Habida and Joash made a call to me a fortnight ago; the call came from Habida as she was the one I had happened to interact with him in a previous engagement. Joash is the husband to Habida and he happens to work out of the country most of the time. My meeting with Habida was a sheer coincidence where I was involved in the development of luxury apartments for her friend Keziah in the up market area of Lavington, Nairobi Kenya and she was so impressed by the returns that her friend got from the investment. Habida and Joash have recently bought a piece of land along the southern bypass in Nairobi and they are so excited about developing it. Habida having witnessed what her friend Keziah got from her luxury apartment investments is even more excited and wants to put up almost exactly the same kind of development and her intentions is to sell the apartments at the same price as those of her friend Keziah.
When I got that call from Habida I went ahead and booked a date with her and the husband in the following week in my office. They got to the office at the time we had agreed and as usual in the office I prepared a cup of hot coffee for both of them. Habida’s mind was already made up she new what she wanted and the expected returns. I listened to her explain to me how after this project she would make enogh money to become and developer and she even joked about there being more work for me, her husband was all silent, he is one of those reserved guys. After she was through, it was my turn for me to give her my professional advice of course I didn’t want to discourage her but one thing was for sure I had a duty and professional one for that matter to manage her expectations.
My first point was to congratulate them for a great idea and also for the investment they already had in terms of the land. After that I had to share my thoughts with them and as usual I asked them whether they had undertaken a feasibility study for the project. They looked at each other and then looked at me, Habida went first and she shook her head and I knew the answer, it was a big no. I took time to explain to them what a feasibility study entails and what are the advantages of such an endeavor before undertaking any real estate development, I can tell you for sure they walked out of my office more satisfied but of course with their expectations managed.
Many people today are like Habida and her husband when it comes to investing in real estate developments. Either they know a friend who made a kill from a project they undertook or have heard a good rumor somewhere of how they can put up a development and become instant millionaires. Truth be told you can get into a certain real estate and it becomes a nightmare for you. One important aspect in real estate development that people often forget is undertaking a feasibility study and I would like to address it in a very simple but self explanatory way.
What is a Feasibility Study?
According to Wikipedia A feasibility study is an evaluation and analysis of the potential of the proposed project which is based on extensive investigation and research to support the process of decision making.
In simple terms as the name implies, a feasibility study is an analysis of the viability of an idea. The feasibility study focuses on helping answer the essential question of“should we proceed with the proposed project idea?” All activities of the study are directed toward helping answer this question.
A feasibility study main goal is to assess the economic viability of the proposed business. The feasibility study needs to answer the question: “Does the idea make economic sense?”
The feasibility study of a proposed project seeks to determine the following but not limited to;
(1) Source of capital
(2) Market readiness to the investment
(3) Will the project budget be enough
(4) Will it be profitable i.e. Return On Investment (ROI)
Source of capital
Any real estate investment requires a heavy capital outlay and would have been important for Habida and her husband to seat down and analyze the different options they have in order to fund their project. Without that the idea might just remain in papers forever. There are different sources of capital today to fund a real estate development but the trick always is, the funding body always would like to know how the investor will be able to pay back the money and that’s where a business plan comes in handy (To be discussed in the next issue). Different options have different cost implications and one must better leave this option to the experts to do it for them because the funding bodies are also in business. Once the source of funding is settled on they needed to move to the next step which is;
Market Readiness
The most important question that one need to ask him/herself is this “is the market ready for this kind of real estate development?” For the case of Habida and husband, the location of the land would be a very big challenge to put up luxury apartments there, but if they were to go for a low cost housing project it would have very positive results. It is important to study the real estate market and understand what sells in a particular place and what can’t sell because here we are talking about an investment.
Also, a market assessment may be conducted that will help determine the viability of a proposed product in the marketplace. The market assessment will help to identify opportunities in a market or market segment. If no opportunities are found, there may be no reason to proceed with a feasibility study. If opportunities are found, the market assessment can give focus and direction to the construction of business scenarios to investigate in the feasibility study. A market assessment will provide much of the information for the marketing feasibility section of the feasibility study.
