Thursday, 21 May 2015

Definition of the Final Product in a Feasibility Study

Product Definition in the Feasibility Study

Probabilistic Approach. Selling Prices.

Foundations of Real Estate Financial Modelling
The Feasibility Study of a building project is based on estimates (mainly about time and costs) and assumptions (e.g., evolution of the market). As a result, it can only be considered by way of approximation, subject to an inevitable error margin. Real estate developments are always developed in an environment of uncertainty, so it is necessary to apply a probabilistic approach that considers all risks associated with the project. This approach makes the results provided by the Feasibility Study to be more comprehensive and reliable, but also less precise. The fundamental equation that should condition the Feasibility Study expresses performance as a result of subtracting cost of sales. Performance is deemed acceptable by applying profitability criteria, among which is the comparison with other investments that provide returns with an equivalent risk.

Definition of the Real Estate Product

In real estate developments, product definition is progressive, so from an initial description, the implementation of the successive phases of the project will provide the definitive features and functions. The Feasibility Study must contain an initial definition of the real estate product, which can be complex to the extent that it may be a product composed of multiple partial products. The initial definition process is subjected to conditions, among which are the following:
  • contract terms
  • the state of offer and demand in the real estate market
  • the legal and technical regulations that may result applicable
  • economic and financial demands.

Selling Prices in the Feasibility Study

In the initial product definition provisional sales prices should be set. The establishment of the selling prices of the real estate products is a business task that should be based on two essential requirements:
  • final prices should be competitive, based on the market situation and based on the marketing strategy
  • the income should always cover the estimated costs, within a certain margin of error, considering direct costs plus an appropriate share of indirect costs.

The marketing strategy should be structured in a set of techniques to promote, sell and distribute the final products. Its suitability can allow sales prices slide upward within the range set by the real estate market.

Architect Report

Daniel Trujillano, Architect
Feasibility Studies for Building Investments

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