In real estate development, the feasibility study is the document that separates professional developers from speculators. Every experienced developer knows the mantra: you make your money when you buy, not when you sell. And the feasibility study is how you know whether the buy makes sense.
A development feasibility study evaluates whether a proposed property project — residential, commercial, mixed-use, or industrial — can be delivered profitably given the land cost, construction expenses, market conditions, and financing structure. Get this analysis wrong, and you're locked into a multi-million dollar commitment that can't be unwound.
Why Real Estate Demands Rigorous Feasibility Analysis
Real estate development has characteristics that make feasibility analysis non-negotiable. The capital commitment is enormous and largely irreversible. Construction timelines span 12–36 months, during which market conditions can shift dramatically. Revenue depends on future market prices that are inherently uncertain. And the leverage typically involved (60–80% debt) means even modest underperformance can wipe out equity returns.
The feasibility study exists to quantify these risks and determine whether the expected returns adequately compensate for them.
Core Components of a Real Estate Feasibility Study
1. Site Analysis and Highest-and-Best-Use
Every feasibility study begins with the site itself. What can be built here, and what should be built here?
Zoning and Planning: What does the local planning scheme allow? Residential, commercial, mixed-use? What density is permitted — how many units or how much floor area? Are there height restrictions, setback requirements, or heritage overlays? Zoning determines the maximum development potential of a site. Physical Characteristics: Site dimensions, topography, soil conditions, drainage, existing structures requiring demolition, contamination risk, and access to utilities. Each of these affects construction cost and feasibility. Location Attributes: Proximity to employment centres, transport, schools, retail, and amenities. These attributes drive end-user demand and pricing. Highest-and-Best-Use Analysis: Given the zoning, physical characteristics, and market conditions, what type of development generates the highest return? A site zoned for mixed-use might be most profitable as pure residential, as a retail-residential mix, or as a commercial office development. The feasibility study should evaluate the most promising options.2. Market Analysis
Demand Assessment: What's the current and projected demand for the type of property you're proposing? For residential, this means analysing population growth, household formation rates, migration patterns, and affordability metrics. For commercial, it means assessing employment growth, vacancy rates, and tenant demand. Supply Pipeline: What competing projects are planned, approved, or under construction in the area? A flood of new supply can depress prices and extend sales timelines, even in markets with strong underlying demand. Pricing Analysis: What are comparable properties selling or leasing for? This requires recent comparable sales data, not asking prices or dated historical transactions. Your revenue projections are only as good as your comparable evidence. Absorption Rate: How quickly is the market absorbing new stock? If the market is absorbing 50 new apartments per quarter in your area and you're proposing 200 apartments, your project represents a full year of market absorption. That's a meaningful concentration risk.3. Development Cost Estimation
Land Acquisition: The purchase price plus stamp duty, legal fees, and any demolition or remediation costs. Land cost is typically 20–40% of total development cost in metropolitan areas but varies dramatically by market. Hard Costs (Construction): The direct cost of building. This includes civil works, structure, services (mechanical, electrical, plumbing), finishes, landscaping, and external works. Construction cost is typically expressed per square metre of gross floor area. Current benchmarks vary widely — a basic apartment build might cost $2,500–$3,500/sqm while a premium finish could reach $5,000–$7,000/sqm. Soft Costs: Design fees (architect, engineer, interior designer), planning and permit fees, legal fees, project management, marketing and sales commissions, finance costs (interest during construction), and insurance. Soft costs typically add 15–25% on top of hard costs. Contingency: An allowance for cost overruns and unforeseen issues. Industry standard is 5–10% of total construction cost, though complex or unusual projects may warrant higher contingency. Finance Costs: Interest on construction debt during the build period. This is a significant cost — on a $20 million construction loan at 7% over 18 months, finance costs could exceed $1.5 million.4. Revenue Projections
Residential (For Sale): Number of units × projected sale price per unit, based on comparable sales evidence. Account for the sales timeline — not all units sell on day one. Model a realistic absorption schedule. Residential (Build-to-Rent): Number of units × projected weekly rent × 52 weeks × occupancy rate. Calculate a capitalisation rate to determine the completed asset value. Commercial: Net lettable area × market rent per square metre × occupancy rate. Apply a capitalisation rate to determine investment value. Mixed-Use: Combine revenue streams with appropriate timing assumptions for each component.5. Financial Analysis
The financial model brings costs and revenue together to determine returns:
Residual Land Value: Working backwards from projected revenue, subtract all development costs and required profit margin to determine the maximum price you should pay for the land. If this residual value exceeds the asking price, the project is financially feasible at your target return. Development Margin: Total revenue minus total development cost, expressed as a percentage of cost. Developers typically target 15–25% development margin, depending on risk and market conditions. NPV and IRR: Calculate the net present value and internal rate of return of the entire development cash flow — from land acquisition through construction to final sale or stabilisation. Developer IRR expectations typically range from 15–25% for straightforward projects, higher for complex or risky developments. Payback Period: How long from initial equity investment until cumulative cash flows turn positive? For a build-and-sell project, this is typically the construction period plus the sales period — often 2–4 years. Peak Equity Requirement: The maximum amount of equity needed at any point during the project. This determines how much capital you need to have available, even if the total equity contribution is lower.6. Sensitivity and Scenario Analysis
Real estate developments are exposed to multiple risks simultaneously. Your feasibility study should test:
Construction Cost Overrun: What if hard costs increase by 10%, 15%, or 20%? Construction cost escalation is the most common source of development losses. Revenue Decline: What if sale prices or rents are 5%, 10%, or 15% below projections? In a market downturn, this can happen rapidly. Time Blow-Out: What if construction takes 6 months longer than planned? Additional finance costs can erode margins significantly. Combined Stress Test: What if costs increase by 10% AND revenue falls by 10%? This combined scenario tests whether the project survives realistic adverse conditions.The sensitivity analysis should identify the "breakeven" values — the exact point at which NPV turns negative or IRR falls below the hurdle rate. If a 7% cost overrun turns the project unprofitable, the margin of safety is thin.
Red Flags in Real Estate Feasibility Studies
Experienced developers and investors watch for specific warning signs:
Thin Development Margin: Margins below 15% leave insufficient buffer for cost overruns or revenue shortfalls. In high-risk markets or complex projects, 20–25% is the minimum. Aggressive Pricing Assumptions: Revenue projections that assume price growth during the development period, or pricing above the top of comparable evidence, signal optimism bias. Unrealistic Absorption: Assuming all units sell within 3 months of completion in a market where the average absorption period is 12 months. Insufficient Contingency: Below 5% contingency on a construction project virtually guarantees cost overruns will eat into profit. Ignoring Holding Costs: Every month a completed property remains unsold incurs finance costs, rates, insurance, and maintenance. These post-completion holding costs must be modelled.The Bottom Line
Real estate development is a game of margins, timing, and risk management. The feasibility study is your primary tool for evaluating all three. It tells you whether to proceed, what price to pay for land, how to structure the project for optimal returns, and how much risk you're taking.
In a market where construction costs are volatile, interest rates are significant, and competitive supply is always a factor, the feasibility study isn't just useful — it's essential. Every dollar spent on getting the analysis right is insurance against the millions at stake.
SimpleFeasibility generates real estate development feasibility studies with market-grounded data, complete cost estimation, multi-year financial modelling with NPV/IRR/payback, and interactive sensitivity analysis. Test different project configurations before committing capital. Run Your Property Development Feasibility →Related Articles: