IMPACT OF PHASING DEVELOPMENT ON PROFITABILITY

Abstract

The real estate development process is fraught with uncertainty. A developer has to take into considerations many variables before deciding whether to embark on a project. These include the size of the development, prevailing market demand, the ability to get financing etc. A developer who has a tract of land to develop can either do it in a single stage or in phases. A big project can be phased to reduce it to a more manageable level. It is also easier to obtain funds for each individual phase as capital outlay is not so large. Market demand can be gauged by the response to the initial phase of the project. Construction of the subsequent phases can then be halted if demand is sluggish or speeded up if demand is good. Based on the response for the first phase, the developer can also adjust the selling price of the following phases. The cash flow position of the developer will also be eased if he can channel profits from the initial phase to the subsequent phases. Moreover, excess funds can be channelled to other projects. In times when the labour market is tight, phasing a project will help the developer to ease his manpower constraints. However, phased developments are not without its drawbacks. It is more complex than a single stage development as there are more legal contracts involved. There must also be careful coordination to ensure its smooth operation. No economies of scale can be reaped as materials cannot be ordered in bulk to enjoy a lower price. The construction works of the subsequent phases will also cause inconvenience to the residents occupying the initial phase. A comparative study of a single stage development and a phased development was done to examine the effects of phasing on profitability. It was discovered that by phasing developments, a developer can have a better control and regulation of the periodic cash flows of a project. It also gives the developer a degree of flexibility over the project. However, these advantages may have to be offset by losses in earnings.