Hunter a Shining Star

I’m often asked why I continue to focus my developing efforts in the Hunter Region.  Good question.  It’s been nine years since we started working in the area and I continue to be amazed at the research we uncover.  Because when you are a developer you need to understand the dynamics of the areas you will invest in.  As I’m sourcing sites and project managing developments for my clients, I need to be sure that the projects will be in the right locations. So I’ll explain a few of the reasons why the Hunter continues to be my shining star.

Firstly, the Hunter Regions is currently feeling the pressure from the much publicised “lack of housing” situation in Australia.  My agents are telling me the same story over and over.   Jo they say...”we can’t get enough quality rental stock, hurry up and finish that development would you!”

One of the reasons we are seeing rental markets in the Lower Hunter continue to tighten is the billions of dollars worth of infrastructure projects currently underway which is creating hundreds of jobs for both local and new residents.  One three bedroom house that Property Bloom renovated as part of the overall development, a few months ago in Stanford Merthyr, a suburb under the Cessnock LGA, was purchased for $210,000 and was rented quickly for $325 per week to contractors working on the Hunter Expressway.  The Newcastle Herald reports that there are 133 major projects worth $2.61 billion under way in the past year, with the majority taking place in the Cessnock local government area.

In Muswellbrook, Property Bloom has gained approval for dual occupancy projects and we are about to start building.  Each time I update my feasibility the rental estimates increase. These clients will end up with close to an 8% gross yield and create a large amount in equity by developing in this town.  Here, it’s the Mining Industry that is contributing to the desperate cry for housing, with employees moving to the town from all over Australia and even from New Zealand.  Several mines are undergoing expansion in Muswellbrook.  Contractors come to the area to work on the development works and then one the expansions are complete they will be replaced by full time workers as the mines increase their capacity. 

John Boyle of John Boyle Real Estate in Muswellbrook reports “We have limited land releases available for the amount of growth in the area. This growth is mainly coming from construction employees who are working on infrastructure in the area and mining support and services,” said John.

“We have only six homes for rent at the moment. Before the homes are completed, they have been rented. We need the developers to get a move on and finish their developments”, said John.

This lack of housing is ticking all the boxes and bringing investors to the area as they can see the potential growth destined for this area. BIS Shrapnel, expects median house prices to rise a further 18 per cent by 2014.

Leading Australian construction analyst Cordell Information reports there are 310 major civil projects in the pipeline for the region, with most of those planned for the Newcastle LGA. The boom is being led by Upper Hunter mine expansion and earthworks, major road and rail projects and BHP-site remediation work.

With Maitland being the fastest growing inland town of NSW over the past few years, we are always looking for potential sites in this area.  We recently found a 2000sqm piece of land where we’ll be building six villas for our client.  This area is earmarked by council for ongoing growth and Maitland has all the facilities you need in a town to support the fast growing population increase. 

Todd Fisher from LJ Hooker Maitland, says the lack of housing for current and potential employees is distressing.   “I feel sorry for tenants as there is a 1% vacancy rate. It is not unusual for us to have 50+ people at an open house. It is unbelievable,” said Mr Fisher.

“The Mining Industry is bringing in a lot of new blood especially from Western Australia, Queensland and New Zealand”, said Mr Fisher.

To top it all off, there is the most beautiful tourist attraction in the form of the vineyards and rolling green countryside that makes up the Hunter Valley. In addition to the wine industry, we see tourism growing substantially from the ongoing famous Concerts in the Vineyards where international artists such as Elton John, Fleetwood Mac, Meatloaf, Dolly Parton, Rod Stewart to name a few  come to perform. In addition there are spa, health and golf resorts and large five star hotel chains who have launched into what was not long ago a ‘bed & breakfast’ market.   

For me, the main sparkle for this region is affordability.   It’s one of the important factors that will drive the region in the short term, with a medium price well under all our capital cities, the Hunter will continue to shine on.   

Surround yourself with only people who are going to lift you higher." Oprah Winfrey

This week I sat around a table with a group of very important people.  Why were they so important?  They are the people who, at this stage of our development, could make a massive difference in the result of our project.

We were there to brainstorm the best way to build six villas on a 2000sqm block of land that I had sourced for my client.

This land is in a suburb of Maitland in the Lower Hunter Region. The main driver at the moment of this suburb is one of NSW’s largest infrastructure projects that is under construction right now; the Hunter Expressway. It will have an interchange less than 3kms away.  So people living in this suburb will have very quick access onto the F3 to get to Newcastle or Sydney. They could also live in this town and still work in one of the large coal mines as travel time to Branxton on the New England Highway will be cut. Another driver for this suburb is that the town of Maitland has been the fastest growing inland town in NSW for the past few years. So there is good demand in this market.

