Property development offers significant opportunities to create value in the New Zealand property market, but it also involves a range of risks that must be carefully managed. From construction cost increases to market fluctuations and funding constraints, even well-planned projects can face challenges if potential risks are not identified and mitigated.
While these risks are widely understood at a high level, what matters in practice is how they affect a project’s ability to be funded, delivered, and exited successfully. Lenders assess projects through this lens, which means developers who take a structured approach to risk are better positioned to secure funding and achieve consistent outcomes.
Common Property Development Risks
Once you understand how property development finance works, the next step is to familiarise yourself with the potential risks that accompany each project. Property development projects face several categories of risk that can affect both project viability and profitability. While these variables cannot always be eliminated or controlled, experienced developers plan for them early and structure their projects to reduce potential impacts.
Construction Delays and Cost Overruns
Construction risk remains one of the most significant challenges in property development. Cost increases, labour shortages, and delays can all impact both timeline and total project cost. Even relatively modest overruns can reduce profit margins, particularly where projects are tightly structured.
Delays also extend holding costs and interest exposure, which can compound quickly over the life of a project.
To mitigate: Developers typically manage these risks by working with experienced builders, securing fixed-price contracts where possible, and creating detailed cost estimates during the feasibility stage. Including contingency allowances within the project budget also provides a financial buffer if unexpected costs arise. This includes completing critical infrastructure works such as stormwater and wastewater connections, along with driveway construction, prior to vertical build to avoid delays in the titling process. It also involves locking in utility provider agreements early (such as from Vector and Watercare) where upgrades or network capacity constraints may materially impact costs.
Changing Markets
Property markets can shift during the lifecycle of a development project. A project that appears profitable during the feasibility stage may face reduced demand or lower sale prices by the time construction is completed.
Changing economic conditions or buyer preferences can all influence resale values. Developments that take several years from acquisition to completion may be exposed to these types of market fluctuations. The key risk is not that markets move, but that feasibility assumptions fail to allow for it.
To mitigate: Developers often adopt conservative assumptions when estimating projected sale values. Conducting detailed market research, analysing comparable sales, and aligning the project design with local buyer demand can all help improve the likelihood of achieving targeted prices. Obtaining pre-sale cover can provide additional confidence to both lenders and developers by validating pricing assumptions and demonstrating market depth, although it is not always a requirement depending on the funding structure.
Interest Rates and Funding Risk
Because property development projects rely heavily on borrowed capital, financing conditions play an important role in project viability. Rising interest rates, tightening lending criteria, or funding gaps can significantly affect cash flow during the development period.
Interest costs are typically incurred throughout the construction phase, which means unexpected rate increases or delays can materially affect project margins, particularly where funding is structured on a floating basis (e.g. BKBM plus a margin). In contrast, many non-bank lenders provide fixed rates for an agreed term, which offers greater certainty during delivery. However, if the loan term needs to be extended, re-pricing may occur at expiry, which can impact overall project returns.
To mitigate: Developers manage funding risk by stress-testing feasibility models under different interest rate scenarios and maintaining sufficient equity to support the project if conditions change. Working with lenders with extensive development finance experience can also help ensure the funding structure aligns with project timelines.
Planning and Consent Risks
Planning and regulatory approvals are another common source of uncertainty in property development. Resource consent processes, zoning restrictions, infrastructure requirements, or council compliance conditions can all delay project timelines.
Unexpected consent requirements may also increase project costs or require design changes, which can affect feasibility.
To mitigate: Developers typically undertake detailed due diligence before acquiring a site. Engaging planning consultants early and allowing realistic timeframes for approvals can help identify potential issues before construction begins. The quality of consultants and development partners also plays a critical role in the overall success of the project.
How Experienced Developers Manage Development Risk in Practice
Because development projects carry multiple layers of risk, lenders take a structured approach when assessing applications. Their goal is to help projects remain financially viable even if timelines extend or costs increase.
Feasibility Assessment
Before approving funding, lenders assess the project’s financial feasibility in detail. This includes reviewing development costs, projected end values, timelines, and contingency allowances, and considering how the project performs if conditions change.
Equity Requirements and Lending Limits
Development finance is typically structured with defined limits such as loan-to-cost (LTC) and loan-to-value ratios (LVR). These parameters ensure that developers retain meaningful equity in the project and provide a buffer if costs increase or values soften.
Staged Funding During Construction
Funding is generally released in stages as construction progresses. Drawdowns are linked to milestones and verified through inspections or reporting, helping ensure that the project remains on track and that sufficient funds remain available to complete the development.
Structuring for Property Development Success with ASAP Finance
Property development always involves some level of uncertainty. Developers who understand potential risks early are better positioned to structure projects that remain viable even if conditions change. While these risks cannot always be completely removed, they can be anticipated and managed.
At ASAP Finance, we work with developers to structure development and construction loans that shield projects from risks. Our focus is on creating funding frameworks that align with the realities of development projects, giving each project the best chance of success. If you’re planning a development and want guidance on structuring finance for your project, get in touch with the team at ASAP Finance to discuss your plans.