Key takeaways
- A land bank and phased development do not automatically make a project more profitable, but they reduce Peak Funding and make it possible to stop or change the plan.
- In the example, splitting into 3 phases and buying the land in instalments cuts peak investment from THB 450 m to THB 200 m, at the cost of a total land price that is THB 18 m higher.
- A good phase must be able to sell and complete construction on its own, with clear criteria for when the next phase starts.
Last year construction costs rose sharply, and this year they have risen again, while customers will not immediately pay more. Owners of large land plots therefore face the same old question: build everything in one go to lock in costs, or proceed one phase at a time? Climbing fast gets you to the summit sooner, but if you slip halfway there is no rope to hold you. Phasing is paying for that rope at a price you know in advance.
Two topics often lumped together
Land Bank
Holding, or holding the right to buy, land for future projects. The key questions are what kind of money will fund the holding, how long to hold, and whether an option can be used instead of an outright purchase.
Phased Development
Dividing a project into stages that are launched, built and paid for separately. The key questions are what the first phase proves, and whether cash from the first phase can genuinely be recycled into the next.
Having a lot of land but no phasing plan means sunk cash. Phasing while buying all the land on day one reduces early construction funding, but not the funding needed for land.
What phasing changes in the numbers
| Variable | Expected effect | What to watch out for |
|---|---|---|
| Peak Funding | Decreases, because receipts from the first phase are used to invest in the next phase | Applies only to cash that has been released from loan conditions and project obligations |
| Selling price | Later phases may sell at higher prices once the location has been proven | Requires evidence of take-up, not an assumed price rise every year |
| Construction cost | Later phases risk higher costs and lose economies of scale | Site mobilisation costs and common systems may be duplicated |
| Common infrastructure | Often has to be funded upfront, beyond the first phase's share | Makes the first phase bear heavier costs than an average allocation table suggests |
| IRR | May increase or decrease, depending on the timing of land payments | Always read together with total profit and peak investment |
Example: building in one go vs three phases
Hypothetical example. Figures in THB million, cash flow before debt and tax, with infrastructure included in construction cost. Land cost is 150, total construction cost is 900 and sales value is 1,500. For the phased plans, construction costs for phases 2 and 3 rise by 5% a year and selling prices rise by 4% a year; each phase takes 2 years and cash is received at the end of the phase. For the staged land purchase, assume the seller grants an option over 3 instalments of 50, 56 and 62.
| Plan | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
|---|---|---|---|---|---|---|---|
| A: Build in one go | (150.0) | (150.0) | (150.0) | 900.0 | 0 | 0 | 0 |
| B: Phased, single land purchase | (150.0) | (150.0) | 350.0 | (165.4) | 375.4 | (182.3) | 402.6 |
| C: Phased, staged land purchase | (50.0) | (150.0) | 294.0 | (165.4) | 313.4 | (182.3) | 402.6 |
| Indicator | A | B | C |
|---|---|---|---|
| Total profit before debt and tax | 450.0 | 480.3 | 462.3 |
| Peak Funding | 450.0 | 300.0 | 200.0 |
| Project IRR | 38.9% | 35.5% | 52.2% |
If plan A receives the final instalment one year late, with THB 600 million shifting from year 3 to year 4, total profit is still 450 but IRR falls to 29.0% and Peak Funding remains 450.
Plan B has higher total profit than A because the assumed price increase outweighs the effect of higher costs, but its IRR is lower because the whole land payment is tied up for longer. Plan C earns less than B because it pays THB 18 m more for the land, but its peak investment falls to THB 200 m. These figures are for comparing logic only; they exclude debt, tax, management costs and down payments received during construction.
The value of being able to stop. At the end of year 2, plan C has positive cumulative cash flow of THB 150 m before paying the next land instalment. If the market changes, the owner can choose not to buy the next land instalment, subject to the contract terms. Over the same period, plan A has already paid out THB 450 m and must keep building. A single-point return table cannot show this difference.
How to phase in practice
- The first phase must prove the product and the price. It should not be the easiest part to sell, as that would reveal nothing about the later phases.
- Each phase must be able to survive if the next phase does not happen. This covers roads, systems, the clubhouse and obligations to buyers.
- Separate shared costs clearly so that profit by phase and cost of sales can be calculated on a basis that can be explained.
- Check the legal conditions. Land allocation permits, condominium registration, the EIA and the project layout may not allow phases to be changed at will.
- Read the loan agreement before counting recycled cash. Transfer proceeds usually have to repay debt and satisfy account conditions before they can go into a new phase.
Rules before starting the next phase
| Gate | Evidence to have |
|---|---|
| Market | Non-cancelled bookings and actual prices after discounts, compared with the base case |
| Cost | Latest contractor prices and the forecast at completion for the current phase |
| Funding | Funding sources for the next phase confirmed, and Peak Funding within the facility limit |
| Impact on the existing phase | The new construction site does not affect handover or the buyer experience in the existing phase |
Next steps
- Build at least 3 models: building in one go, phased with a single land purchase, and phased with staged land purchase.
- Show total profit, IRR and Peak Funding side by side.
- Negotiate an option to buy or instalment payment of the land price, and have a lawyer check the protection of your rights.
- Define the infrastructure that must be built from the first phase, and a plan in case the project stops after that phase.
- Set a decision gate before the next phase starts, with the people who have authority to approve it.
- Test the case where prices do not rise but costs still increase, before using these figures in discussions with banks.