PROP 342 Development

Property Development

A multifaceted process involving the purchase, improvement, and sale or leasing of land/buildings to create profit.
Developers coordinate land, capital, design, and tenants to turn ideas into real assets.

What developers do

Developers initiate and complete projects, coordinate all stakeholders, and aim to create profit by increasing property value.
They take on full responsibility for delivering the project.

Developer risk

The potential for financial loss or failure associated with property development projects due to market fluctuations, construction issues, or regulatory changes. Developers must manage these risks to ensure project success.

Managing Development risk

Developers invest upfront capital, carry uncertainty, and often have personal liability.
They take the first money in and last money out, meaning they bear the highest risk if the project fails.

Developer attributes

Strong market knowledge, understanding of finance and design, ability to manage time and risk, and an entrepreneurial mindset.
They typically control land, capital, knowledge, or tenants.

How development starts

Development begins either from demand (use looking for a site) or from land ownership (site looking for a use).
A key concept is identifying the highest and best use of land.

perception of developers

Developers are often criticised for profit motives but are responsible for creating cities and infrastructure.
Development quality reflects market demand.

Property market cycles

Property markets move in cycles of growth and decline, typically lasting 7 to 13 years, affecting rents, values, and vacancy rates.

 Boom-bust cycle

Demand increases → rents rise → development increases → oversupply occurs → vacancy rises → rents fall → market recovers → cycle repeats.

Timing in development

Development timing is critical because projects take years to complete.
Starting at the wrong point in the cycle can result in oversupply, vacancies, and financial loss.

Causes of cycles

Economic factors such as immigration and business confidence, and market behaviour such as supply and demand imbalance and overconfidence.

Reducing cycle risk - risk mitigation

Pre-leasing and pre-sales are used to secure income or buyers before completion, reducing exposure to market downturns.

Behaviour in cycles

During booms, developers often act with reduced caution, leading to oversupply and eventual downturns.

development process

A staged process of progressive refinement where risk decreases and detail increases as the project moves forward.

Importance of early decisions

Early decisions have the greatest impact on project success.
Mistakes made early are costly and difficult to fix later.

Development stages

Initiation → Concept → Evaluation → Definition → Approvals → Construction → Commissioning → Asset Management.

Purpose of staging

Staging allows gradual commitment of capital, reduces risk, and provides go or no-go decision points throughout the project.

Development funnel

The process moves through a funnel where uncertainty decreases, detail increases, and financial commitment rises.

 Early development stages

Initiation, concept, and evaluation focus on identifying opportunities, developing ideas, and assessing feasibility before committing to the project.

Middle stages, definition and approvals

Design is refined, risks are planned, financing is arranged, and all approvals and contracts are secured.

Late stages - construction to asset management

The project is built, completed, handed over, and then managed to maintain performance and value.

Cost and commitment over time

Early stages involve low cost and high flexibility, while later stages involve high cost and low flexibility, with a point of no return.

Value management

A process used to ensure the best outcome by aligning stakeholders, refining design, and identifying risks early.

Feasibility

A financial assessment used to determine whether a development should proceed.
It compares total costs with expected value or returns to decide if the project is viable.

go / no-go decision - feasibility decision

Total project cost is compared to the sale value.
The difference is development profit.
If the profit is acceptable relative to risk, the project proceeds.

development profit

The difference between sale value and total project cost.
Usually expressed as a percentage of total project cost and reflects the risk of the project

profit expectations

Typical required profit ranges from 20% to 40% of total project cost depending on risk.
Lower risk projects require lower returns, higher risk projects require higher returns.

total project cost

The sum of all development costs including land, design, construction, development costs, and financing.

development cost categories

Land, design, construction, development costs (fees, marketing, infrastructure), and financing costs such as interest.

revenue in development

Income generated from leasing space or selling units.
For leased buildings, revenue is annual rent from net lettable area.

Sale value

For leased buildings, calculated as revenue divided by capitalisation rate.
For sold developments, total sales value of all units.

Cap rate

A market-derived rate used to convert income into value.
Lower cap rates indicate higher asset value.

key formula - development profit formula

Development Profit = (Revenue ÷ Cap Rate) − Total Project Cost
Often expressed as a % of Total project cost.

Rentable Area - Net lettable area

The area that generates income.
Measured using industry standards and is less than gross floor area.

rentable area measurement

Measured to inside face of external walls and includes columns, toilets, and lobbies.
Excludes lifts, stairs, and service areas.

landlord vs tenant costs

Landlord pays development and capital costs.
Tenant typically pays outgoings such as rates, energy, and maintenance.

development financing

Interest is applied to all project costs over time.
Financing significantly impacts total project cost and profitability.

limitation of sale on completion - feasibility limitation

Does not account for long-term growth or rental changes.
Only reflects value at completion, not full investment performance.

commercial assessment

A structured financial model (usually spreadsheet-based) used to calculate development feasibility using costs, revenue, and profit.

CA structure

Costs, revenue, and decision making (profitability and risk).

CA Decision logic

Total costs are compared with sale value.
The difference determines whether the development is financially viable.

