The Challenges of Property Development

Jonathan Rooks

November 4, 2022

Property Development

There are several challenges to property development. These include access to land, cost overruns, supply chain issues and tax management. This article discusses some of the key issues that face property developers. These can make or break a development project. The key challenge for developers in 2022 will be to meet the changing demands of buyers.

Access to land

One of the key issues facing property developers is access to land. It is not always easy to acquire access to land if it is not registered or owned by someone else. This means that the developer must consider the requirements of adjoining landowners, the length of time required and the extent of the required access. They should also consider the best means of gaining this access within the development timetable.

First and foremost, the developer must seek permission from the neighbour to carry out any work involving the neighbour’s land. This can be done by obtaining the neighbour’s consent through an easement agreement. These agreements can be in the form of a letter, licence, or deed, and can be freely negotiated between the two parties. A well-informed neighbour will understand that their consent will be worth ransom if he or she is unable to use the land in any way.

Cost overruns

Cost overruns in property development are the bane of a developer’s existence. While most of the time these costs are inevitable, there are also some factors that can cause them to exceed the budget. Materials and labor costs make up approximately two-thirds of the total cost. A few factors that can increase these costs are increasing cement prices and labor scarcity.

Developers may choose to hedge their exposure to cost overruns by arranging a guaranteed maximum price contract that transfers risk to the project contractor.

Another cause of cost overruns is underestimation. Overestimates are a sign of poor planning. Architects and contractors might have unrealistic expectations of the time required to complete the project. If these expectations are too high, the cost will likely exceed the original budget.

Supply chain issues

A recent survey revealed that supply chain issues are plaguing the property development industry. More than half of building developers are reporting delays in construction projects, including delays in procuring building materials and obtaining entitlements and permits. While experts don’t know when these issues will ease, they do predict that they will continue through 2023.

In addition to housing shortages, supply chain issues are affecting the construction of new homes. As a result, there are more “under construction” and “unfinished” homes than ever before. And the cost of materials is rising, too. The global pandemic has made the materials market less than hospitable, resulting in increased operating expenses for landlords and property owners.

Those facing supply chain issues should monitor prevailing trends and seek ways to resolve them. One of the best ways to address these challenges is to enter projects with a strong reserve. This will prevent financial surprises and extend timelines. In addition, savvy developers can use their “war chest” to make smart purchases of bulk inputs.

Tax management

You should also make sure that your business is compliant with government policies regarding leave in lieu of taxes. One of the most common property tax issues is how to determine if an asset is taxable. Real estate is considered a capital asset, which means that you can either earn a capital gain or incur an ordinary loss. While this distinction may be beneficial, it can also have significant disadvantages. Proper planning and structuring can help you determine the most beneficial characterization for your project.

Another tax management challenge for property developers is maintaining data integrity. The constant changes in business processes such as M&A activity and employee turnover put pressure on existing manual processes. This can result in data quality problems.