Developing - Where do the numbers stack up

I think this is a very telling thread, a sign of the times IMHO.

When developers can no longer make margins its time to be cautious

 

Hello everyone.
Can I ask same question with different angle.
Have BC of 460k. Cash 57k. No mortgage or liabilities, still renting in Sydney.
Which suburb in Brisbane can be best for development in next 3 years. Plan is to buy and develop in 3 yrs.

 

Is this for your ppor or develop to rent or sell?

 

Hi Leo.
Its definitely not ppor.
Rent or sell is not decided yet. It will depend on market conditions at that time.

 

The problem in inner Brisbane for splitters is that there is such a shortage of decent 405m2 blocks that people will buy the splitter and sell off the spare block so they can build their own home.

When you are dealing with people who want to build their own PPOR they are not making an investment decision.

 

I think with the budget you have in mind, it will be very hard to buy a good site imo. I know of some splitter sites that are selling for around 900-1mil mark with end sale value of 1.2-1.4m each. Say 1-1.1m for building. The margins are tight to buy now..unless the aspect of the site is unique, eg city views. LMR sites are another story altogether. Buying now and hoping it stacks up in 3 years time is too speculative for me to take on that risk. Just be very careful.

 

It strikes me that a lot of properties are being marketed as development opportunities, and priced so that the vendor gets most of the eventual profits.

So a renovation project will be nearly as expensive as a freshly refreshed property, or a small dwelling on a large block is treated as the site for a couple of townhouses.

 

Yep I'm seeing this more and more now. The agents who market older real estate this way are the good agents. Doing what's in the best interest of their client. Whenever I see a home being marketed just as a normal older home, but it has slight development or reno potential which is not being stated/highlighted... I straight away cross off that agent from ever using them to sell in the future.

 

This annoys me greatly - as I'm sure many other people. "Oh my house could be a duplex and end values are worth blah blah so I will sell it for blah blah now". They want all the gain without the risk.
Then wonder why no one buys it as developable? It sits on the market and just sits sits sits

For example 75 Harold Street Mount Lawley WA 6050 - House for Sale #126100042 - realestate.com.au has been on market for 106 days. Originally the property was listed as a development site with subdivision approval for a rear block so a total of 424sqm and had a price of $1.3m. Then dropped to "offers over $1.195". 10 days ago they are now just listing it as the front block and no mention of the rear block. The whole site (both blocks), in my opinion, is worth mid $900s
After 106 days on market they really should have gotten the message.

 

$898,000 for that dump? Tell 'em they're dreamin'!

The house could be nice. But not worth it at that price for 261sqm

 

Its on a busy around about, significantly reduce the appeal.

 

No onsite parking and where do you hang your washing?

I will be very surprised if this gets up.

 

My understanding is that market cycle can absolutely make or break your project.

Beginning of market cycle, developers are cautious and ensuring there is at least 25% profit on TDC. They also borrow conservatively.

As the market strengthens developers get over confident so they end up purchasing land based on fact that if the market keeps going at the same rate then they should be able to make their profit at the end of the project.

Banks at this stage are also generous, relaxing their under writing standards (lucky we had APRA intervene) leading to developers borrowing more to increase their RoE. Some developers overestimate their skills and start ponzi borrowing like mezzanine funding.

When the market turns their is an oversupply of the product, prices are too high and there is not enough income to cover debt. So developers default and banks shut off lending.

 

Yes
When market turns you cant sell stock and prices fall so developers are at risk of losing money if they can not hold stock

 

supply vs demand, when the markets start hotting up you get silly people paying silly prices, and ignoring whether it actually stacks up.

Also in booming markets why bother renovating, the product is rising so quickly you don't need to do this unless its higher end and there are some serious $ in the game.

 

Certainly was.

 

Was already offered ( by a builder) 1mil for the site, less than 6 months later. Um.. i think not

 

So given that Perth is certainly not booming, why the are so many small development sites so over priced right now?

 

Could be a number of reasons - investors purchasing at peak, if they drop the price they lose money. Investors offloading because end values of development product has dropped no longer makes sense.

If investors don't meet the market in terms of price point they will have to hold.

Development sites are selling however its a buyers market.

MTR

 

More stock is coming to market at the moment.
When last in Melbourne I spoke to my re agent in Thomastown he said at the moment he cant sell site with DA approvals. Builders are not buying, which tells me there is no money in the deals.