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Help me do a feasibility on large development

Discussion in 'Development' started by mrdobalina, 9th Jul, 2015.

  1. mrdobalina

    mrdobalina Well-Known Member

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    I've had an offer accepted on a large development site, so I thought I would tap into the vast knowledge and collective minds here to help me do the DD.
    • Location: Hamilton Hill WA
    • Purchase price: $1.8m
    • Stamp duty: $90k
    • Block: 3061m2 R60 with dual street access.
    • Build: 30 2x2 multi-units over 2 levels (70m2 internal living plus balcony/courtyard, parking, etc). Will probably be predominantly 2x2 with some 2x1 and 3x2.
    Strategy is to get DA approval for the whole lot, then develop in 2 stages. First stage will build 10 multi-units and sell all. This will provide the funds to build the next 20, which will be all retained.

    I am planning 2 years to get to the end of Stage 1, and another 1 year for end of Stage 2. So 3 year project in total (this might be a bit optimistic).

    Stage 1: 10 multi-units (apartments)
    • Plans & DA: $100k
    • Site works, retaining, demolition: $100k (there's quite a large slope on parts of the block)
    • Development contributions: $100k (about $3.5k per lot)
    • Construction: $1.7m (@170k each. I've been told it costs about $180k per apartment. However, I've been working with a builder on a cost plus basis. Current projects are tracking about 10-15% savings under fixed price contracts)
    • Sale proceeds: $3.7m (@$380k each minus $10k for agent fees. Apartments in the area have sold for $400k for 2x1 and $420k for 2x2 in last 6 months... So hopefully there is some conservatism built in)
    • Gst: $120k
    • Profit tax: $350k
    • Remaining funds: $3.2m (used to fund construction of Stage 2).
    Stage 2 (20 apartments)
    • Construction: $3.4m (majority of funds come from sale of Stage 1 + $200k additional cash)
    • End value (all to be retained): $7.6m (@$380k each
    So in total:
    • Total capital invested: $4.1m
    • Value of end products retained: $7.6m
    • Profit: $3.5m
    • Return on capital: 85%
    Notable items:
    • Council have stated they will support staged construction
    • Funding is planned to be 80% finance for land ($1.4m) at resi rates. Construction costs to be funded from combination of cash and some mates as equity investors. This will avoid needing commercial finance and all the strings attached to it (like pre-sales, etc)
    • Haven't included holding costs, although only a third of it is from finance
    • Planning to do a geotech report to see if there is any clay or limestone
    • Designer keen to design as a 'village' to mix it up a bit and create a communal feel.
     
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  2. sanj

    sanj Well-Known Member

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    Congrats and thanks for sharing. I'll go through in detail later but one thing I'd like to point out is that commercial finance really isn't as scary as it's made out to be.

    I'd consider using it if I were u, at least for the first stage where u have a clear exit strategy anyway.

    Make sure you have a significant buffer as well as contingency in place for something of this size
     
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  3. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    @mrdobalina (yes I sing Don Dobalina as I type it!! :p) awesome work.

    I think $100k for siteworks, retaining and demo on a 3000sqm block is not enough, though depends on the slope. You could spend over $100k on retaining alone.

    Budget for headworks? This will be high for 30 dwellings.

    I experience about $200k per apartment plus some extras depending on the area and how much frou frou I want - ie garages instead of carports, stone bench tops, higher ceiling, nice elevations etc. You will get some discount for higher numbers though.

    Don't forget FESA requirements - this will add up per unit.

    Good idea on the village style, that will make it very attractive.
     
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  4. MichaelW

    MichaelW Well-Known Member

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    Wow, looks liek a great opportunity. Nothing jumping out at me as a watch it. The only big unknown is that end valuation but you seem to have been conservative. The other risk is the cost+ funding model on the build. I used a fixed price contract on my small multi-unit build so that I could get my Commercial finance across the line. It helped to cap my costs but had all sorts of other issues with the builder constantly fighting the contract for variations to build their margin.

    I like what you've got going here. Looks great!

