Development Feasibility: How the Numbers Are Actually Built

An owner rang us about a block near Wollongong with the answer already worked out. Four townhouses, he said. They sell for a million each, you build them for two, so there's two million in it, and he wanted to know why the offers he'd had were nowhere near that.

It took about forty minutes on a spreadsheet to walk that two million down to a bit over two hundred thousand, and almost none of the difference was construction. It was the lines nobody counts on the back of an envelope: contributions, water headworks, professional fees, the agent, GST, a contingency, and the interest that quietly accrues over the eighteen months between settling the land and settling the last sale. He wasn't wrong about the build cost. He was wrong about everything sitting either side of it.

That gap is the entire reason a development feasibility exists. It's a structured way of asking whether a project pays, and if so, who it pays.

The four lines everything reduces to

Strip away the tabs and the colour coding and every feasibility says the same thing:

Net realisation, minus total development cost, minus the margin the project must return, equals what's left for the land.

Four lines. Every argument about a site is really an argument about the inputs to one of them, and most of the arguments are about the middle two.

The order matters, because it tells you which variable you're solving for. If you already own the land, or you're under contract at a known price, you fix the land line and solve for margin: what does this project return? If you're pricing a site you don't own yet, you fix the margin and solve for land: what can I responsibly pay? Same model, run in two directions. Owners tend to only ever see the second version, which is how a developer arrives at the offer in your letterbox. This post is about building the thing rather than reading the output.

Net realisation is not the sum of the listing prices

Gross realisation is easy. Add up what the finished dwellings sell for.

Net realisation is the number that matters, and it's meaningfully smaller. Off the gross you take agent commission and a marketing budget, and then you take GST, which is the line owners most often forget entirely. New residential premises attract GST on sale. Where the margin scheme is available the GST is one eleventh of the margin rather than one eleventh of the price, which is a large difference on a project of any size, but availability turns on how the land was acquired and it isn't automatic. The ATO's guidance on the margin scheme is the place to start, and this is a line to get accountant's advice on rather than assume. Purchasers of new residential premises also withhold GST and pay it to the ATO at settlement, so it leaves the project before it ever reaches your account.

Setting the end values themselves is judgement, not arithmetic. We look at what comparable stock in the same suburb has settled at, not what it's listed at, and we discount for the fact that four near-identical dwellings hitting one market at once will not all achieve the best result. If your end values come from asking prices on a portal, the feasibility is already wrong at the top and every line below inherits the error.

The cost side, which is where feasibilities go to die

Construction is the biggest line and the one people are most comfortable with, usually quoted as a rate per square metre of building area. It's also the line where a plausible-sounding rate can be out by fifteen per cent depending on finish level, site access, slope and how the tender market is running. The rest of the cost side is a long tail:

Acquisition costs on the land, meaning transfer duty, legals and due diligence. Civil and external works, which on a sloping block can be a project in themselves. Professional fees across architect, town planner, structural and hydraulic engineers, surveyor, certifier and whatever specialist reports the site drags in. Authority costs, covering DA fees, Section 7.11 or 7.12 contributions and utility headworks, which vary enough by council and by service authority that we never carry a default number. Contingency, which we run at around five per cent of construction and expect to spend. Finance, both the interest across the holding and construction period and the establishment fees. Then selling costs at the other end.

Two of those deserve particular attention because they're where optimism hides. Contingency gets cut when a project looks tight, which is precisely when it's most needed. And finance costs are a function of time, so every month the DA sits with council is a real cost that never appears on a builder's quote. A twelve-month approval instead of a six-month one is not a scheduling annoyance. It's a line item.

Margin on cost, not margin on revenue

The margin is the return the project has to make for the risk taken, and it's conventionally expressed as a percentage of total development cost. Around twenty per cent on cost is the figure most lenders want to see before they'll fund a residential project of this scale, and it isn't arbitrary generosity toward developers. It's the buffer that absorbs a build overrun or a soft settlement quarter without the project going underwater.

Watch which denominator someone is using. Twenty per cent on cost and twenty per cent on gross realisation are different numbers, and quoting the second while implying the first is a genuinely common way of making a marginal project look funded. On the example below, the same profit is twenty per cent on cost and almost exactly fifteen per cent on gross realisation. If a feasibility quotes a margin without saying what it's a margin on, that's the first question to ask.

A worked example

Every figure here is an illustrative assumption, chosen to show the shape of the calculation. They are not market rates and no site should be priced off them.

Take a 900 m² block with approval for four townhouses of about 180 m² each.

Revenue

• Gross realisation: 4 dwellings at $1.25 million, so $5,000,000
• Selling costs: 2% commission plus $30,000 marketing, so $130,000
• GST under the margin scheme, assuming a land cost near $1,000,000: about $364,000
• Net realisation: $4,506,000

Development cost, excluding land

• Construction: 720 m² at $3,200 per m², so $2,304,000
• Civil works, driveways, landscaping: $180,000
• Professional fees: $150,000
• Contributions, headworks and authority fees: $180,000
• Contingency at 5% of build and civils: $124,000
• Finance across an 18-month project: $250,000
• Subtotal: $3,188,000

Now run it both ways.

Say the owner wants $1,000,000. Add acquisition costs of about $50,000 and total development cost comes to $4,238,000. Against net realisation of $4,506,000 the profit is $268,000, which is a bit over six per cent on cost. No lender funds that, and no developer should want to, because six per cent is not a return on risk. It's a rounding error with eighteen months of work attached.

Run it the other direction and fix the margin at twenty per cent. Total development cost can then be no more than $4,506,000 divided by 1.2, or $3,755,000. Subtract the $3,188,000 of development costs and you're left with $567,000 for land and acquisition costs together, which puts the residual land value near $540,000.

That is the residual land value method, and the gap between $540,000 and the owner's $1,000,000 is the whole explanation for why his offers disappointed him. It isn't developers being cheap. It's what the project can carry.

There's one wrinkle worth naming: the GST assumption above depends on the land price, and the land price is what we're solving for, so the model is circular. In practice you iterate it two or three times until it settles. Anyone who tells you their feasibility has no circular references either hasn't modelled GST properly or has hard-coded something they shouldn't have.

The sensitivity test that decides most sites

A single-point answer is close to useless, because the interesting question isn't what the project returns if everything lands on the assumption. It's how wrong the assumptions can be before the project stops working.

Take the same example with the land at $1,000,000 and knock five per cent off the end values, so $1.19 million a dwelling instead of $1.25 million. Selling costs and GST fall a little with it. Net realisation drops to about $4,284,000, and the profit goes from $268,000 to roughly $46,000. A five per cent move in one input took more than eighty per cent of the profit.

Now leave end values alone and put construction up ten per cent instead. Profit goes to about $20,000. Effectively gone.

That gearing is the real output of a feasibility, and it's why a project with a thin margin is not a slightly worse version of a project with a healthy one. It's a different kind of thing: a position where an ordinary market wobble, the sort that happens every couple of years, turns a profit into a loss. The twenty per cent target exists to keep the answer positive through a five per cent miss, not to guarantee anyone a good year.

Why round numbers should make you suspicious

The feasibilities we distrust most are the tidy ones. Construction at exactly $3,000 per square metre, contributions at a round $150,000, a twelve-month program with no allowance for the fact that almost nothing in NSW planning takes twelve months. Round numbers usually mean an assumption was adopted rather than checked, and adopted assumptions cluster in one direction, because the person doing the adopting already wants the site to work.

The test we apply: for every line over about $50,000, can you say where the number came from? A quote, a comparable settlement, a council contributions plan, a written indication from the service authority. If the answer is "that's roughly what these things cost", it isn't a feasibility yet. It's a hope in a spreadsheet.

None of this makes the method hard. The arithmetic is addition and one division. What it takes is the willingness to write down a cost you'd rather not have and to test the answer against a bad market instead of a good one. That's the difference between the duplex projects that work and the ones that don't, and it's worth knowing before you spend anything how the tax treatment on the eventual sale will land.

PropertyThrive runs this model on owners' properties for free, with the inputs visible rather than hidden, so you can see the margin the project returns at your price and the residual land value at a fair one. Whether you sell, partner or do nothing is then a decision made on numbers instead of a letter in the post. Book a free assessment and we'll have your figures back within 24 hours.