The field of real estate development is very wide. It includes land purchases and development, securing finance, construction, and sale or lease of residential or commercial properties. It is a dynamic project that goes through various stages, and one that usually lasts quite a long time. Shaun Benderson warns that it is also a field with a lot of risk, however, and he feels it is important that people are aware of this.
Switch on the news, and it is likely that you will come across some story about a real estate development project. These projects, which can take place in Phoenix, Sarasota, Tampa Bay, or anywhere else in the country, are either on the news because they made a tremendous success, or because they were a complete and utter failure. It is a news scoop, in other words, rather than a true picture of the industry as a whole. This is precisely what Benderson is trying to address, mainly by explaining to people what real estate development is, what its risks are, and how they can be mitigated.
Shaun Benderson on Types of Real Estate Development Projects
There are different types of real estate projects. Mainly, they are residential, referring to properties in which regular people live, or commercial. Commercial real estate is further divided into:
3. Industrial and warehouse.
The Risks at Project Level and How to Mitigate Them
There are always risks to be aware of. At project level, those include:
- Land value risks, caused by changes in prices.
- Land exploitation risks, caused by environmental changes.
- Planning permit risks, which can take longer than was expected, or may be denied altogether.
- Construction risks, relating to every element of construction.
- Revenue risk, as properties may end up being valued less than expected.
- Duration risk, as a developer may need to hold on to the plot for longer than expected.
- Political risk, with each president changing the rules on property development.
- Partner risks, as most developers work with others and it is never possible to tell what someone else will do.
- Legal risk, which includes zoning, liability, contracts, permits, and taxes.
These risks can be mitigated by performing proper research. This includes:
- Forecasting yield development.
- Putting strategies in place for allocation.
- Understanding demand of investors, consumers, and occupiers.
Real estate developers must focus on phasing, understand contracts, make full cost calculations, be involved in the pre-lease and sales, and ensure payments are made on time.
The Risks at Portfolio Level
At portfolio level, the main risk is that the investment ends up being worthless. However, it is possible to put strategies in place for this, including:
- Having a diverse portfolio that does not focus solely on real estate development.
- Setting a proper budget and actually sticking to it.
- Ensuring strategic land positions are not too restricted.
Essentially, real estate developers are risk managers, and incredibly good ones at that.