Chirayuthchai TraisaengsatheanStrategic Finance for Property Development

Feasibility Study for property projects: structure and assumptions

The five dimensions of a Feasibility Study: market, cost and revenue assumptions, and Go/No-Go criteria before buying land

Key takeaways

  • A feasibility study that can support a decision must answer five dimensions: market, technical, financial, legal and risk, and then reduce them to a single proposal
  • The quality of the assumptions matters more than the complexity of the model. Every figure must have a traceable source
  • The final output is a Go or No-Go with conditions, not a report that merely confirms a land price that has already been agreed

The five dimensions of a Feasibility Study

A Feasibility Study is the first gate in an investment decision and the basic document used in discussions with banks and investors. Each dimension answers its own question, and the answers must then be combined into a single conclusion

DimensionKey questionToolsResponsible party
MarketDoes the market genuinely want it?Demand-Supply AnalysisMarketing and consultants
TechnicalCan it really be built within budget and on time?QS, Design, Construction PlanDevelopment and engineers
FinancialDoes it pay back and deliver a sufficient return?Financial Model, ValuationFinance (CFO)
Legal & RegulatoryCan it be done lawfully?Due Diligence, Permit ReviewLegal and advisers
RiskWhat level of risk is involved, and can we bear it?Risk Matrix, Stress TestFinance and Risk

Process and document set

  1. Screening (1–2 weeks) High-level analysis for an initial Go/No-Go
  2. Preliminary Study (2–4 weeks) Gather preliminary data and build a basic model
  3. Detailed Study (1–3 months) Full due diligence, financial model and risk analysis
  4. Review & Approve (2–4 weeks) Submission to the Investment Committee
  5. Post-Investment Review (ongoing) Compare actual results with the feasibility study to improve the assumptions for the next project

A complete output set has five parts: Executive Summary (5–10 pages), Market Study Report (20–50 pages), Technical Feasibility Report (30–80 pages), Financial Model with Investment Memo (15–30 pages), and Risk Analysis with Mitigation Plan (10–20 pages)

Market assumptions

The market study answers whether there are real buyers at the price we set. If the market is not there, the quality of the product is irrelevant

Demand

  • Target Segment The primary segment accounts for about 70–80% of sales and the secondary segment 20–30%. Specify age, occupation, income, nationality and reasons for buying
  • Buying Behaviour Thai or foreign, investor or owner-occupier. This affects both Presale speed and the transfer completion rate
  • Market Size TAM is the total market, SAM is the market in our location and segment, and SOM is the share we can realistically capture
  • Demand Drivers GDP, tourism, FDI, interest rates, credit policy, infrastructure, schools, hospitals, and trends in wellness or an ageing society

Supply

  • Existing Supply Number of units, sales status, average price per square metre and positioning level
  • Pipeline Supply Projects due for completion within 1–3 years, projects with permits applied for that may complete within 2–5 years, and remaining suitable land
  • Pipeline Risk Competing projects launching at the same time as ours

Absorption Rate

Absorption Rate = monthly sales ÷ number of units available for sale × 100%

Monthly absorptionInterpretationEstimated time to sell out
Below 1%Very weak market, high riskOver 8 years
1–2%Normal to slow market4–8 years
2–4%Good market2–4 years
4–7%Hot market14–25 months
Over 7%Very hot market, prices may be set too lowUp to 14 months

The time to sell out in the table is calculated as 100 ÷ Absorption Rate, assuming constant monthly sales. It is only an estimate, because in practice units usually sell quickly at launch and more slowly towards the end

Example A sample project of 247 units is in a location where average absorption is 2.5% per month. If the target is 3.0% per month, it will sell about 7.4 units per month and take about 33 months to sell out. If the goal is to close sales within 30 months, it must sell 8.2 units per month, or 3.3%

Price Benchmarking

  • Select 5–10 comparable projects in nearby locations
  • Adjust for quality, size, location, brand and amenities
  • Calculate the average price per square metre and the standard deviation
  • Define the positioning as Premium, Mid or Value, and set the price accordingly

