The trade-off between spreadsheets and purpose-built feasibility software

There’s a reason why development feasibility spreadsheet templates remain the go-to solution for property developers. They are easy to use, offer flexibility and powerful customisation. Although conventional spreadsheets have these upsides, the downside risks of using them for your real estate development feasibility are too big to ignore.

When you are making a large number of assumptions – and let’s face it, that’s a big part of property development – you can expect large variances. Depending on the size of your development project, making just one wrong assumption could cost you millions.

Most property developers don’t want to admit that they still rely on spreadsheet templates with complex calculations to understand their financial feasibility. But we know almost one in five large businesses have suffered financial losses due to errors in spreadsheets. Here are just a few horror stories:

• TransAlta: A cut and paste error in a spreadsheet caused Canada’s largest clean electricity provider to buy more power contracts at a higher price. The cost of the mistake? $24 million.

• Fidelity: The company’s Magellan fund was forced to cancel a dividend distribution thanks to a missing negative sign. A loss became a gain, causing the dividend estimate to be off by $2.6 billion.

• JP Morgan: Copying and pasting a long list of cells led the investment bank to severely underestimate the downside of its synthetic credit portfolio. The bank eventually copped $6.5 billion in losses and fines

• Fannie Mae: While changing its accounting system, the company’s finance team relied on spreadsheets for calculations. But the spreadsheets contained errors that skewed results by over $1.1 billion, which was later reported to angry shareholders as “honest mistakes made in a spreadsheet”.

What does this mean for property developers?

A property development feasibility spreadsheet template can look surprisingly sophisticated, but they are far from foolproof. There are four main sources of error when property developers rely on spreadsheets. These are:

• Manual errors: Development companies are often high-octane environments where appraisers are required to undertake complex work and make quick decisions in very short timeframes. This makes human error the most common cause of errors in feasibility studies and templates.

• Failure to audit: Sometimes, changes made in one section of a spreadsheet can have downstream impacts that are not easily understood. Auditing can eliminate some errors from spreadsheets, but following the audit trail and checking the mechanics of calculations can be a long and laborious task.

• Missing modifications: Development projects are not static, and most will require multiple changes from the initial appraisal. Many assumptions may need to be tweaked before work starts on site – and just one forgotten number can make a world of difference to your project profit.

• History repeats: It makes sense to replicate a spreadsheet feasibility study when considerable time and effort has already been invested in previous projects. But this can perpetuate errors from earlier projects. Can you be sure the last feasibility model was audited and error-free?

What tools can help me make the best decision?

To uncover deeper details about your project, you’ll need to depend on sophisticated software, like ARGUS EstateMaster or ARGUS Developer. With a robust solution, you’ll be able to input more data to build a more accurate real estate feasibility study, allowing you to make confident financial decisions.

• ARGUS EstateMaster: Once you input your costs and revenues, you can calculate key performance indicators, including residual land value, development margin and profit, net present value and internal rate of return to help you evaluate development opportunities.

*Purpose-built for the Asia Pacific and the Middle East region

• ARGUS Developer: Build and leverage pro forma templates, set up a project timescale with configurable stages to suit your project, link phases and model phase dependencies, test scenarios for proposed developments, and bring transparency to risks.

*Purpose-built for North America and European regions 

Continue reading the next instalment: Property development feasibility guide part 5 – fundamentals of development financing