Is developing property the right strategy for today's market?

This week we’ve been inundated by reports in the media about an impending market crash.  I watched in interest as one current affairs program sensationalised and dramatised a story by editing quick grabs of what a few different commentators were talking about. 

If you missed the host’s introduction that ‘some markets were at risk of collapse’ then you’d be thinking that we were all doomed and there was an impending national market crash fast approaching. Little cuts to the US property market didn’t help.  Later in the story we do find out they were talking about what was going on in two Queensland suburbs where two people had purchased units off the plan in a massive high rise complex in a very densely built up area (a risky investment strategy).  Further into the story up popped a list of other ‘difficult’ suburbs around Australia.  The interviews with several commentators were edited so much that I’m sure a lot of the really interesting detail they spoke about wasn’t included.

The problem with these reports is that they are designed to keep you glued to the TV and up the ratings, not necessarily to educate you on the topic.  So if you were thinking about developing property and watched that program, you would certainly be having second thoughts. 

It’s up to us to dig down to the detail, sift through all the noise and get to the facts.  We need to become a specialist in the areas we want to invest in. 

I do this by tracking a certain postcode’s medium quarterly sales going right back to 1997.  I buy this data from Residex and to me it’s the best investment I can make as I can see:

- How fast the market grew during its boom years;
- The actual number of property sales each quarter;
- The median price has stabilised and enjoys steady incremental growth over
   the past 6-7 years even though the number of sales seems to fluctuate; and
- I know the average 10 year growth rate is over 12% which works for me.  

This long term statistic can help you compare different suburbs.  I overlay this historical data with the current research I collect on these towns.  I read regional strategic council reports, I look for government and council spending on infrastructure and what is happening in the community.

A $1.7 billion freeway link is under construction and will have an interchange in one of the towns in this postcode.  We are seeing two major supermarkets opening in one of the towns and this is boosting employment. Another town under this postcode is enjoying incremental spend from the phenomenal concerts in the vineyards industry which is bring massive artists such as Elton John to the area and boosting the hospitality and tourism sectors. I know that the vacancy rate is under 1% and the type of dwellings that are in demand.  Armed with all this information, I feel very confident that developing property in this post code is going to continue to pay off. 

 As a developer you need to be extremely confident about the location of your development because there are so many other factors that can affect investment, the more you can sure up, the better chance you’ll have of a successful result.

So is now the right time to be developing property?  It will depend on the areas you are looking at. For me, it’s a resounding YES as I’ve done the research and know that my client’s projects in the Hunter Region of NSW are going to do well for them.

Infrastructure – Why It’s Important to Your Investment

When I first decided to develop property, I was overwhelmed with where to start.  I’d purchased four properties in Sydney and realised that I couldn’t keep buying negatively geared property, coming up with the short fall required certainly puts the pressure on.  By this stage, the major cities in Australia had become too expensive, so I began doing the figures on areas within a 200 kilometre radius of Sydney.... Wallah... the Hunter Region came up trumps!
I found that I could buy large residential lots of around 1000sqm and develop them a lot more cost effectively than if I was to develop in Sydney. Everything was cheaper from the land purchase through to consultant fees and building costs.  I also found the people there fabulous to work with.  Most importantly, I found that there was a lot of infrastructure investment being made in the area.
Infrastructure investment is very important to an area as it stimulates the local economy by creating lots of employment and attracts more people to the area.  Infrastructure projects create demand for rental property and other goods and services.  As the projects progress, money is spent in the local community and there is a flow on effect to associated businesses.  For instance, the local cafe sells more coffee and there is demand from contractors for convenience services such as laundry mats and take away food. Once the project is complete it adds to the local services. A great example of an infrastructure project is a new freeway being built where the benefits may be to cut travel times, improve efficiency within the roads network, relieve congestion of vehicles in certain areas and attract more people to the area as it is now quicker to access.
But you can’t just look at infrastructure investment when searching for a good location for your development; one of the other things you should consider is growth rates.  The latest RPData figures show that although values across Australia have fallen, New South Wales regional areas such as the Hunter and Illawarra are still performing well with median house prices up 2.2 per cent and 3.6 per cent respectively over the past 12 months. Both are in close proximity to Sydney and this is a key reason for their standout performance.  
John McGrath, CEO of McGrath Estate Agents points out that Newcastle is a great example of an area growing for local reasons.
“It’s shedding its steel city image and positive media attention is encouraging retirees, seachangers and investors from as far as Melbourne, Brisbane and Sydney. Great value is available and Sydney is just a two-hour drive. The median house price is currently $380,000, up almost 12 per cent since 2009,” said John.

