Reading a Feasibility Study: The Assumptions That Flatter the Return

How to audit a development study you did not write: the seven places optimism hides, what each one does to the return, and the question that exposes it.

A feasibility study is written by someone, and that someone usually wants the project to happen. That does not make it dishonest, but it does mean the optimism is concentrated in a few predictable places. If you are reading a study prepared by a seller, a promoter or a partner, these are the seven lines to attack first, and the question that settles each of them.

Why these keep happening

Development returns are geared. Because land and profit sit at the end of the calculation, a handful of per cent added to revenue or shaved off cost produces a transformation in the headline return. Anyone who wants a study to show a strong number does not need to invent anything: they only need to be generous on the sale rate, thin on the cost plan, short on the programme and silent about the absorption period. Each choice is defensible on its own, and together they can double a margin.

1. Revenue taken from asking prices rather than transactions

Listings show what sellers hope for, not what buyers paid, and in a slow market the gap is wide. A study that builds revenue from portal listings inherits the whole of that optimism, and revenue is the most geared input in the model.

• Avoid it by: Requiring achieved transaction or letting evidence for each unit type, with dates and addresses where available.
• Proof it is closed: A revenue schedule referencing evidence obtained from an accredited valuer or from completed deals, not from listings.

What it costs you: An overstated gross development value, which flows straight into an overstated land value and profit.

2. Revenue applied to gross area

Applying a sale rate to gross floor area rather than net saleable area silently adds the cores, corridors and walls to the things you are selling. On a typical apartment building this can inflate revenue by a fifth without a single number looking odd.

• Avoid it by: Checking that the area used for revenue matches the net schedule in the product chapter and asking for the net to gross ratio.
• Proof it is closed: Two stated areas in the study, gross for cost and net for revenue, with the ratio between them written down.

What it costs you: A revenue line inflated by the whole inefficiency of the layout, which is often the entire apparent profit.

3. A cost plan with no site-specific abnormals

A rate per square metre covers a normal building on a normal site. Earthworks on a slope, deep foundations in poor ground, utility extensions, retaining walls and demolition are project-specific and none of them is inside the rate. Studies routinely omit them because the site investigation has not been done yet.

• Avoid it by: Insisting that the cost plan carries a separate abnormals section and that it references the survey and ground report.
• Proof it is closed: Named abnormal lines with quantities, cross-referenced to the site chapter.

What it costs you: A construction budget that misses the very items the site was always going to impose.

4. A programme that assumes nothing waits

Approvals, tendering, utility applications and procurement of long lead items all take time that is difficult to compress. A study with an unbroken programme understates finance cost, understates cost inflation and brings revenue forward, all in the same direction.

• Avoid it by: Asking for the programme assumptions behind each phase and testing the appraisal with a longer overall duration.
• Proof it is closed: A sensitivity run showing the return with the programme extended by a realistic margin.

What it costs you: Understated finance and inflation, and a return measured over a period the project cannot achieve.

5. Instant absorption of the finished product

Selling or letting takes time, and the units do not all go at the asking price on the day of completion. A model that receives all revenue at practical completion removes both the holding cost of unsold stock and the discounting that clears the last units.

• Avoid it by: Requiring an absorption profile by month, with a price or rent assumption for the slowest units.
• Proof it is closed: A cash flow that shows revenue arriving over a period, with the void and holding costs during that period.

What it costs you: Overstated returns and an undisclosed need for capital to carry unsold or unlet units after completion.

6. Contingency that is really a rounding

A contingency of a token percentage on construction only, with none on fees, none on abnormals and none for the design developing, is not a risk allowance. It is an acknowledgement that a risk allowance was expected.

• Avoid it by: Asking what the contingency is for, what it is a percentage of, and who has authority to release it.
• Proof it is closed: A stated contingency policy with a base, a percentage and a release rule.

What it costs you: Every genuine surprise comes out of the profit line, because the reserve was never sized to absorb one.

7. Profit treated as whatever remains

If the study computes profit as the leftover after paying the asking price for the land, then the asking price has become an input and profit has become an output. Turn the model around and it will justify any price at all.

• Avoid it by: Setting your required profit as an input before reading the study, then asking what land value the model produces.
• Proof it is closed: An appraisal run with profit fixed at your requirement and land shown as the residual.

What it costs you: A land price accepted because the model was built to accommodate it rather than to test it.

A short check before you sign

• Revenue based on achieved evidence and applied to net area, with the ratio stated.
• A cost plan with a named abnormals section referencing the ground and survey reports.
• A programme with stated assumptions for approvals, tender and procurement.
• An absorption profile with holding costs for unsold or unlet units.
• A contingency with a base, a percentage and a release rule.
• Profit fixed as an input, with land value shown as the residual.

If it has already happened

If you have already relied on a study and the project is underperforming, rebuild the model once, honestly, on today's evidence, and stop arguing about the original. You then have three real options: change the product to suit the market that exists, slow the programme to reduce peak funding while you wait, or exit at the best price available. The choice depends on the corrected numbers, and making it early is worth far more than proving whose assumptions were wrong.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.