Mindaugas Liaudanskas: Real Estate Development – Sales as the First Step
- A shift is occurring in real estate development,moving away from the customary "build first" model towards a "sales first" strategy.
- traditionally, real estate developers would secure financing, complete detailed planning and design, and then begin construction, hoping to sell units upon completion.
- This shift isn't about abandoning due diligence on the "hard" variables of construction - location, topography, utilities, structural solutions.These remain crucial.
The “Sales first” Approach too Real Estate Progress: A New Paradigm
Table of Contents
A shift is occurring in real estate development,moving away from the customary “build first” model towards a “sales first” strategy. This isn’t simply a preference; it’s a response to current market dynamics and a more disciplined approach to risk management. This article details what this approach entails, its implications, who it affects, a timeline of its emergence, frequently asked questions, and next steps for developers considering this strategy.
What Happened: The Rise of “Sales First”
traditionally, real estate developers would secure financing, complete detailed planning and design, and then begin construction, hoping to sell units upon completion. This model carries significant risk – market conditions can change during the construction period, leaving developers with unsold inventory. The “sales first” approach flips this script. Developers now prioritize pre-sales, securing a considerable percentage of units before committing to large-scale construction. This de-risks the project, provides a clearer picture of demand, and unlocks more favorable financing terms.
This shift isn’t about abandoning due diligence on the “hard” variables of construction - location, topography, utilities, structural solutions.These remain crucial. Though, they are secondary to answering the essential question: “Does the market need this project, at this price point, and at this rate?” Market trends, conversion rates, and the uptake of recent projects provide the most reliable answers.
Market Context: What’s Happening Now
Several factors are converging to make “sales first” a compelling strategy:
- Increasing Buyer Activity: 96% of transactions occurred within 9 months (January-September of the current year), a significant increase compared to the previous year. activity remains robust even after the typical summer slowdown.
- Softening Construction Costs: The price index for basic construction materials has remained relatively stable, increasing only +1.8% in July of the current year compared to July of the previous year. This creates a more predictable cost environment for contract negotiations.
- Stabilizing Borrowing Costs: Interest rates for housing loans are stabilizing, averaging around 1.46% bank margin + Euribor. Monetary policy is generally supportive of economic growth.
- Supply Inertia: The number of projects ready to quickly enter the market (with building permits or in pre-proposal stages) is shrinking due to bureaucratic delays and lengthy approval processes. This creates a potential supply shortage.
These conditions create an environment where securing sales upfront becomes paramount. A positive income outlook is the primary signal for attracting capital and initiating construction.
From Principle to Routine: How sales First Works
The benefits of “sales first” extend beyond risk reduction:
- Faster Capital Turnover: Money is actively working, generating returns, rather than being tied up in construction.
- More Flexible Financing: Demonstrated sales momentum improves negotiating power with lenders, perhaps securing better terms.
- Market Adjustment: The strategy allows developers to adjust stage sizes and manage capital structure in response to changing demand.
However, a principle requires a practical implementation. A recommended set of indicators to monitor daily includes:
| Indicator | Target | Frequency |
|---|---|---|
| Minimum Sales Threshold per Stage | ≥70% | ongoing |
| Monthly Absorption Target (Mid-Range Projects) | 8-12 Apartments/Month | Monthly |
| Capital Turnover Cycle | 12-18 Months | Per Stage |
| Budget Reserves | Time & Cost Contingency | Project-Wide |
| Financing Price & Conditions | Competitive Rates & Terms | Ongoing |
| Market Background monitoring | Transaction Dynamics,Cost Index,Credit Conditions | Monthly |
The Risks That sales First Doesn’t Eliminate & How to Manage Them
“Sales first” isn’t a foolproof solution. Macroeconomic uncertainty, building permit processes, contractor capacity, supply chain fluctuations, and liquidity risk in a slower market all remain. It’s a framework for disciplined risk management, not a complete elimination of risk.
Effective risk management involves:
- Staging: Breaking down projects into phases to manage capital deployment.
- conservative Budgeting: Building in sufficient contingencies for unexpected costs.
- Judicious Contracting: carefully vetting and selecting contractors.
- Reserve Maintenance: Maintaining adequate financial reserves to weather potential downturns.
Sales are the starting gun, not the finish line. Sustained success requires maintaining momentum throughout the entire project lifecycle.
FAQs
- Q: Does “sales first” work in all markets? A: It’s most effective in markets with moderate to high volatility and where pre-sales are culturally accepted.
- Q: What if we don’t reach the pre-sales threshold? A: This signals a need to re-evaluate pricing, design, or marketing strategy. It may also indicate that the project isn’t viable in its current form.
- Q: How does this affect project timelines? A: The initial phase (pre-sales) may add time to the overall project timeline, but the reduced risk and smoother financing can accelerate subsequent phases.
next Steps
For developers considering adopting a “sales first” approach:
- Assess Market Conditions: Thoroughly analyze local market trends and buyer behavior.
- Develop a Pre-Sales strategy: Create a comprehensive marketing and sales plan to generate early demand.
- Refine Financial Modeling: Adjust financial models to incorporate pre-sales revenue and associated risks.
- Build Strong Lender Relationships: Communicate the “sales first” strategy to lenders and demonstrate its benefits.
- Implement Robust Monitoring Systems: Track key indicators and adjust strategies as needed.