Two weeks ago, the NEWCASTLE Herald revealed figures from BIS Shrapnel that house prices are set to increase 18 per cent in the next three years. It also states that residential properties in Newcastle are set to rise at the same speed as Sydney.

The Residential Property Prospectus for 2011-14 outlines an increased migration rate from Sydney, north to Newcastle and south to Wollongong with Wollongong experiencing higher price levels at the moment which will result in a slightly lower growth rate of 16 per cent compared to Newcastle and Sydney.

The migrations north and south of Sydney are the result of a housing shortage in Sydney and a combination of higher prices and increased interest rates according to the survey. It seems as though people are quite happy to commute to work one or two days a week to be relieved of the pressure of a huge mortgage.

When purchasing a property, we are told to “look for infrastructure” so just what impact can an infrastructure project have?
I’m seeing right now a massive tightening of rental markets in two major Hunter towns I’m developing in. One town has a large coal mine that is being expanded. After many years in the planning, this expansion has been approved and now contractors are flocking to the area to work on the infrastructure required within the mine for it to expand. Once the project is complete the contractors will be replaced with additional full time workers required to work the larger mine.
The other town is literally being put on the map by an interchange for a major expressway to be built.  It’s a $1.7 billion infrastructure project and the impact is being felt.  All of a sudden we have seen McDonalds, KFC, a new Coles supermarket and an Aldi store being built in this small town.  Consequently, there are a lot of contractors working on the road works looking for rental properties and rental returns are increasing. Employment prospects are bright now in this small town.
Whilst we love infrastructure spend, other boxes the Hunter Region ticked when I was researching the area include:
- Proximity to Sydney
- Affordability
- Strong rental demand and low vacancy rates
- Undersupply of new housing
- Strong population growth – Maitland has been the fastest growing inland town of NSW for a few   
   years running
- Diverse economy, whilst the mining industry supports the area, the wine, hospitality, tourism and
  retail industries are also providing many jobs
- Large lots of residential land
Developing property is challenging and getting it right takes a lot of time and research.  But we are lucky to have a plethora of information and statistics provided to us by qualified researchers, companies and the media. So it’s up to you to sift through it all and work out what may be a viable location for your property development.  Good luck! 

Planning Permission or Punishment?

Property developing can be very rewarding and can also be overwhelming, especially if you are building in an area that you are unfamiliar with for your first development. The best way to become familiar with your choice of location is to find out how the local council work and what they would like to see built in their area. Developing relationships with the local town planner could save you a lot of time and money and help make the difference between a frustrating development and a fabulous development.

To get off on the right foot, do some research on the type of new development you see driving around the town and what you would like to build.  Then call the council and organise a meeting with a town planner. Sit down with them to discuss your ideas and plans and find out what will help your development to get across the line with minimal stress.  You’ll also need to do some ‘light’ reading so you have the heads up on what is and isn’t permitted in the area. This way you won’t be wasting the town planners time asking questions that have been answered in their plans and you can go in with questions relating to your particular development.

Some documents to read include...

