Development strategy

01Why strategy comes before the site#

A site is not an investment strategy.

The same property may support several theoretically possible projects, but those projects can have very different:

• customers;
• planning requirements;
• design efficiencies;
• infrastructure needs;
• construction costs;
• funding profiles;
• operating obligations;
• sales periods;
• risk levels;
• exit routes.

It is: can this site deliver the product, return and exit required by the strategy after allowing for planning, time, cost, finance and risk?

021. Define the product#

The initial product definition should be specific enough to guide site selection without becoming a fixed architectural design.

Possible development models include:

• residential units for individual sale;
• houses or villas for sale;
• urban rehabilitation;
• build-to-rent;
• student accommodation;
• senior living;
• co-living;
• hotels;
• aparthotels;
• tourist apartments;
• tourist resorts;
• branded residences;
• mixed-use development;
• land subdivision and serviced plots;
• logistics or industrial development;
• acquisition and completion of an existing project.

The intended commercial description must be compatible with the legal and planning use. Marketing terminology does not determine the applicable planning, tourism, residential or operational regime. Expressions such as “serviced apartments”, “branded residences” or “resort residences” may describe a commercial product, but they do not, by themselves, establish the lawful use or the applicable legal framework.

032. Identify the customer#

The project should be designed around a defined customer or user rather than a general assumption that demand exists.

The target may include:

• local owner-occupiers;
• international second-home buyers;
• long-term tenants;
• students;
• senior residents;
• tourists;
• hotel guests;
• corporate occupiers;
• institutional investors;
• hotel or residential operators;
• another developer acquiring a completed or partially completed project.

The customer definition affects the site, product, design, unit mix, specification, marketing, contract structure and exit route.

043. Select locations using rules, not preference#

The location strategy should establish objective selection criteria.

These may include:

• permitted or potentially compatible uses;
• planning stability;
• access and infrastructure;
• population and employment;
• tourism or business demand;
• competing supply;
• land availability;
• construction and logistics costs;
• municipal requirements;
• environmental and heritage constraints;
• utilities;
• seasonality;
• expected sales or leasing period;
• operator demand;
• liquidity at exit.

054. Choose the development model#

A development can be originated and controlled in different ways.

The strategy may involve:

• direct acquisition of land;
• acquisition of an existing building;
• acquisition of a project with planning history;
• acquisition of shares in a property-owning company;
• an option to acquire;
• an exclusivity agreement;
• a conditional promissory purchase and sale agreement;
• a joint venture with the landowner;
• a development-management agreement;
• phased acquisition;
• a purchase subject to defined conditions.

A share acquisition may preserve contracts, project history or other arrangements held by the target company. It may also transfer corporate, contractual, tax, employment, litigation and other historical liabilities. The choice between an asset acquisition, share acquisition or joint-venture structure should therefore be made after legal, tax and financial assessment, not because one route appears faster.

065. Define the exit before acquisition#

The exit strategy determines how the project is expected to generate value.

Possible routes include:

• sale of individual units;
• sale of serviced plots;
• sale of the completed asset;
• sale of the project company;
• pre-sales or off-plan sales;
• leasing and stabilisation;
• hotel or tourism operation;
• appointment of an operator;
• refinancing;
• phased disposal;
• retention as a long-term income asset.

A project should not rely on a single optimistic exit. The strategy should identify a principal exit and at least one realistic alternative.

076. Establish the return requirements#

The project should have clearly defined financial decision criteria.

Relevant measures may include:

• total development cost;
• gross development value;
• cost-to-value ratio;
• profit on cost;
• project internal rate of return;
• equity internal rate of return;
• equity multiple;
• stabilised yield;
• break-even sale price;
• break-even rent;
• peak equity requirement;
• interest cover or debt-service measures;
• residual land value.

These are internal investment criteria, not guarantees of performance.

087. Define the capital strategy#

The developer should identify how the project is expected to be funded through each phase.

Possible sources may include:

• sponsor equity;
• shareholder loans;
• co-investor equity;
• landowner participation;
• senior development finance;
• bridge finance;
• mezzanine or subordinated finance;
• preferred equity;
• pre-sale receipts, where legally and contractually available;
• operating cash flow;
• refinancing.

