Real estate field is a multi-step process that can be complex, uncertain and lengthy. It can take years to deliver a project from the initial preparation stage through construction to ultimate completion, and there are plenty of barriers that can rise up along the way. Yet construction projects also can be highly productive investment opportunities. By outlining, these projects provide the opportunity to serve a product that does not exist in a market now, often giving the fresh new supply to satisfy pent-up market interest. When performed well, this aspect of a development project can translate into a runaway success story, something that simply isn’t almost as possible with an existing asset. Investors can more positively assess some of the risks connected with development by better understanding the “life cycle” of a development project.
The rise in this sector is due to the good projects that are being developed in the country. The Maryland Realtors and Developers are a renowned firm which provides real estate property in Pune and other areas at affordable prices.
There has been a constant growth in the real estate sector in India. A recent report showed the growth in the majority of the states in India. Maharashtra being at the top recorded a 15% growth in this sector while Tamil Nadu rank second with an 11% rise in growth. Uttar Pradesh has shown 10 % rise while Gujrat and Karnataka have shown a 7% rise in the real estate growth.
Risk across project type and stage
Majorly two factors can play a significant role in the risk of a given project: the project type and stage.
An example of a project type with comparatively low risk across all stages of the life cycle is a retail project. In a retail project i.e. build-to-suit, a developer achieves a long-term credit tenant, such as a Walgreens or McDonald’s, and develops a property to suit that resident. For such types of projects, expansion risk is low because the buildings are similar in a manner, and renting risk is almost non-existent because the tenant is already recognised and under lease with restricted ability to terminate. There may be some pre-development risk depending upon the regulatory hurdles, as described in the Pre-Development section below.
As each step in a project construction is completed, generally project risk incrementally reduces. Early in the process, there are possible obstacles and unknowns. As a project comes to the ready construction stage, many of those possible difficulties have been identified and resolved and there is more certainty related to execution, costs and schedule.
Types of projects:
Pre-Development: Early stage
The initial stage of a project concentrates on due diligence, analysis and authorisations. It is often the most variable in duration. Investing at this stage offers the greatest and various possible risks because there are many unknowns.
Some of the common steps in this phase include:
Market analysis and feasibility study
Land acquisition or obtaining option rights to buy land
Site plans, development plans, and building plans
Arranging construction financing
Some infrastructure improvements
The pre-development work is usually funded by the project sponsor or a source of seed equity that might get taken out by the construction loan, as this stage is the riskier. Purchases made during this stage, hence, provide for greater returns than those made during the later stages. One significant tip for equity investors is that obtaining development financing from a bank or other lender is a very rigorous method, and if a builder already has a development loan arranged, it usually means that a number of major obstacles have been cleared.
The land use application procedure can delay a project for some period of time or even for years. For this purpose, the land use authorization, while not the final approval for development purposes, is often the greatest difficulty in obtaining project financing. Some items that might delay land use permission are:
Appeals from neighbours or other parties
An involved design method that requires various site plan iterations
Conflicts between the developer and the authority
By giving a permit, the jurisdiction is allowing a project on a technical ground. A jurisdiction, through its engineers, will examine building plans to decide whether they meet certain safety criteria and conform to current building regulations. The building permit request process is relatively fast compared to the land use process as it is based on objective standards. Hence, it is less likely to slow fundraising. The building permission is generally the last event in the pre-development stage.
Middle Stage: Construction
The middle stage includes constructing the plan and design. Since the pre-development jobs have been finished, the project risks at this stage are greatly subdued but certainly not killed.
Some of the basic steps in this stage include:
Drawing on construction financing
Arranging for property manager
Arranging permanent financing
The project typically is funded at this stage by the sponsors, investors and a short-term construction mortgage. Often, the debt is given to the developer in increments called “draws” upon the completion of construction stages. Investments and loans made during this stage usually provide lower incomes than pre-development investments but larger incomes than those made for fully-constructed or maintained buildings.
The certification of occupancy generally indicates the end of the construction phase and leaves for the commencement of property plans. Like the building permit, it is dependent upon objective criteria concerning construction quality and is a fairly administrative method.
Last Stage: Operation
The last stage of the development process, operation, is the initial stage of the building’s life. Though the pre-development and construction risks may be eliminated by this point, getting tenants is still at risk.
Some activities during the final stage include:
Ongoing marketing and leasing
Determining a hold strategy, if not selling
Finding a buyer, if not done earlier
Ramping up property management