Local Environmental Plan (LEP). You will find this on the council's website.  An LEP defines the land zones and outlines permissible land uses within these zones. You will need to be familiar with this as this will determine what type of building you can put on the land, low, medium or high density. Right now, a number of councils in NSW are preparing Draft LEPs so ensure you check to see if your council is working on a new LEP as when processing your DA, they will take the Draft LEP into consideration, even if it has not yet been gazetted. 

Development Control Plan (DCP). This document contains more detailed provision than those in an LEP. Its information is specific to geographic zones or development types. It will give you a thorough understanding of the guidelines to follow when developing in your chosen area.

Regional Strategy Report (if the council has one), is used to locate areas with the greatest potential for development. The document will outline plans for land releases land rezoning, population and employment projections and will pinpoint specific areas that have been earmarked for future growth.

When you meet with a council planner, come prepared with the 149 Planning Certificate from the contract of sale of the property or land you are looking to buy. The 149 will inform you about things such as whether the land is in a bushfire or flood zone or if the land may be considered for complying development and it will tell you what may be prohibited on the site, whether it is heritage listed etc. If you are not sure about some of the information in the 149, then the planner can explain it to you.  Also bring with you a survey and sewer diagram, also found in the sales contract.

Council Meeting Minutes will sometimes give you valuable information on other DAs that have gone to a council meeting and comments made about the developments. You can also read other DA Consents to get an insight into the type of Conditions that council may include in your consent.

Some questions you can ask the duty planner:

What kind of development is council wanting to see in the area?

It’s important you work with your council rather than against it if you want a smooth process. You want to align your project with council’s vision for the community.

Can they see any problems in developing this particular site?

They may see a problem such as access onto the road if it is perhaps a major road or they may be privy to information on neighbouring properties for instance.

Is the land in a flood zone?
Although this will be included in the 149 Planning Certificate, it is really important to ask this question.  The planning certificate you have may be out of date or lacking in information. For example, the council might be working on a new flood study, but this won’t be reflected in the planning certificate. By the time a DA is lodged, the property's flood zone may have changed and it could be rejected. The council will have a flood and/or drainage manager who can give you up-to-date information over the phone. If the land is in a bushfire-prone area, be aware that you’ll need to comply with current fire-safety regulations, which will add to your building costs.
What is the minimum lot size?
This will be specified in the DCP r Subdivision Guidelines, however, sometimes council may be a little flexible on this, so it is an important question that will help narrow down your search for properties. If you are looking for land to subdivide, you will need to look for land more than twice the size of the minimum lot size.

Are there any issues that may arise in developing in this area?
This is a good question to ask a town planner, who will be aware of social issues outside the constraints of the DCP. For example I developed in an area where the local neighbourhood fought any DA that had been lodged for more than one dwelling on a title. I soon learned that the deputy mayor lived there and was rallying neighbours to fight these DA’s. I sought legal advice and was able to negotiate with council and gain consent as my DA met all the requirements of the DCP.

Once you have secured your development site, have your draftsman or architect put a concept plan together. You can use this to go back to council to show them your design and get valuable feedback from them at this stage.  Also check if there are any specific reports that may be required to be included in your development application. These may include acoustic reports or traffic reports for instance. You can easily make changes at this stage and ensure that your DA is processed as quickly as possible.

After your DA has been lodged, check to see if your council has a DA tracker on their website that you can follow the progress on.  If you see it is not progressing as forecast on the tracker, then certainly make a call to the planner assigned to your DA to find out what the hold up is.  If there is no online tracker then make regular calls to your planner to keep on top of the progress.

All councils work to different timeframes according to their resources. Sometimes I am surprised at the speed of council, but mostly we find the process does take too long. So staying in close communication with your council can help fast track the process.  Enjoy this important part of your development journey; you will learn so much from going through the planning process.

How to determine if a development site is Feasible

You’ve found what you think is a brilliant development site.  Now it’s time to jump on that roller coaster and start the ride of your life as you commence the analysis process.  Will the project be feasible?  What is feasible anyway?  

