The Opportunity Cost of Due Diligence

DD — the Devil is in the Details.

How much time do you spend on Due Diligence — researching a development opportunity before you commit? After you’ve committed, how much time do you spend keeping track of the market to make sure you’re in the best possible position to rent or sell your development?

The current process follows quite a logical path: Question → Determine Sources of Information → Extract Information → Collate/Calculate Information → Create Presentation → Present → Review. Once the question is answered, you can move on. But it’s not always so simple. Typically, a development opportunity or site review can raise multiple questions regarding the state of the market.

Our research has found that, on average, companies were spending about 40 hours per project going through this process. Larger firms, 30 percent of our survey, were spending upwards of 120 hours per project. If we apply the adage that ‘time is money,’ companies are spending, on average, £14,000 per project just pulling together details on the market and project viability. With the average developer taking on six projects per year, the time (and money) spent keeping track of the market, making sure that projects and proposals are viable and looking for new opportunities, quickly adds up.

Having accounted for cost, the next biggest problem is, of course, accuracy. Most developers have a designated person, or team, who is responsible for site selection and analysis. Oftentimes, developers will have multiple ongoing projects, so these site selectors and analysts can be very pressed for time and bandwidth.

While these individuals’ varying skill levels will undoubtedly correspond to their levels of success, their best efforts will ultimately be limited by the lack of accurate information in the market. Government data is often retrospective, listings portal data is quite selective and information from agents can be limited. As a result, almost all developers admit to some buyer’s remorse over a site or building because they had missed a critical piece of information as the market was changing.

In the pursuit of accuracy, many developers pay retainers or advisory fees to consultants, research houses and agents to do the legwork. In some cases these bills can accumulate to tens of thousands of pounds depending on the size of the site. Others prefer to pay a few hundred pounds for stock PDF reports — with a few minor alterations if they’re lucky. Through the current processes, developers are forced to choose between accuracy and speed in market research when pursuing new opportunities.

What if you could have both? Return on equity is shown to improve by 5–6 percent when developers have better data in order to make ‘data driven decisions.’ With better data, developers can not only make more accurate decisions, but also properly time the market, negotiate the right acquisition prices and get to the deals ahead of their competitors. Given the paucity of data in the development market, it may well be that developers with better data could improve their returns by far more than 5 percent.

It is undoubted that the market is moving to make use of better data and analysis to improve decision making, and it is clear that the first movers in this space will reap the largest rewards.

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Statistics sourced from REalyse surveys and Brynjolfsson, Erik and Hitt, Lorin M. and Kim, Heekyung Hellen, Strength in Numbers: How Does Data-Driven Decisionmaking Affect Firm Performance? (April 22, 2011). Available at SSRN:http://ssrn.com/abstract=1819486 orhttp://dx.doi.org/10.2139/ssrn.1819486