Project Budget
For any real estate project to take off it is important to have a project budget. The project budget helps an investor organize their financies, it also helps them when looking for finance from the financiers. A project budget includes; Cost of land, Construction estimates, Professional fees, marketing costs and any other expenses that would go into the project. This is a very key step to undertake as it is used to determine the next course of the project. The project budget may prove too expensive to undertake the project and therefore some cost cutting initiative are put in place what is commonly referred to as cost engineering.
Return on Investment
At this stage the investor is able to know whether the project is profitable or not and there they are able to decide whether to go on or not. Once the investors knows the project budget, and market studies have been done and they know how much to expect from the proposed development, an analysis is done to compare the project cost and the estimated income from the project. This step informs the investor whether the project is profitable or not.
Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of an existing business or proposed venture, opportunities and threats present in the environment, the resources required to carry through, and ultimately the prospects for success. In its simplest terms, the two criteria to judge feasibility are cost required and value to be attained.
A feasibility study evaluates the project’s potential for success; therefore, the perceived objectivity is an important factor in the credibility to be placed on the study by potential investors. It must therefore be conducted with an objective, unbiased approach to provide information upon which decisions can be based.
A consultant may help you with the pre-feasibility study, but you should be involved. This is an opportunity for you to understand the issues of project development.
Results and Conclusions
The conclusions of the feasibility study should outline in depth the various scenarios examined and the implications, strengths and weaknesses of each. The project leaders need to study the feasibility study and challenge its underlying assumptions. This is the time to be skeptical.
Go/No-Go Decision
The go/no-go decision is one of the most critical in business development. It is the point of no return. Once you have definitely decided to pursue a business scenario, there is usually no turning back. The feasibility study will be a major information source in making this decision. This indicates the importance of a properly developed feasibility study.
Feasibility Study vs. Business Plan
A feasibility study is not a business plan. The separate roles of the feasibility study and the business plan are frequently misunderstood. The feasibility study provides an investigating function. It addresses the question of “Is this a viable business venture?” The business plan provides a planning function. The business plan outlines the actions needed to take the proposal from “idea” to “reality.”
The feasibility study outlines and analyzes several alternatives or methods of achieving business success. The feasibility study helps to narrow the scope of the project to identify the best business scenario(s). The business plan deals with only one alternative or scenario. The feasibility study helps to narrow the scope of the project to identify and define two or three scenarios or alternatives. The person or business conducting the feasibility study may work with the group to identify the “best” alternative for their situation. This becomes the basis for the business plan.
The feasibility study is conducted before the business plan. A business plan is prepared only after the business venture has been deemed to be feasible. If a proposed business venture is considered to be feasible, a business plan is usually constructed next that provides a “roadmap” of how the business will be created and developed. The business plan provides the “blueprint” for project implementation. If the venture is deemed not to be feasible, efforts may be made to correct its deficiencies, other alternatives may be explored, or the idea is dropped.
Reasons Given Not to Do a Feasibility Study
Reasons given for not doing a feasibility analysis include:
- We know it’s feasible. An existing business is already doing it.
- Why do another feasibility study when one was done just a few years ago?
- Feasibility studies are just a way for consultants to make money.
- Feasibility studies are a waste of time.
The reasons given above should not dissuade you from conducting a meaningful and accurate feasibility study. Once decisions have been made about proceeding with a proposed project, they are often very difficult to change. You may need to live with these decisions for a long time.
Reasons to Do a Feasibility Study
Conducting a feasibility study is a good business practice. If you examine successful businesses, you will find that they did not go into a new business venture without first thoroughly examining all of the issues and assessing the probability of business success.
Below are other reasons to conduct a feasibility study.
- Gives focus to the project and outline alternatives.
- Narrows business alternatives
- Identifies new opportunities through the investigative process.
- Identifies reasons not to proceed.
- Enhances the probability of success by addressing and mitigating factors early on that could affect the project.
- Provides quality information for decision making.
- Helps in securing funding from lending institutions and other monetary sources.
- Helps to attract equity investment.
The feasibility study is a critical step in the project assessment process. If properly conducted, it may be the best investment you ever made.
Habida and husband are now in the right path towards making the millions from the new venture “a block of low cost apartments”
Are you like Habida and Husband? And you have these great ideas on how to invest in real estate? Always consult the experts.
copied from http://gachaguagreat.blogspot.com
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