Let’s find out.  Feasible is really another word for “is it going to be financially worth it for you to spend your time, energy, money, blood, sweat and tears developing this site?”

Some advice I can give you about property investing and anyone in property will also tell you, to stay emotionally unattached to the property, as this is where bad decisions can be made. I have seen it many times and this is where it can all come undone.

Firstly, it’s important to determine your development strategy and your investing criteria prior to looking for a development site.  Your strategy may include:

-          Land Subdivision

-          Renovate an existing dwelling

-          Dual occupancy or low density development

-          Renovate an existing dwelling and build new villas/units also on the land

-          Medium density development

-          All of the above

Your budget will help to determine your development strategy. A simple land subdivision will be less costly (but not necessarily quicker) than a larger villa/unit development for instance.

As part of your strategy, you will need to think about what profit margin you would feel comfortable making from a development.   You may have heard about the ‘20% profit margin’ rule for developers?   Once all development costs are taken from the potential sale result of the properties, (when selling the properties) there will be a 20% profit margin.  Personally, I don’t always work back from a certain profit margin as I find this restrictive. 

Most of my clients are looking to boost their portfolios and hold the new properties long term, so we also need to meet other criteria.  By other criteria, I mean rental returns on completion.  For instance, if a client wants to create a positively geared development the end gross yield will need to be around 10% and we will actively search for development sites in very strong rental areas of the Hunter to meet this objective.  Other criteria will include the amount of equity we can create from the project.  We strive to create over $100k in equity after our project management fee. 

To determine the feasibility of a site, you will need to:

-          Talk to an accountant who specialises in property and one who preferably develops property themselves as they can advise you on the best structure to purchase under and explain the tax implications when developing such as GST and CGT. 

-          Meet with a financial lender or a Bank to determine your budget and the best loan structure for your development.  It’s important to choose a lender that offers construction loans and find out what their lending criteria is around this i.e. not all residential lenders will lend to you for a four unit site for instance.  Check interest rates on these loans.

-          Meet with solicitor to determine their costs. They will check for restrictive covenants or easements that may affect the land. They will also make sure services are available and connected especially if you are developing in a new area as well as finalising the deal for you.

-          Read the local Development Control Plan (DCP) and Local Environment Plan (LEP) and speak with your council’s town planner to find out DA and CC (Construction Certificate) costs. Get friendly with the Town Planner to find out which developments they want to see in the area as this could save you time and money by getting it right the first time.

-          Meet with an architect and builder to determine what you can build on the site.  Some builders offer standard designs which will save you design fees.  If they do this, then they will be familiar with the local planning requirements.  If you are not happy with a standard design, engage a local architect to design specifically for the site. Get a quote.

-          A surveyor will give you advice on the subdivision process. They’ll prepare your subdivision plan and estimate costs relating to the subdivision including sewer extension and service connection costs.  

-          Once you have a concept design and before you lodge your DA, meet with builders to determine construction costs. Try to get 3 quotes and make sure they offer you a Fixed Price Contract.

-          Talk to real estate agents to determine the value of your development and rental returns on completion as this will have huge impact on the success of the feasibility.

-          Research other costs such as Stamp Duty, reports, Insurance and Interest payments.

The aim is to keep the above costs to a minimum so you will receive a higher profit margin. All this information can be kept in a spread sheet or there are software programs to help you with this process.

Below is a quick one page analysis I do to determine if a development is going to be feasible. In this case the client is keeping the three properties we have created from one.

Purchase price three bed house on 1012sqm of land: $210,000Estimated set up costs, stamp duty, legals, pest & building reports, survey: $8,500
Estimated renovation cost: $8,000
Build cost for a two bedroom duplex (2 x villas) to be built behind existing house: $353,000
Contingency:  $20,000Note: build costs includes all council, subdivision and other fees & charges. I always ask my builder to wrap all development costs into their contracts so my clients can maximise their lending.