The funding structure should be tested against delay and cost increases, not only the base programme.

098. Set the risk limits#

Every development involves risk. Strategy determines which risks are acceptable and how much evidence is required before the project proceeds.

109. Identify the legal and planning assumptions#

The strategy is not a legal opinion or planning confirmation. It should, however, identify the assumptions that require professional verification.

These commonly include:

• who owns the property;
• whether the registered and physical property correspond;
• whether the required access exists;
• which territorial plans apply;
• the classification and qualification of the land;
• the intended use;
• assumed building parameters;
• applicable public-law restrictions and easements;
• the likely urban-planning procedure;
• the relevance of a prior information request;
• the position of existing applications or decisions;
• whether existing project rights remain valid;
• whether project documents, contracts or rights can be used or transferred;
• the preferred acquiring entity;
• the acquisition structure;
• tax and VAT treatment;
• financing and security requirements;
• the legal requirements for sale, lease or operation.

A proposed project should not be described as “approved”, “licensed” or “ready to build” unless the underlying documents have been reviewed and support that description.

1110. Decide how the project will be governed#

Strategy should identify who has authority to make decisions.

This is particularly important where the project involves:

• multiple shareholders;
• external investors;
• a landowner joint venture;
• lender approval rights;
• a development manager;
• an operator;
• different entities within the ownership structure.

Governance should be documented in the appropriate corporate and contractual instruments. An informal understanding between investors is not an adequate substitute.

12What should happen during the first 30 days?#

13Documents for this phase#

The strategy phase should create:

14The one-page project brief#

Before assessing individual opportunities, complete the following:

• Project type — what are we developing?
• Customer — who will buy, lease, stay in or operate it?
• Location — which municipalities or submarkets qualify?
• Scale — what site area, building area or unit count is appropriate?
• Product — what unit mix, specification and amenities are required?
• Capital — how much equity can be committed and when?
• Return — what is the principal measure and minimum acceptable result?
• Risk — which risks are acceptable and which cause rejection?
• Acquisition — direct purchase, project acquisition, company acquisition, option or joint venture?
• Planning — what minimum level of planning evidence is required before acquisition?
• Programme — what is the maximum acceptable delivery period?
• Exit — sale, lease, operation, refinancing or project disposal?

Indicative timing and costs#

A focused strategy phase commonly takes approximately two to six weeks.

The timing will depend on:

1. 1number of investors;
2. 2project complexity;
3. 3availability of market information;
4. 4number of locations;
5. 5financing strategy;
6. 6need for preliminary legal, planning, tax or technical input.

There is no statutory fee or standard strategy cost. Initial expenditure may include market research, planning advice, legal structuring advice, tax advice, financial modelling, concept design, technical input and project-management support. The developer should define an initial investigation budget and approval limit before detailed work begins.

Common mistakes#

1. 1Starting with “we have found a site”.
2. 2Describing the strategy only as “residential” or “hotel”.
3. 3Failing to define the customer.
4. 4Choosing locations based on familiarity rather than evidence.
5. 5Confusing permitted use with commercial terminology.
6. 6Defining the project only by gross building area.
7. 7Failing to model parking, common areas and technical areas.
8. 8Using one fixed construction cost for every location and product.
9. 9Assuming tax efficiency equals project efficiency.
10. 10Forming an SPV before considering acquisition, funding and exit.
11. 11Having no clear authority to approve costs or changes.
12. 12Treating the exit as something to decide after construction.

Frequently asked questions#

Official sources#

• Regime Jurídico da Urbanização e da Edificação — Decreto-Lei n.º 555/99, in its current consolidated version.
• Regime Jurídico dos Instrumentos de Gestão Territorial — Decreto-Lei n.º 80/2015, in its current consolidated version.
• Direção-Geral do Território — SNIT territorial-plan information.
• Instituto dos Registos e do Notariado — Portuguese land-registry information.
• Turismo de Portugal — installation and registration of tourist developments.