    Michael
     
  5. mrdobalina

    mrdobalina Well-Known Member

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    Thanks for the feedback Westminster. I'm thinking the end product would be lower spec than what you would normally do in inner city (e.g. North Perth). I'm also looking to save on cost of construction using cost plus, saving about 10-15% of the builders margin.
     
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  6. OC1

    OC1 Well-Known Member

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    Cost plus + 10%?
     
  7. mrdobalina

    mrdobalina Well-Known Member

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    Thereabouts.
     
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  8. mrdobalina

    mrdobalina Well-Known Member

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    I find there's no such thing as fixed price contract, cos there are so many items with provisional sum. Builders always transfer the risk onto you ... and they keep all the additional profit for items they can reduce cost for.
     
  9. Pistonbroke

    Pistonbroke Well-Known Member

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    You need your head read MrD. Cost + is only for complex projects which cannot be effectively priced by builders even with adequate/complete documentation.

    Banks will choke at cost plus - how are you going to control costs? Getting competitive quotes and a decent contract in place (RAIA/MBA format ).
     
  10. Brady

    Brady Well-Known Member

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    @Pistonbroke not sure if you read the OP post... Not planning to finance through the bank.
     
  11. Pistonbroke

    Pistonbroke Well-Known Member

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    I didn't read that far into the op. My concern still stands. Cost + is not effective on standard construction projects.
     
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  12. mrdobalina

    mrdobalina Well-Known Member

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    The slope is only on about 800m2 of the block, so most of the retaining and siteworks costs is only applicable to this part. The rest is relatively square and flat. I had my builder scope it out, and he reckons 100k should cover it.
     
  13. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Coolio.
    I was worried it was 3000sqm of retaining :)
    I agree that Hammy Hill spec is probably a bit lower than what I'm currently using though you'd be surprised that everyone wants luxury for nothing these days lol!
    So that leaves me with the question about budget for headworks
     
  14. mrdobalina

    mrdobalina Well-Known Member

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    Yeah... everyone wants luxury these days but don't want to pay for it.
    I'll include a budget of $300k for water corp and and western power costs (i.e. $10k per apartment). Are these costs normally costed for within your $200k per apartment, or in addition?
     
  15. Aaron Sice

    Aaron Sice Well-Known Member

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    You can actually view your likely head works at the Water Corp website.

    I'd be running a larger master meter and then thirty individual meters behind that - saves a fair bit of cost.

    One thing I did wonder about was power - a transformer *might* be needed for something this size....but then the intensity of the development around the site should indicate if there will be a drain on power or not. And don't actually ask if you need one, because Western Power will always ask for one if given the chance.
     
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  16. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    $300k is probably too much but might as well stick it in for peace of mind.

    Generally in addition but it's somewhat hard to say accurately as I experienced construction costs 5% increase last year and that is $10k so previously $200k might have included it, last year it didn't, this year it might :confused:. It's $200k base construction then headworks/siteworks and maybe some architectural extras on top if I've gone for extra large balconies, skillion roofs, garage doors, cladding etc etc
     
  17. mrdobalina

    mrdobalina Well-Known Member

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    Have you had experience, or come across problems, with this method?
     
  18. mrdobalina

    mrdobalina Well-Known Member

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    Have you used commercial finance for any of your developments @sanj ? I'm really cautious in case another GFC erupts, with all that's happening in Greece and China.
     
  19. sanj

    sanj Well-Known Member

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    Yup used on 2 of them.
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The GST numbers on Stage 1 don't seem right even using the margin scheme.
    Many of the DA and acquisition costs will need to apportion over both stage 1 and 2.

    One of the costs many ignore or under estimate is fencing, scaf, footpatch covering, ped access, waste, sheds, temp power, temp water, WCs, etc...And a rock allowance. Murphy's law says you will find rock or ground water or even mystery items like pipes, tanks, asbestos etc. A client of mine just doing a dev for a new retail just found a old 2.4m diameter concrete pipe running 2 metres under whole site (48m). Sydn Water old plan showed in on boundary under carpark. Huge cost to excav and remove.
     
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