Scott Keck

Large developments are risky, by their nature. But there are ways of keeping that risk under control.

Taming development risk

I am often asked how to build large developments and manage risk at the same time. It’s a tricky question.

Large developments are risky by nature. The investment timeframe extends beyond expected demand and other economic factors crucial to its success.

Projects that cannot be completed within three years assume great risk because of the changes that may occur. Many examples office, retail and industrial projects were started in the buoyant period of 1988 to 1990 and, when the recession arrived, were irreversible. When they were completed in 1992 and 1993 were devastated by the reduced economy.

Smaller projects with a timeframe up to two years significantly avoid this risk.

The risk with developing a grand vision is that they can often be too ambitious. Innovation and excellence are admirable but they increase the risk of cost and time overruns, due to design changes, supply shortages, currency fluctuations in relation to imported finishes, and the time involved in coordinating specialist teams.

For larger projects where the concept, management, marketing and “driving force” are with one individual, typically the charismatic developer, there is greater risk than those managed by a development team, such as a corporate developer.

Without detracting from the brilliance of some individuals, a team approach involves debate of key decisions, differing views, diligence from a range of specialists that one individual cannot provide. Teams tend to be reluctant to take risks than individuals, and a board of directors with experience brings a moderating sense of responsibility.

There is a view that mixed-use projects spread risk, but I have found it is difficult to achieve harmony among tenants and acceptance in the market. Compromising the design in favour of one component above another, the separation of pedestrian and vehicle access, the priority for exposure, and the “roll on” effect of the failure of one component to other sections all increase risk to the developer.

By comparison, single-category projects usually have the benefit of an exclusive target market, fewer design considerations, easier research and are more popular with investors.

In summary the following is worth keeping in mind.