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Nov 27, 2012, 12.45 PM IST | Source: Moneycontrol.com

Residential real estate - From concept to construction

Residential project development begins as a concept, when the builder evaluates the market and decide on a suitable location based on historic and projected demand for housing in that area.

Residential project development begins as a concept, when the builder evaluates the market and decide on a suitable location based on historic and projected demand for housing in that area. The location should either have more demand than supply or there should be a lot of infrastructure coming up there. Experience plays a big role at this stage - developers with insufficient experience tend to misjudge an area's potential and suffer resulting losses.

Viability Analysis

Once the site is identified, the builder needs to undertake a preliminary viability analysis, which is ideally done through an outside agency. The agency will conduct a feasibility study based on how many households already exist in the area and how many will be required over the ensuing 2-3 years (which is the average period required for a mid-income residential project). The local property registration office is the first port of call to obtain the information of existing households. The expected demand is invariably based on a certain degree of academic extrapolation. However, the location's overall development profile will provide sufficient control points to ensure a fair degree of accuracy.

Another aspect included in a viability study is the average income profile of the existing and expected population. This aspect, which basically centers around how much potential property buyers would be able and willing to spend in the area, is very important in order to arrive at the most appropriate project profile. This, again, is where many inexperienced developers go wrong. They buy into uninformed opinions and guesswork about a location and launch projects with units whose price tags are not calibrated to the locality's economic profile. Once the results of this miscalculation become apparent, it is too late. Considering the cost of constructing larger and better-equipped flats, they cannot reduce rates retrospectively without incurring heavy losses and marring their company image.

Competition analysis plays an important part in the feasibility study. In any area with sufficient real estate market potential, there are bound to be quite a few other developers in the fray. While analysing the viability of a developer's proposed project, the agency will have to assess how many competitors exist, what kind of projects they are launching and when these projects are likely to be completed. If too many other projects are scheduled for completion at the time when the developer intends to launch, the resulting glut will result in reduced demand and give rise to a pricing war.

Land Acquisition

Once the location and the type of project to be launched there are finalized, the developer scopes the area for available sites. Not all sites are equal even within a small location - some do not have sufficient ground water, while others may have geological flaws which would be very costly or impossible to correct. Some have existing access roads or potential for creation of such roads, while others lack roads and zoning regulations do not permit their creation. Yet others may be ideal but not for sale. Once a suitable site is selected, the developer enters into an option agreement or a contract of purchase for the selected site.

In a number of cases, developers have land banks in locations that they judged to hold potential for the future. Since such land may have been held for a number of years before actual use, such developers are at a distinct advantage.

Project Planning And Development Permits

If the feasibility study gives a general green signal, the developer will engage an architect to prepare the preliminary plans along with projected costs. These plans then need to be submitted to the planning authorities for clearance. This is invariably an extremely tedious and time-consuming process as a multitude of permits need to be obtained before the authorities give clearance.

Financing The Project

Once all permits are in place, the developer will have to raise capital in order to fund purchase of the site and the construction of the project. Established builders with good success records tend have significant cash reserves from previous projects and also have healthy investor pools. Their reliance on bank lending is therefore lower. Less established developers would depend a lot on their personal reserves, revenue generated by pre-sales and costly debt funding.

After funding is ensured, the developer can draft the final project plans and layouts and begin construction. Marketing of the project begins alongside. Sample flats are constructed first to offer prospective buyers a visual of what their flat would look like. At this stage, the developer will also begin marketing the project aggressively, employing various avenues of promotion and advertising. Brokers are engaged to supplement the marketing efforts of the developer's own direct sales staff.

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