Real Estate development is a complex and multifaceted process, involving land, construction, permits, infrastructure and numerous practical and financial considerations. In order to better understand the requirements, and how Estateguru evaluates development projects that are seeking funding through the platform, we’ll go over the different stages of the process below.
The Project Stages
Let’s first review the typical stages involved in real estate development and project evaluation, before taking a closer look at some of the more important ones.
Land Plot Acquisition:
Acquiring separate land plots with specific permissions for building, which can be for semi-detached houses, private residences, apartment buildings, or commercial structures.
Design and Approval:
Preparing building designs, adhering to city development plans, and obtaining approvals from local authorities. This stage involves collecting technical requirements from utility providers and compiling detailed architectural and engineering plans.
Construction Estimation:
Generating construction estimates by soliciting bids from different construction companies to determine the project’s final cost.
Market Suitability:
Assessing whether the project aligns with market demands and adjusting plans accordingly to avoid potential price reductions due to mismatched products.
Risk Mitigation:
Ensuring that the development adheres to cost-effective building practices, avoiding unnecessary extravagance, and monitoring material and construction costs closely.
At Estateguru, we always evaluate projects based on their compatibility with the market and their ability to meet demand, thus reducing risk and ensuring successful repayment.
Now we’ll take a closer look at some of the most vital stages mentioned above and conclude with an overview of how Estateguru evaluates applications for funding through the platform.
Acquiring the Property
The initial phase of real estate development involves the acquisition of a suitable piece of land. When assessing the current and future value of the plot it’s important to take into account the location; is it in a sought-after area and is their suitable infrastructure and supplies in the surroundings.
For instance, let’s consider the purchase of a 10-hectare plot. To make this land ready for development, several critical factors must be addressed. These include ensuring a stable supply of electricity, water, sewage, gas, internet connectivity, and other essential utilities. Additionally, the large parcel often needs to be subdivided into smaller plots, a task that requires careful planning and documentation.
Planning and Design
A pivotal step in this process is the creation of a detailed planning document. This document outlines how the land will be divided, the layout of roads, and the allocation of different zones for various functions—such as residential, commercial, or communal spaces like kindergartens and playgrounds, depending on the project’s scope and nature.
This planning phase is particularly complex and risky due to the uncertainty surrounding the costs of establishing essential infrastructure, such as roads and utility networks. Unlike constructing a private house with relatively predictable expenses, land development often involves extensive road networks and sewage systems that may span hundreds of kilometers, requiring pumping stations and melioration facilities. Additionally, flood prevention measures may be necessary, making cost estimation challenging.
At Estateguru, we only consider financing such projects when comprehensive designs and precise cost estimates are available, as these uncertainties pose substantial financial risks.
Valuation and Risk Assessment
In the real estate industry, property values can fluctuate significantly. When assessing a development project, we calculate the property’s current value and, in some cases, its future value. This calculation involves considering factors like land conversion and infrastructure development.
For example, in regions like Riga, undeveloped land may cost around 10 euros per square meter. Once it’s converted into residential land with fully developed infrastructure, the value can soar to 60 euros or more per square meter in desirable areas. Our evaluators take into account these current and potential future values when determining the project’s viability. They also factor in construction costs to ensure accurate risk assessment.
Loan Valuation
The valuation of a development project can change at each stage. We rely on the current value of the land rather than projections. However, future value assessments are also considered, with meticulous attention to potential risks. In some cases, we use comparable deals to validate property values, particularly for land.
It’s important to note that valuing a project becomes more challenging once construction begins. Few comparable deals exist for partially constructed buildings, making it necessary to estimate future value and subtract the costs involved in achieving it, accounting for potential risks and uncertainties.
In conclusion, real estate development is a multifaceted journey that involves careful planning, design, risk assessment, and valuation at various stages. Estateguru approaches each project with a keen eye on market suitability, ensuring the best possible outcome for both developers and investors.