Ok back to the meeting.  The most important person there was my client, let’s just call him Jim. Whilst obviously important to me, he should be congratulated for taking on what is a very exciting property development. Jim has vision and can see the potential that I do in this project. Jim has a clear strategy; to create wealth through developing property as quickly as he can.  He understands he has a set number of years before he retires and he doesn’t want to muck around. This is Jim’s second development with Property Bloom so he is well on his way. If all goes to plan (which is what the meeting was about) Jim will come out with a very handsome amount of equity that will be created through the development project. He can use this to pay down any personal debt and continue to build his property portfolio.

Also at the meeting was our town planning consultant. This man has invaluable experience working with the local council and gave us a clear strategy on how to tackle the DA. This was not straight forward as we need to consider the lending criteria and stage the DA in the correct way so it can be financed. 

Next to him was our architect.  When I met him, I was impressed to find out he used to be a carpenter.  This meant he had actually worked on a building site!  This is a rare find, so I immediately thought he was pretty important.

Our builder has been in the game for over 20 years and bought along his construction manager who is very experienced and managers all the builder’s projects. I thought this was a great initiative as this guy is going to be directly overseeing our build, so what a great idea to include him at the design stage.  I recon he’ll take ownership having been involved at this level.

Also in attendance was the builder’s senior estimator who is the man who prices every aspect of the project, every square and lineal meter of it...so very important to have him there as he could tells us the areas where the big costs lay.

The final person was one of my project managers who had managed many projects not just for Property Bloom but for other builders so he has a strong understanding of the way builders work and also in the planning phases. 

I had called the meeting as we had just received a price back from the builder on our initial concept plan and we wanted to see how we could bring down the costs to increase the profit.

The architect, construction manager and the estimator started bouncing off each other on the engineering of the two double story villas, was there a way to decrease the metal beams required?  Did we need double story, yes.  We were happy with the floor plan design of the villas, so our focus switched to the site levels and the extent of the retaining required. There was some fall on the land which meant the development would be stepped. It wasn’t long before an agreement was made to minimise the height of the walls so that they didn’t need to be engineered by clever slab design and site preparation. We talked about the best and most cost effective way to subdivide the villas and then discussed maximising the street appeal and front façades of the villas.

The table was buzzing and I found myself quietly reflecting on how lucky I was to do this for a job. I loved the interaction between my team and pondered on the value of the accumulated expertise of the people I had on my side. 

We left the meeting on the final note of an amount that we’d be happy to wipe off the costs; the architect would proceed with more detailed plans and work with the estimator to ensure he had the details to deliver the next round of costings.  The solutions that were found in that one hour meeting are very exciting. 

So don’t try and tackle a property development on your own, as Oprah says, you can be lifted higher by others, get yourself a great team of experts that you can rely on and enjoy the process.

Developing a Positive Attitude

Tuesday this week saw the most volatile day for Australian share markets in 27 years, with shares down 5.6% at one point. Apparently, it was the only day where the market was down by such a significant margin, only to turn and finish in the black. Talk about a roller coaster ride.

We are seeing very low consumer sentiment, in fact confidence has fallen for the past four months straight as everyone is spreading their doom and gloom thoughts.

This week, the Australian dollar fell below parity for the first time since March this year and the US Central Bank announced they would keep interest rates at zero for the next two years.

Retail spending across the country is growing at its slowest pace in 50 years.

This is just some of the data I’ve been pondering today when writing this column.  It wasn’t hard to Google up the negative news, so when I was asked to write about my take on it all and how it may affect starting a new development, I really had to stop and think.

Because what is extremely interesting right now, as we see these turbulent times in the stock market and world economies, is that we are getting a lot of enquiry from people wanting to take the next step into developing property.  We’ve never been busier. You might think this strange as developing is often referred to as a ‘risky’ strategy. And if there’s one thing we don’t need now in these volatile times is more risk.

But is developing really that risky?  Not compared to what else is going around right now.  By developing, you are adding value to your property.  I’m not suggesting you build a block of 50 units, perhaps look at a simple dual occupancy development, creating two properties from one.  By doing just this, you can also create equity rather than wait for capital growth to come.  If you take it one step further and build three villas on your land, you will see the equity creation grow substantially with little further risk.  Three villas may take only a little longer to develop than two.  Minimise the risk by using a project manager to help you fast track your development.

Our clients at the moment are also holding investment properties.  They want to add to their portfolios quickly and they see opportunity in today’s buyers market.  Hmmm....on one hand there is the doom and gloom of what they are calling the ‘Second GFC’ and on the other hand we have clients lining up to buy development sites.

