Developing - Where do the numbers stack up

To me its becoming clear that property development is all about the numbers and more important factor is getting the timing right.

Those who developed in strong markets will do well and have a choice to either sell some stock, hold all, access equity etc.
If investors are developing when markets are flat and the try to offload in a slow/poor market they will be paddling against the tide.

Risks in developing in a flat market -

Can not sell stock
Have to hold stock and debt does not cover bank interest
Not able to move onto another project as capital is tied up
Holding costs will hurt while trying to sell
Have to reduce price on units/villas etc.
Make a loss and do not recover for years.

MTR

 

Anyone finding stuff that stacks?

Haven't found anything for a while now. Note even geelong anymore

 

I saw a project last weekend that wouldn't seem to stack up. 33 Palermo Street, South Yarra is a rundown brick house, with a distinct smell of damp to it.

The Statement of Information gives a price range of $1.4 to $1.5 million, comparing it to 64 and 67 Wilson Street, and 13 Bowen Street, all of which sold in that range. Unfortunately, looking at the photos, they were all renovated.

OK, how about a knockdown-rebuild? 45A Osborne Street is $1.8 million, and is a three / four bedroom property. It strikes me as being similar in size to what I'd expect to see on that site.

That said, 122 Surrey Road North is a new-build four bedroom townhouse that's been squeezed onto a smaller plot. (141 m2 according to the old sales details, versus around 250 m2 for Palermo Street.) The asking price of $3.5 million seems optimistic, though.

Or you might be able to squeeze a pair of townhouses on the block. There's a rear laneway, and the neighbour, 4 Oxford Lane, is for sale at $1.48 million.

 

That's got to tell you something and it aint pretty.

 

If you're trying to buy good development stock off realestate.com.au then you are already out of the loop. Most of the good stuff never hits the market, the agents have investor clients that swoop before bothering to list it. You gotta get off your chair and off the internet.

 

Do you usually consider CGT when doing your maths?

 

All tax considerations and planning is essential to look at prior to undertaking a project. Mistakes there can cost you dearly. I've been bit before unnecessarily.

 

Yes, it can work this way, if you develop a relationship with a re agent and he sells your stock then he will look after you.

My last development site in Melb had just been listed first home open was for the Saturday, I made a cash offer. I knew if it got to inspection stage I would miss out. I am located in Perth so I had my architect view it

 

Quick question to all the experienced developers

Do you buy stock with DA's/ advertised as Development potential or avoid these types of sites?

 

I'm not into buying sites with a DA, but certainly if advertised as 'development potential' I take a look. Often by that time I know what I am looking for and if the block has a decent chance to fall within the guidelines. I then just flick it onto my town planner to let me know if there are any obvious red flags before I waste my time doing further due diligence.

Most dev sites will say STCA but some agents do say "development potential", which can mean its going to be a more challenging site to get approved but nonetheless still worthwhile assessing. Often the more problems you need to solve, the more potential reward there is in it.

 

I have sold a few.

Builders/developers will buy DAs if they make sense, why not? If there is enough fat in the deal and you are saving 12 months trying to put together a DA and then risk of getting approval then of course.

Comes down to the numbers, if it stacked up and the market conditions were favourable I would buy a DA

 

Both....as long as the numbers work and you're aware of the market conditions.

If you're worried about the market turning then buying a raw site is silly (unless you want to bank it and wait for the next upswing)....but buying a DA approved site where you can get in and get out quickly might be worth looking at.

If you're confident of the long term market then buying a raw site where you do the lot is a feasible idea.

 

Yes agree.
Our real estate agent in Melb has now quite a few DAs that investors/developers are offloading but now the numbers don't make sense.

This is the dilemma developers are at the mercy of the markets, I like to have a backup plan, if I cant sell I can hold and rents will cover the mortgage. This wont work with the higher end stuff.

 

We've bought with DA, without DA, and bought to develop and sold with a DA. Usually buying with DA makes eliminates a significant portion of risk and therefore the returns are more predictable. The trade off is that as a general rule the margin is lower. In the end it all comes back to the numbers!

We've been keeping half an eye on the market but have not seen any attractive deals in Sydney in the last couple of months. Granted the market in general (I feel) has been pretty slow and it isn't like money is burning a hole in the pocket. Come the new year I'd expect some buying opportunities will materialise, but having said that we'll also be selling some completed projects so still looking for the market to be buoyant!

 

Only problem with this is when the market turns you have no idea whether the end product is going to fall?? or worse you cant sell if you need to? Not being negative just coming from experience and what I have seen.

BTW, I have your avatar, what a cutie

 

What if...that way of thinking you will never get ahead....take risks or stay average!

 

100% agree the scenario needs to be considered. You need to think about the exit plan and in particular market conditions are going to be when you're selling it and I've seen people get into hot water where they've even assumed market growth in feasibility models. Cashflow and liquidity at the end of a project can be a killer if you're sitting on unsold inventory particularly if construction loans are involved.

As a general we are very conservative with our feasibility with our projects and usually run dual feasibility models:
1) Base conservative forecast e.g. include provision for additional costs, assume low end resale price. This is our qualifier for if we proceed with a project.
2) Target forecast e.g. what we think we can get for the project based on assumed market conditions with minimal contingencies. This becomes the operational budget once acquired.

Truth be told we've actually sold a DA approved site before because we were bearish on conditions and the market went the other way!

PS: Thanks but don't let looks fool you, she is a tough cookie!!

 

Calculated risks, not stupid risks. There were development sites in Perth at the peak of the mini boom that naive investors snapped up. I saw some of them sell later for a loss. It was pretty obvious to all and sundry that it was the peak. When land hits record prices at auction but the properties are being passed in then it's game over.

 

Agreed. Found a good example the other day of people that bought at boom or soon after and then presumably had a feaso that couldn't handle the drop in values or they could no longer get finance.
reiwa.com - 19 Ferguson Street, Maylands
Was sold in early 2015 for $1,021,750 to a Momentum Wealth client. They got a DA for 10 apartments via JDAP (JDAP approve projects over $2m instead of local govt). DA was approved late 2015 so would have expired late 2017 - ie now expired.
It's on the market now for "from $899k". The block next door which is already cleared sold recently for $930k so I don't think this will go for more than that.
3 years of holding costs + stamp duty + architect + town planner fees + Momentum Wealth BA plus most likely project management fees

 

Was gonna ask what the heck is momentum fees (thought we had enough dam fees)... then I reread the post and it made sense.