Total development cost to create three properties from one in Hunter Region of NSW:  $599,500

Estimated end values:

Renovated three bed house on 400sqm:  $220,000

Two bed villas $260,000 each:  $520,000

Total end values:  $740,000

Potential gross equity to be created: $140,500

Note: lending costs are not included at this stage: 

Estimated rental returns:

Renovated house $300 per week

Two bed villas @ $280 per week each:  $560 per week

Total rental return: $860 per week or $44,720pa

Gross yield on completion of development: 7.5%

Gross Rental Yield – How it worksOne of the first calculations you will need to understand if you intend renting the properties on completion is the Gross Rental Yield (GRY). To calculate the GRY you need the annual rent and the total cost of the development. If we use the above example:

Annual rent: $860 per week x 52 = $47,720pa
Total development costs: $599,500
Gross yield: $47,720 divided by $44,720 =  7.5%

The yield on the above example of 7.5% is ideal at the moment as anything over 7% is considered to be a strong yield.  Some of our developments are creating up to a 10% gross yield.  

Once you have obtained the estimates for your development and the figures are looking good, you have some actual estimates to go back and speak to your lender about and ensure you can finance the project. There are various finance options so seek professional advice on the best one for your situation.  Then before you purchase, ensure you have discussed the best legal entity to be purchasing under for your individual circumstances with your accountant.

When your finance is preapproved, you can then start to negotiate the purchase. Always ensure you have a preapproval before making an offer so you can move quickly to exchange. This is a good negotiation tool.  Ask for a longer settlement and a lower deposit which will reduce your holding costs.

There are many more things to consider for your site selection, so it’s important you do your due diligence.  In the development game, time is money. So you will need to learn to assess a potential site very quickly. One way to fast track the analysis process is to engage other professionals to do this important work for you.  If it is your first development then work with an experienced project manager so you can learn from them as you progress through the complicated and challenging journey of your property development.  Enjoy the ride!

If you are interested to learn more about what I do, please go to http://www.propertybloom.com.au/  or give me a call on 0418 293 575

Choosing an Awesome Development Site

What exactly is a property developer?   I quite like this description found on Wikipedia;

“Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control and orchestrate the process of development from the beginning to end”

I especially like the words ‘create, imagine and orchestrate’ as this is exactly what I do.  When I find a development site, I stand on it and spend some time visualising what can work on the land, then I dissect this down by considering several factors including:

The local market demand – what do people want to buy or rent in this are?

Local economics – what is the income of the people living in this area, where do they work, what can they afford?  What infrastructure spend is going on right now or planned for the area?

Population growth – what is the growth right now and what is it forecast to grow to?

Budget –how much have we to spend on the development process

Market growth rates – what historically has this suburb been growing at and what are you expecting it to grow at?

End values – what are similar dwellings selling or renting for now?

Choosing the right area in which to develop is crucial. It requires research, research and more research. Most first-time developers can’t afford to develop property in areas such as capital cities where everything- including land, building costs and professional services is more expensive. Instead, I suggest you cut your teeth on an affordable area within a three-hour radius of a capital city.

Look for areas that:

- offer promise; perhaps going through a gentrification phase
- going through a growth phase; median prices are historically performing well

- where the population is expanding;
- where diverse industries support employment;
- where private enterprises, such as large retailers or mines for example have announced expansion plans.

All these factors result in strong rental and sales demand. Once you’ve settle on a location, search the area for land in close proximity to schools shops and public transport which will attract buyers or renters.

Below are tools to add to your research in finding the perfect location for your development. These include:

Newspapers –  subscribe to the local paper to keep up to date with community news

Property Data sources – where you can purchase specific reports

Property Magazines –

Web sites - realestate.com.au, domain.com.au and Property Observer to name but a few
Budget Reports – look at federal and local government budget and spending reports as this will show you where money is being spent on infrastructure and you will find areas that are pin-pointed for future growth.

