Why scenario analysis matters in development feasibility

Short answer. Scenario analysis is the difference between a feasibility that argues a point estimate and one that frames a defensible range. The base case is what you expect. The downside is what you can survive. The upside is what motivates the equity.

Why a single number is not a feasibility

A single feasibility output reads as a forecast. It is not. It is the centre of a distribution. Construction costs move. Pricing moves. Programs slip. Interest rates move. Treating any one of these as fixed is a modelling choice, not a fact about the world.

Investment committees know this. The most common reason a feasibility fails IC is not that the numbers are wrong. It is that the modeller has not done the work to show what happens when one of the inputs moves.

Base, downside, upside

Base case

The base case is what you actually expect to happen. Best estimate inputs, no optimism, no pessimism. This is the scenario you defend in front of IC and the one the senior lender sizes against.

Downside case

The downside is the scenario that should still produce a positive answer. If the downside loses money, the deal is fragile, regardless of what the base case shows. The downside is what you survive, not what you target.

Upside case

The upside is what motivates the equity. It is allowed to be ambitious, but it has to be plausible. An upside that requires every variable to break right is not an upside, it is wishful thinking.

Sensitivities versus scenarios

Scenarios move multiple inputs together. Sensitivities move one input at a time. Both are useful, and they answer different questions.

• Scenariosanswer “What does the world look like if things go well/normally/badly?”
• Sensitivitiesanswer “Which single variable moves the answer the most?”
• Both togetheranswer “Where is the project actually exposed?”

How to present scenarios to IC

1. Three scenarios, side by side, on a single page.
2. Six metrics per scenario (GRV, TDC, profit on cost, development margin, IRR, peak debt).
3. Highlight what changed between base and downside in plain English.
4. Show the sensitivity that hurts the most as a small bar beside the scenario column.
5. Make the downside the recommendation, not the base.

A worked example

A small apartment project in Sydney’s inner west. Base case profit on cost 19.4 percent, downside 11.2 percent, upside 23.8 percent. The base looks healthy. The downside still positive, but inside the equity hurdle, not above it. IC asks: what would push the downside below break-even? Answer: a 6 percent fall in pricing combined with a 4-month delay. That is a useful answer. It tells IC exactly what to watch.

Practical takeaways

• Three scenarios per project. Base, downside, upside.
• Defend the base case. Build to survive the downside. Sell the upside.
• Combine scenarios with single-variable sensitivities. They answer different questions.
• Make IC read the downside first, not the base.