The Place of Feasibility Study
The place of a feasibility study is in the heart of every investment decision. The surest way to know the rent a property can fetch is by putting it up for rent in the market. If you want to know how much a property can sell for, put it up for sale. In the case of a development project, the scenario is a little different. The market can easily change by the time the project is delivered and this means every project carries some amount of risk.
A feasibility study therefore allows the investor to design a winning project by testing it, re-designing it and re-testing it before he/she can implement it. In the long run the feasibility study will save the investor money, time and effort. One of my clients had to abandon a project, which appeared lucrative, and opted to sell the land after running some of the analytical tools that I discuss below.
A feasibility study comes in two stages: pre-feasibility stage and feasibility stage. This is explained below.
1 Pre-feasibility Study
Under a pre-feasibility study, the consultant carries out an inspection of the site and proceeds to carry out a market survey to determine the various possible alternative development options that can be put up on the site. These are then interrogated and ranked, before a recommendation of the highest and best use is proposed. The pre-feasibility report informs the design concept for the project and feeds into the feasibility study.
2 Feasibility Study
This is the actual feasibility study and a costly one. It involves many professionals such as the projects manager, architect, engineers, quantity surveyor, valuer, land surveyor, etc. With the collective input of these professionals and informed by the pre-feasibility report, the project can be conceived and costs estimated with reasonable degree of accuracy. The valuer or appraiser would then be able to determine the viability of the project.
Common Objectives of Feasibility Study
- To provide an overview of the real estate market; neighborhood characteristics, growth and future outlook.
- To consider and recommend the highest and best use of a site in terms of permitted planning parameters – user, plot ratio, site coverage and minimum plot size. A project should be economically, socially and environmentally sound.
- To estimate the cost of the project.
- To estimate the income level of the project and thus return on investment.
- To estimate the net present value of the project and thus its viability.
- To determine the internal rate of return – IRR of the project and to compare it with the industry benchmark and alternative investment vehicles.
- To determine the projects pay-back period and to compare it with the industry benchmark and alternative investment vehicles.
- To provide further recommendations that would increase the project’s potential.
Investment objective are normally defined by the investor and one project may be feasible to one investor and not feasible to another. The standard measure is however the industry benchmark, though this must not be used to condemn a project with a positive net present value.