Planning Information- from your state planning body and council’s website
Once you have found the area you want to develop in, it then comes down to good site selection.  To get ready to assess a site, you will need to:

- have narrowed down your area or suburb where you want to develop;
- completed extensive due diligence on the economic and social factors of the area;
- know whether the suburb has a high rental demand;
- know what the vacancy rate is and what the median sales price is;
- understand council’s Local Environment Plan (LEP) and Development Control Plans (DCPs) so you
  know what the council will and won’t allow in your area.

You need all this information to determine if the land you are assessing has good development potential... or not.  The next step is to find the right property within your chosen suburb.  This is called site selection.

The site selection criteria is based on a number of factors including:

-          Location

-          Aspect

-          Slope

-          Frontage

-          Depth

-          What’s on top of the land

-          What’s underneath the land

 Location of your development site is obviously important, we all know that being close to community amenities is top priority whether you are planning to keep your new dwellings or sell them, being close to schools and universities, shops, transport and medical facilities is very important.  You should check out the neighbours on all sides of the land to make sure there are no dog breeding kennels, chicken coups, car workshops or noisy businesses that may make the location undesirable for tenants. Ask the locals about crime rates and take a drive around the streets to get a ‘feel’ for the area. Trust your gut feel or intuition; we will often get an instant negative feeling if something is not quite right.

Aspect is the direction the land faces; north, south, east or west.  It’s important to have the living areas of your development as close to facing north as possible to maximise natural light.  Aspect is also very important for the energy rating of your development.

The slope of the block is important. Most people think a dead flat block may be good for developing, whilst it may be better than a steeply sloping site but you may need to build up the site with fill and retain it to meet drainage issues. So the ideal block will slope or fall slightly to the street which will assist with natural stormwater runoff and drainage.

A wider frontage or width of the block is usually desirable particularly if you are looking at a medium density development as you will be losing some of the width to a driveway to access the rear dwellings. Some councils have a calculation as to how wide the driveway needs to be based on the number of dwellings. So make sure you have taken this into consideration and have a wide enough block.

Depth is important and will determine how many dwellings you may get onto the land.  Be careful with very deep blocks as the deeper the block, the longer the driveway. A long driveway can add thousands to your costs. You may also need to run services such as sewer, water, gas and electricity from the front of the block to the back, depending on where the connection points for these services are located.

What’s on top of the land?  For a quick assessment, take a look around to see how many large trees may need to be cleared, a mature gum tree can cost up to $5,000 to remove, so if there are a few of these, you will need to allow more for you site clearing costs. Also look out for asbestos sheds on concrete slabs which are expensive to remove. If there is an existing house that you plan to keep, check there is good access to the back of the block for the large site clearing machinery that may be required.

What’s underneath the land?   In some regional areas, you should check for old mines.  If you know it’s a mining area, then you can apply to the local mine board for a subsidence report.  You can still build over an old mine, but it adds considerable costs to correctly under pier the project for stability. Is there a natural water course running under the land?  The soil type is also important. In most cases, you won’t know unless you commission a geotechnical report which is advisable to have done if after all your research you are sure this is the correct site. It may cost around $800 but worth every cent if it means you can more easily assess projects viability.  You will also need to know the location of the sewer line, sewer junctions and sewer manholes as some of these may be built over but one of them most certainly cannot.  You can request the sewer diagram from the agent or the local water authority.  A detailed survey will show other important things so again, if you are serious about the site, get a detail/contour survey done as you will need this to have a builder or architect work on a design for your project.

There are many more things to consider for your site selection, so it’s important you study what is required. Or engage other professionals to do this important work for you. A development project manager will be able to assist you with every stage of the process. If you are interested to learn more about what I do, please go to http://www.propertybloom.com.au/  or give me a call on 0418 293 575, I would love to help and are happy to teach you along the way