Cost Inputs - land costs

Purchase price, legal fees, surveys, and vacant possession costs.

cost inputs - design costs

Consultant fees, investigations, and specialist reports, typically 10–13% of construction cost.

cost inputs - development costs

Marketing, leasing fees, inducements, infrastructure, and council fees.

cost inputs - construction costs

Building costs based on area rates or Quantity Surveryor estimates, including contingency and inflation adjustments.

cost inputs - financing costs

Interest applied to land, design, and construction over time using approximations like 0.5 and 0.42 factors.

revenue components

Rental income from lettable space, carparks, and other sources like naming rights.

net/gross ratio - building efficiency

The ratio of net lettable area to gross area, typically 85–95%, indicating how efficient the building is at generating income.

development profit - decision/final output

Profit is calculated from the model and used to decide if the project should proceed based on risk and return.

sensitivity analysis

Testing how changes in variables (costs, rent, cap rate) impact profit.
Small changes can significantly reduce profitability.

risk analysis/modelling

Different scenarios are tested to understand potential outcomes and risks in development performance.

gearing

Using debt to fund part of the project increases return on equity but also increases risk.

financing structure - development funding

Typically includes senior debt (bank), mezzanine debt (higher risk), and equity from the developer.

bank requirements - finance conditions

Banks require pre-sales, contingency allowances, approved contracts, and strong financial backing before lending.

Investment Assessment

An evaluation of development performance over time, typically 10 years, focusing on cash flow and long-term returns.

IRR - (Internal Rate of Return)

The discount rate that makes net present value equal to zero.
Represents the annual return on investment.

NPV

The total value of all future cash flows brought back to present value.
Positive NPV indicates a worthwhile investment.

IRR vs NPV

IRR is the most commonly used measure in property.
NPV is more technically accurate but used alongside IRR.

TVM

Money today is worth more than in the future, so future cash flows are discounted back to present value.

Investment Setup - cash flow structure

Initial cost is negative, yearly rental income is positive, and final sale value is included at the end of the period.

Revenue stream - revenue over time

Based on occupancy, rental rates, rent reviews, and operating costs over the investment period.

rent reviews, rental growth

Rent typically increases at intervals (e.g. every 3 years), impacting long-term returns.

Vacancy impact

Unoccupied space reduces revenue and increases costs for the owner.

asset development audit

A review of an existing asset to determine whether redevelopment or refurbishment will improve performance.

 Redevelopment analysis

Compares scenarios such as do nothing, minor upgrade, or full redevelopment using IRR and NPV.

gearing in investment - borrowing impact

Using debt increases returns on equity but introduces financial risk.

development concept

The process of identifying the best and maximised use of land and transforming a business idea into a physical building that supports feasibility and value creation.

business drivers

The underlying needs and objectives of the development that drive design decisions, focused on maximising value and ensuring feasibility.

design solution

A building concept that satisfies business needs, fits the site, meets zoning requirements, and supports efficient operation and profitability.

impact of design on development

Building cost is typically 60–70% of total project cost, so poor design can significantly increase costs and reduce profit.
Good design improves efficiency, reduces operating costs, and increases rental potential.

tenant focus / considerations

Buildings must meet tenant needs, including operational efficiency and cost effectiveness, as tenants consider total occupancy cost (rent + operating costs).

flexibility in design

Buildings must allow for future changes as building life exceeds tenancy length, ensuring long-term value.

maximasing development value

Achieved through efficient design, full site utilisation, and aligning the building with market demand and future opportunities.

masterplanning

Planning for future expansion or additional development on a site to maximise long-term value.

mixed-use development

Combining different uses (residential, commercial, retail) to increase revenue and better utilise zoning potential.

cost effective design

Ensuring every dollar spent contributes to value, avoiding unnecessary costs.

operational design

Designing buildings that are easy and cost-effective to operate, improving tenant appeal and long-term returns.

sustainable development

Green and energy-efficient buildings are increasingly required to achieve higher rents and long-term value.

premium development concepts

Include creating value from problems, identifying market changes early, securing strong locations, and partnering with key tenants.

concept presentation

Concepts must clearly demonstrate how design meets objectives, including options considered and justification for the chosen solution.

authority consents

Approvals required from authorities (primarily councils) before development can proceed, including resource consent and building consent.

Key Legislation

Resource Management Act (RMA) governs land use and environmental impact.
Building Act governs technical construction requirements.
Local Government Act governs district planning

resource consent

Approval required for land use and development impacts.
No resource consent means the project cannot proceed.

building consent

Approval required for construction details and compliance with building standards.
No building consent means construction cannot start.

urban planning - design requirements

Developments must positively contribute to the surrounding environment, including public spaces, transport, and community integration.

 Environmental impact assessment

A detailed assessment of the effects of a development, including physical, environmental, social, and visual impacts.

Types of consent

Non-notified (minor impact), limited notified (affected parties), and notified (public involvement and objections).

consent timeframes

Non-notified: 2–5 months
Limited notified: 3–6 months
Notified: 6–12+ months with possible appeals

consent costs

Include council fees, consultant reports, infrastructure contributions, and potential additional conditions.

infrastructure costs - development conditions

Developers may be required to fund public infrastructure such as roads, stormwater, and utilities.

consent complexity

Requires detailed reports from multiple specialists and can involve significant scrutiny and delays.

consent process

LIM → Resource consent → Building consent → Construction → Code Compliance Certificate (CCC)

post completion requirements

Includes compliance schedules, building warrant of fitness, and ongoing safety and maintenance obligations.

Communication Importance

Effective communication is critical for securing approvals, funding, stakeholder support, and project success.

Developer communication role

Developers lead communication, presenting ideas, securing decisions, and representing the project and team outputs.

 Communication styles

Push (asserting, persuading) and pull (bridging, attracting) styles used to influence outcomes depending on the situation.

Push style

Direct and controlled communication using logic, structure, and clear conclusions.

Pull style

Listening-based communication focused on understanding, engagement, and building alignment.

Gear changing - communication flexibility

Combining push and pull styles to adapt to different people and situations for maximum effectiveness.

Writing skills

Clear, structured, concise writing with logical flow, short sentences, and strong organisation.