Risks associated with property development

Peter Jackson of the Urban Development Institute of Australia defines it as a financial risk with respect to the purchase, construction, marketing and selling of real property.
Real property in this instance ranges from individual residential property to major malls or buildings in the Central Business District.
The first real risk sometimes is a complete failure to understand the local economy. It is easy to be carried away by the collection of different figures or statistics of people who supposedly will want to either rent out or buy into the development without first conducting a feasibility study on current sells and pricing of similar developments. Where development is aimed for rental income, a calculation or estimation of percentage of defaulting tenants within target bracket is helpful in getting a clearer picture of the timeframe of return.

This results in most cases from a complete misunderstanding of the actual requirements of the target market. Many developments are commenced with their main target being the supposedly rich diaspora market. This in some instances has proven fatal as some of our brothers and sisters abroad are going through more or less similar financial straits. At this point property developers usually revert to the local market.
The reality of the local market is that the percentages that can afford options and concessions or inducements by the developer have to be considered.

The idea of implicitly knowing your target market is pervasive to the point of affecting the value of an increase in return on renovations.
The mere act of renovating a property is not a guarantee to an increased return in value. The building of a double or triple storey property in a high-density suburb for the purposes of recouping profit is tantamount to walking in the lion’s den. A miracle is possible but never guaranteed.

Unlike our brothers in the South, if Zimbabweans are presented with the option to purchase a property of an equivalent amount either in the high or lower density areas, more often than not, they will opt for lower density areas. This results in low demand of over invested high-density properties where the price is comparable to up market areas.
Some developers at the start of a project do not factor in potential increases in construction costs resulting from inevitable increases in building material costs. Included in this group are those developers with speculative seasonal incomes that cannot be projected over time.

One runs the risk of over committing themselves to a potential white elephant resulting in many developments being sold unfinished. Where possible, one should have a contingency fund that caters for a possible hike in materials and labour.

On the question of labour, many developments have been derailed off course because of disputes between developers and builders on site. This in most instances results from inconclusive or word of mouth contracts between developers and trade contractors.

Complaints are rampart of terms changing half way through the job or trade contractors balancing several jobs by dedicating limited times to all in the hope of maintain them.
This inevitably will prejudice the developer. The obvious prejudice being time related. The development will take a longer time to complete making it susceptible to market variations. Worst case scenario being a

downturn in property demand and pricing when the development is eventually completed.
When the delay occurs, one runs the risk of trade suppliers increasing their prices stretching the initial budget while not guarantying an increase in return from the initially expected amount. If one opts to replace the contractors then one will have to double pay.

There is no guarantee of quality on the completed work, as each contractor will blame the other regarding any possible complications or structural defects that may surface at the completion of development.
Where town planning or a change of use approval from the council is required, it is best to have a contingency plan in case it is not approved. Delays with the council are common and should be factored in the planning process. Therefore, when one purchases a specific property that can only be developed after acquiring such approval, one has investigated beforehand the probability of success.