The 3 biggest and often not considered, project risks you need to address in pre-acquisition feasibilities and due diligence
The Transactions & Advisory division of Hub Property Group aims to look at and assess over 700 potential project deals each year. This has led to significant success, with the department assisting clients in acquiring over 10 project acquisitions of various asset types within this timeframe, even through tough and varying market conditions.
This experience has taught both us and our clients about the key factors to consider during pre-acquisition due diligence before unconditionally contracting any potential development site. While the main and predictable items in pre-acquisition feasibility include land purchase price, market and economic conditions, revenue forecasting, and construction costs, there are other crucial factors and risks that need to be taken into account prior to acquiring a development site.
Although highlighting and adding potential risks and costs to a project may not be exciting, it is necessary to adequately cover developer risks and ensure capital is wisely invested in projects that will generate appropriate returns over an extended period (3-5+ years). Overlooking key risks can be extremely detrimental, resulting in lower returns than forecasted or, in extreme cases, financial losses.
Collaborating with our Delivery Team at Hub, we have identified some harder-to-identify risks that can still be assessed at the pre-acquisition stage, which developers may miss. These risks include:
- Allowance for Authority Costs: Estimating and forecasting the fees and contributions required to deliver a project to authorities is challenging at the pre-acquisition stage. Major cost risks can arise when relocating or reconstructing existing authority infrastructure such as power lines, overhead tram lines, and bus stops. We recommend a conservative approach, engaging a builder for constructability assessment and a qualified services engineer for comparable costs and timeframes. Including these costs in your due diligence checklists is crucial, as they can significantly impact profit margins and equity contribution forecasts if not properly allowed for.
- Site and Soil Conditions: Comprehensive site investigations are almost impossible at the pre-acquisition stage, but it’s essential to reach out to a Geotechnical and Environmental engineer during due diligence. Confirm their experience with nearby sites or previous projects. Utilizing online databases and groundwater tables can help determine an appropriate contingency level to account for unforeseen site risks and latent conditions during the delivery phase. Consulting with builders who have worked on nearby projects can also provide valuable insights.
- Legal, Title & Stamp Duty Risks: While legal obligations and interests may seem like common considerations, they must be appropriately addressed before any acquisition. Engage a lawyer during due diligence to review the Contract of Sale and Land Title. Risks such as covenants and easements can be hard to identify through online searches and may significantly impact design forecasts or prevent development altogether. Consider GST implications, existing leases, and stamp duty before proceeding with any purchase, as they can significantly affect feasibility. Pay close attention to stamp duty, especially when executing a contract under an “and/or nominee” arrangement, as improper handling can lead to double stamp duty payments.
While these factors are significant, it’s crucial to understand that due diligence is a comprehensive process, and other factors should be considered based on the site’s specific characteristics and intended project. Engaging professionals such as Hub Property Group, along with legal advisors, town planners, architects, and engineers, can provide valuable insights and expertise during the due diligence process, helping to identify risks that developers might otherwise miss.
If you are currently seeking new development opportunities or exploring a potential development site and need guidance on how to address potential risks, please reach out to our Head of Transactions & Advisory, David Walker, david@hubpg.com.au.