Developing Apartments in Sydney

Discussion in 'Development' started by gach2, 7th Feb, 2019.

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  1. gach2

    gach2 Well-Known Member

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    Not really asking about advice but more about curiousity
    With all the negativity in the media with apartments and apartment developments
    Is it really that bad??? And I have the feeling some of these developers have made some pretty decent returns.

    Comes from this article. https://www.smh.com.au/business/com...ts-line-up-for-fire-sale-20190130-p50ulb.html

    26 mil for the site which had 130 unit- Hence 200k per unit. 69 lots sold which based on the article were between 788k - $1.08 (prob otp). Im wondering how this was a failure.

    Was the cost developing really that expensive. Would be suprising if it was over 3-400k a unit but this is where i could be wrong.

    Omega Apartments - 48-56 Derby Street, Kingswood this ad shows 2 bedders from 399k. I know sizes and finishes would be more basic here but im sure based on this costs of developing land cant be over 400k

    while i have a very basic understanding on development, i probably have missed out a lot in something on this scale. But i feel even at 6-800k sale price (20-25% drops) developments would still be feasible
     
  2. FireDragon

    FireDragon Well-Known Member

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    Don't forget you need to pay GST when you sell the units. The construction cost for the one I did recently is around 350K per unit including the contingency funding, but my one has 3 level basement so it's more expensive due to water table. In addition, this doesn't include the project management cost, interest payment during construction, Council contribution, long service levy, consultant (engineers, architect, etc) fees, etc etc...
     
    Last edited: 7th Feb, 2019
  3. gach2

    gach2 Well-Known Member

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    GST would be on the margin (assuming it went through margin scheme)

    350k is a bit more than i thought but even with that and fees you mentioned still seems the example above would have worked out pretty well even with the current slump
     
  4. Redom

    Redom Mortgage Broker Business Plus Member

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    Part of the concern for developers in weaker markets are generally tied to finance & cashflow issues, not so much project profitability. There's enough fat in a project of this size that a 5-10% fall in apartment values isn't going to tank the profitability for the developer. But they do need them to sell, that is a must to maintain control of it & actually draw out their profit. These type of price falls are really bad for the buyer though, as it tanks the actual sale from going through (poor Vals, etc).

    A lot of these development deals are backed by debt arrangements that require the debt to be repaid after a short loan term. To get the funding, they require pre-sales of a certain % of properties, usually enough to repay the debt itself & extinguish this before the loan term ceases.

    For the debt to be repaid, they require the properties to actually settle. Getting 10% cheques isn't enough, they need them sold, otherwise they can't repay by loan contract end date & you end up with 'in one line' fire sales driven by debt holders.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    People who havent done devs always think its loaded with profit. Its not. There are endless costs and blow outs. The last thing any developer wants is to see a fall in value and lose all their margin. The margin must be there for the risks. It isnt there for new projects as the land is now costly and the risks have blown out. If costs increase 10% and a valuation fall of 15% will destroy planned profit. But they will sell or as Redom says may be forced to sell under a covenant with lender.

    Many completed builds on market now are desperate to get a buyer so they can offload. Once the lender gets it $$$ then the pressure to dump property backs off. So some devs will dump enough to get the lender off their back. And do something like Meriton and rent them. But there are few buyers. Plenty of supply......There is nothing pushing things up. Buyers set the price not what the developer wants.

    So lenders back off on vals big time. Even OTP sales are falling through as buyers cant get the finance or the vals dont stack up v's the contract. Lenders will always want those sales replaced.
     

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