Technical assumptions

If actual construction cost differs from the estimate, the entire financial model will be distorted, so you need to know how accurate the figures you are using are

LevelAccuracyMethodTime required
Class 1 (Feasibility)±25%Average cost per square metre1 week
Class 2 (Concept Design)±15%Preliminary BOQ1–2 months
Class 3 (Detailed Design)±5%Detailed BOQ and tender3–6 months

Reference ranges for construction cost

The figures below are reference ranges based on the author's experience. They exclude land, soft costs, interest and tax. Confirm them with contractor prices or a QS before using them in practice

Building typeTHB/sq mTypical construction period
Mid-market condo25,000–35,000Low-rise 18–24 months, high-rise 24–30 months, super high-rise 30–42 months
Premium condominium35,000–50,000
Luxury condo50,000–80,000
Pool Villa Standalone30,000–45,0001–2 buildings 9–15 months
Pool Villa Luxury45,000–70,00010–50 buildings 18–30 months
4-star hotel45,000–60,000100–200 rooms 24–30 months
5-star hotel60,000–100,000
Wellness Center50,000–80,000Wellness resort 30–60 keys 18–24 months

Specification affects total cost by about 5–15%, for example solid timber flooring versus laminate (a 30–50% difference), built-in kitchens versus imported brands (50–100%), sanitaryware (100–200%), smart home systems (adding 5–10%) and LEED or EDGE standards (adding 3–5%)

Financial assumptions

Revenue

  • Pricing Launch price, price increases of 2–5% every 6–12 months, early bird discounts of 3–7%, and premium pricing for better units
  • Sales Velocity Months 1–3 sell quickly, at 15–25% of units; the middle period is steady; the final period slows and then speeds up to close out
  • Cash Timing Booking deposit, contract deposit and down payment total about 25–30%, with the remaining 70–80% received on transfer day, allowing for 5–10% contract cancellations
  • Revenue Recognition Revenue is recognised when control is transferred to the buyer. Customer advances are cash received, but they are not yet revenue in the income statement

Cost

Cost categoryShare of total costTypical payment timing
Land20–30%Early in the project
Hard Cost45–55%Construction stage
Finishing10–15%Late in construction
Design and consultants3–5%From the start to the end of construction
Marketing and sales4–7%From Presale to transfer
Interest and loan fees5–8%Over the loan term
Taxes and transfer fees3–5%Transfer day
Contingency3–5%Spread according to the works

Land held for development and sale is treated as inventory under TAS 2. Specific Business Tax (SBT) is 3.3% (including local tax), calculated on revenue or appraised value, whichever is higher. For transfer fees, check any temporary relief measures, their conditions and expiry dates as at the date of the model

Once the assumptions are complete, lay out the monthly cash flow over the whole project, then calculate Project IRR, Equity IRR, NPV, MOIC, payback and Profit on Cost

Go/No-Go criteria

CriteriaMinimumMeaning
Base Case IRRNot below the hurdle rate for the project typeReturn passes the threshold
Bear Case IRRNot below the cost of capitalWithstands shocks
Peak FundingDoes not exceed the funding actually availableEnough money to complete the project
Stress TestPasses most scenarios, for example 4 out of 5The project does not fail under severe events
Strategic FitConsistent with strategy and team capabilityA project we can execute well

Warning signs that should lead to No-Go

  • Base Case IRR is below the hurdle rate
  • The Bear Case causes losses that affect the company's core business
  • Peak Funding exceeds the ability to raise funds
  • Fails the stress test in two or more scenarios
  • The market study is unclear, or reference figures have no traceable source
  • The team has no experience with this type of project
  • There are legal or permit issues with no resolution

A one-page document for the Investment Committee

It should cover the project overview, market opportunity, key financial figures (IRR, NPV, MOIC, payback), key assumptions, sensitivity and scenario results, risks and how to manage them, and a Go/No-Go recommendation with reasons and conditions