, private placement)
• Sources of debt (bank loans, mezzanine finance, bonds)
• Other Sources of Capital (private equity, securitization)
Sample Pre-Investment Construction Budget
Item
Description
Total ($)
% of Total Cost
1
Site Preparation
0.40%
2
Infrastructure and utilities – off site
0.00%
3
Infrastructure and utilities – on site
5.25%
4
Retail
5
Public Toilet and Mgt Office (incl fit out)
0.95%
6
Car Parking
9.88%
7
Public Realm and Landscaping
1.80%
8
On Site Roads to Retail
0.34%
9
External Works/Service Yards/Utilities
2.08%
10
Phasing Costs
0.00%
11
Sub Total
12
Preliminaries @ 10%
13
Sub Total
14
Design Reserve/ Contingency @ 5%
15
Sub Total
16
VAT
17
Total Estimated Construction Cost
65.88%
86.58%
8.66%
95.24%
4.76%
100.00%
Excluded
0.00%
100.00%
Functional Area
(sqm)
Rate ($)/sqm
Components of Pre-Investment Analysis (cont’d)
•
Sales and Marketing Strategy:
• Marketing channels (print media, electronic media, The Internet)
• Pricing strategy and payment plans
• Leasing strategy/ Sales promotion
•
Product Development:
• Product typologies (Sizes of units, nos. of floors, floor areas etc)
• Facilities and amenities to be provided (swimming pools, generators etc)
•
Construction Details:
• Proposed structural alternatives (foundation, walls, roof etc)
• Description, make and type of finishes
•
Project Timeline:
• Proposed start date, completion date
• Major milestones
Components of Pre-Investment Analysis (cont’d)
•
Property Management Considerations:
• Facilities management
• Asset management
•
Details of Development Team:
• Architects, Engineers, Quantity Surveyors etc
• Development/ Project Managers
• Other Advisors
• Proposed list of contractors
•
Procurement Strategy
• Construction, phasing, contracting
• Materials, sourcing
Pre-Investment Sample Checklist
Title due diligence
Land and topographical surveys
Financing Structure
Soil report
Project cashflows
Land valuation report
Financial model/ simulation
Town planning regulations
Tax advice
Building regulations
Development timeline
Traffic study
List of proposed contractors
Environmental impact study
Concept sketches
Procurement strategy
Detailed budget
Development risks and mitigants
List of potential tenants
Market study research
List of potential debt providers
Indicative term sheets from banks
Sensitivity scenarios
Marketing plan
NPV & IRR Projections
Equity commitment from Investors
Challenges
Sample Development Checklist
Title due diligence
Land and topographical surveys
Financing Structure
Soil report
Project cashflows
Land valuation report
Financial model
Town planning regulations
Tax advice
Building regulations
Development timeline
Traffic study
List of proposed contractors
Environmental impact study
Concept design drawings
Procurement strategy
Detailed budget
Development risks and mitigants
List of potential tenants
Market study research
List of potential debt providers
Indicative term sheets from banks
Sensitivity scenarios
Marketing plan
NPV & IRR Projections
Equity commitment from Investors
Challenges of Pre-Investment Phase
•
Lack of willingness by sponsors to commit resources at the early stage of
development
•
Lack of Information:
• Unavailable primary and secondary data
• Unreliable and anecdotal sources
• Unquantifiable informal sector
•
Lack of professionalism:
• Unwillingness to engage relevant professionals
• Unwillingness to go through the rigour of details
•
Dearth of Skilled Manpower
• Training and development required
Conclusion
•
Pre-Investment is at the heart of real estate development. Comprehensive
studies is a pre-requisite to success in development.
•
The recent global financial crises has made it even more pertinent for
developers to pay closer attention to the pre-investment phase of development.
Pre-investment analysis is often the difference between a project that remains
an idea and one that gets built.
•
Access to information and requisite skills are crucial to improving the quality of
pre-investment reports. This could be an opportunity for Estate Surveyors and
Valuers to fill the information gap for a fee.
•
Estate Surveyors and Valuers, due to their knowledge and training are in a
unique position to provide the best development management services.
Thank you for listening