A property development can look like a very simple calculation.
Buy land for R10 million. Build something worth R100 million. Sell it. Make a handsome profit.
That calculation leaves out the part that consumes years of a developer’s time and millions of rands.
Property development is a business where capital can remain tied up for months or years without producing a return. Planning delays can push a project further from its original completion date, and every month added to the programme has a financial consequence. Even the timing of bank funding can affect progress when the money required for one stage of the project does not arrive at precisely the point it is needed.
The building itself is only one part of the equation.
For developers, the real challenge is managing the period between putting money into a project and getting money back out.
A good site does not create an instant return
Buying the right property is often the first major decision. It is also where the clock starts.
A developer can acquire land with excellent development potential and still spend many months getting the project ready.
Getting from an attractive piece of land to an approved development requires coordination across the professional team. Plans need to satisfy the relevant planning requirements, engineering work has to support the proposed development and the project must progress through the necessary municipal processes.
A change at one stage can have consequences elsewhere, which is one reason seemingly small issues can add weeks or months to a programme.
Each professional adds a cost. Each stage takes time.
That creates an unusual financial situation. The developer has invested capital into the property, yet the project may be generating no income.
If the process takes 18 months or two years, finance costs continue to accumulate throughout that period.
The original feasibility study can then look very different from the position on the day construction finally starts.
Construction is not simply a matter of paying the builder
The next financial hurdle comes once work starts on site.
Development finance is commonly structured around progress. A bank may release funds as construction reaches agreed milestones and value is added to the property.
The developer still has to keep the project moving between those funding points.
Contractors submit claims. Materials need to be ordered. Consultants need to be paid. Insurance and other project costs continue.
Cash flow can become tight even when the development itself remains commercially sound.
That is one of the less visible risks in property development. A project does not have to be a bad investment to experience a funding squeeze.
It can simply be a timing issue.
A developer may have substantial value in the land and a bank facility in place, yet still need additional short-term funding to cover a gap between expenses and the next incoming tranche of finance.
Time has a price
Every delay has a financial consequence.
If a development takes three months longer than expected, there may be another three months of interest. Professional fees may continue. Security and insurance costs remain. Site overheads continue. Revenue from completed units may be pushed further into the future.
The effect compounds across a project.
This is why the headline selling price of a development can tell you very little about its final return.
A development selling for R50 million is not a R50 million business. The developer needs to account for land, construction, professional fees, finance, marketing, legal costs, municipal charges, taxes and a long list of other expenses.
Then there is the developer’s time and risk.
The land can be the real investment
There is a bigger point behind all of this.
In many developments, the strongest part of the investment thesis is not the building itself. It is the land.
A developer may acquire a site at one point in the market cycle and spend several years getting it ready for construction. If the surrounding area strengthens during that period, the underlying property may become more valuable.
That can materially influence the economics of the project.
It also explains why experienced developers focus so heavily on acquisition price, zoning, location and the ability to hold the property for the required period.
The development needs to make sense as a construction project. The land acquisition needs to make sense as an investment.
Both have to work.
Funding gaps can put good projects under pressure
Property developers do not always need another large development facility.
Sometimes the requirement is much more specific.
A developer may need funds to secure a property while another transaction is being completed. There may be a gap between purchasing a site and securing longer-term finance. A construction project may need additional working capital while the next bank draw is processed.
These situations call for finance that is structured around the timing of the transaction.
This is where property bridging finance can provide a practical funding solution.
- RELATED POST: The Different Stages of Development and How Property Development Funding Fits Each One
Geddes can help bridge the funding gap with bridging finance
At Geddes, we offer property bridging finance for South African businesses that need short-term funding linked to property transactions.
We look at the underlying deal, the property and the proposed repayment route to assess whether bridging finance is appropriate for the requirement.
For developers, this can be particularly relevant when timing creates a gap between an immediate property-related obligation and the next source of funding.
Property development will always involve risk. The financial plan should account for that risk from the outset.
A strong sales forecast is only one part of the equation. The real test is whether the funding structure can keep the project moving through each stage until the anticipated exit.
That is where the right finance can make a practical difference to how a development progresses.
This article was originally published on Moneyweb, written by the Geddes team.