Every property acquisition comes with risks. But how do developers make the right call in a volatile market characterised by rising costs and interest rates, skills shortages and liquidations? Altus Group’s Niall McSweeney says the purchase process always starts with one clear question.
Caveat emptor – “let the buyer beware” – reminds property investors to complete their due diligence when purchasing a property. But an unpredictable market and a series of “pinch points” make it hard for developers to weigh up the risks and rewards.
Unemployment is at its lowest rate since 1974 – and trades can “virtually name their price,” according to Altus Group’s President for Cost and Project Management.
“The cost of materials and equipment continues to escalate following a series of events, from extreme weather to the war in Ukraine. China – the world’s factory – continues to pursue a Covid Zero strategy which translates into material shortages.
“Almost 5,000 homes across Australia’s east coast were deemed uninhabitable after the floods in March. The floods are adding huge loadings to the labour costs. And with the insurance bill is expected to exceed $3 billion, premiums are likely to rise by around 10%.”
Then there’s interest rate hikes – five in as many months – and the risk of runaway inflation. “Investors and developers must make predictions about the future in a very unpredictable market,” McSweeney notes.
The old adage, ‘Do your homework’, has never been more important. But when it comes to real estate due diligence, the devil is aways in the detail.
There are four types of due diligence: market, physical, financial and legal. But due diligence isn’t an activity that can be simply crossed off with the help of a checklist.
Unlike other investments, where it is easy to compare apples with apples, every commercial asset is unique. The varying locations, designs, uses and structures mean no two transactions are alike.
McSweeney starts the process by asking his clients one clear question: “What is your strategy?”
“If an investor is holding the asset for 50 years, the due diligence process will be very different to someone who is turning it over quickly. A plan to reposition and resell comes with different risks to a knock-down rebuild.”
Due diligence doesn’t necessary equate to dozens of consultants and a mountain of reports. “By starting with your strategy, you can carefully assess – and, most importantly, cost – the interventions needed to make the investment a good one.
“Due diligence can feel like yet another cost, but the cost of not doing your homework can be far greater,” McSweeney concludes.
Download Altus Group’s guide to smart due diligence.