 I think I know why.  Over the past few years, we’ve seen our rental markets tighten and tighten and keep tightening.  So those of us holding investment property have finally been able to reap the rewards of higher yields.   In the meantime, our access to credit has loosened up, a little bit anyway.  Most lenders are offering higher LVRs and softened serviceability criteria compared to the drastic changes that were made in 2008 as a result of the global credit crises.  Construction loans are becoming easier to obtain for multi unit developments and I’m working with one lender who is now lending on Tentative on Completion valuations, meaning developers can borrow against the end value of the development, maximising their finance and using less of their own cash.  As a result, investors holding high yielding investment properties can service a development.

Property Bloom™ develops property in the Hunter Region of NSW, but only in large towns where the government is spending up on major infrastructure projects and where there is growing employment.  The coal mining industry has an impact on most of our towns but we still like to develop where there is a diverse economy.  We choose towns that have already been earmarked for high growth to take up the area’s growing populations and where there is strong rental demand.  In fact, these towns are powering along, some are even opening retail stores, it’s like they are on another planet, oblivious to what is happening in some parts of Australia and other parts of the world.

So is property development a good strategy right now. It’s a yes from me, but only in the right areas.  I think we’re on the cusp of a growth phase that may be triggered when interest rates drop. The demand will come from mainstream investors wanting less volatility than the share market is offering.  If you are adding value to your property at the same time as the market moves up, it’s a double whammy.  I really think this is a window of opportunity rather than a gloomy dark place.

The Evolution of Building Costs

Property developing can throw many different challenges at you and one thing I have learnt in this industry is there is always a solution to a problem. The trick is to understand what possible problems may arise and preparing yourself for them.  Unfortunately things don’t always go to plan and as a project manager it is up to us to make sure the development gets through as efficiently as possible.
One of the biggest areas for problems is not allowing enough for building works. 
When pricing a development and running feasibilities, it is important to understand that your building estimate is an organic creature. By this I mean the building estimate you start with will nearly always be different to the one you end with.  It will evolve throughout the process as you obtain more and more details.  Once you have all the fine details, the building estimate can be finalised to the fixed price builder’s tender. 
If architecturally designing our villas, we generally follow this process:

1.       Concept plan – this will show the number and size of villas on the land, but not much detail

2.       Development Application (DA) plans – enough information is included on the plans to satisfy  council

3.       Construction Certificate (CC) plans –more detail, including engineer drainage and slab design

The starting point for our build estimate will be based on similar projects that we have recently completed and an allowance for the different site.
This progresses to an estimate based on the Concept Plan.  Still a very ‘loose’ estimate as there is usually not enough detail on the Concept Plan for the builder to have all information he needs.  The build estimate we have at this stage will tell us whether we are tracking within budget.  If not, we can make the necessary changes required, perhaps reducing the size of the villas working with both our builder and architect to design the right dwellings for our project to be successful.
Once the Concept Plan is approved, the architect will proceed to full DA plans.  It is here that much more detail is added and we will have our builder price the DA plans.  Again, this does not give us a final build cost but we will be getting closer to the expected outcome.  Once approved by our client, the DA plans are finalised and the DA is prepared.
During the DA process, council may request some changes to the plans, so it is important to understand we are still ‘evolving’ at this stage. We also need to review the Conditions of the DA Consent before we have more detail to finalise the build costs.
Once council have approved the DA, we will start to prepare the CC plans.  Engineers will be briefed and a drainage and engineered slab design or footings for the foundations will be produced. More detail is added to the CC plans, finalising levels and double checking schedules. 
Before we lodge the CC plans with our private certifier we will have our builder issue a third costing. It is this costing that will give us the final build costs...well almost.  We still need to have the CC approved and ensure there are no further revisions to the plans required.  
After we have the CC stamped plans, our builder will issue their final tender and building contract. This will be a fixed price contract; however, there may still be a few items that will be ‘provisional’. They are usually some site works, removal of fill and retaining walls.  The builder may mark these items as provisional as they won’t know until works proceed exactly what the cost is. For instance, if rock is hit during the site cut, this will increase the site costs. If the site cut differs slightly to the plans, this may impact on the height of retaining walls.  So these ‘provisional’ items will be charged at actual cost whether it is lower or higher.
So you can see how the build estimate must evolve through the development process and until your development is completed, you really won’t know the exact cost.  It’s important you allow a contingency amount for any variations that may crop up along the way. 
As a developer, you will embark on a challenging journey from start to finish and the path you choose can be simplified with the help of a project manager to guide you along the way.  Always take the time to have full builder’s estimates done at each stage to avoid any nasty surprises.