R40 - 776 sqm (zoning ratified)

Thanks TB
In the New Year I am going to meet up with a draftee work out some solid build costs, I know building costs have dropped, not significantly but perhaps this will help.

Yes, it is Campbell Estate, and should get a premium in this location.

When I was building Spearwood the market turned and prices started to fall back but still managed to achieve high prices. I guess it comes back to whether there is a demand for your product.

Look forward to posting some numbers on various scenarios once I get further information. Thanks

MTR

 

Here are some numbers for 3x2 villas, 18 sqm, med/high specification

Had a look at my last WA project and I had a slopping block 1.5-2.5 metres and all new fencing required around $11,000. Fortunately I wont have this issue.

3x2 (18 sqm villas)
$700,000 - acquisition costs
$657,000 - building costs
$60,000 - hold costs (75% @ 12 months)
$100,000 - infrastructure, demolishing, contributions etc (Spearwood came in at $66,000 including fencing)
$1,517,000 TOTAL


Realistic/conservative Sales/End Values
villa 1 - $600,000
villa 2 - $560,000
villa 3 - $580,000
TOTAL: $1,740,000

Gross: $223,000 (approximately 15% profit margin)

I would much prefer 20%, but I also know developers who would take this on and say a profit is a profit, some people don't make this money in a day job.

Pros
Low risk, easy to access finance


Something up my sleeve
Location - Willagee is basically State Housing, my pocket basically all new, nice homes which are fetching $750K+, this I hope will help with end values.

I could be wearing rose coloured glasses, but I also see Willagee as holding up quite well compared to other areas. Perhaps because they aint making anymore land, proximity to Freo, infrastructure etc.



MTR

 

You can buy a similar property for $580,000-$620,000 in Willagee.

 

No, absolutely not in this location, rectangular block and flat block and good size.
Most of Willagee is not flat, with 3-5+ metre or odd shape.

 

How much is the current property worth on the market now? That is the present value you should do the feasibility on.

 

$650,000

 

Just sold one recently my street, slightly larger land component for $700K, but realistically I would say $650K??.
Not sure I get why I need to do the feaso on present value of land?? at the end of the day are we not looking at end values today??

 

You do the feasibility on the present value because that is how much you would get for it if you sold it on the open market.

For example, if I bought a devy site 10 years ago for $200k and its now worth $600k; I would need to do the feasibility on the present value, not what I originally bought it for.

 

OK, I guess I have never looked at it this way, generally build straight away when plans and permits approved.

If I do this, then my figures will look better? but they are not real. For example if the land is valued at $650K I am up $50K in profits? am I missing something??

 

When I do my feas study, I run NPV on a few scenarios to see what the best option is:
- Do nothing
- Sell in current market
- Build scenario 1
- Build scenario 2... Etc

NPV analysis is good at comparing options that have different timeframes. For example, building 3 units might return 20% in 18 months; whilst 6 apartments might return 30% in 24 months. Which is better?

 

I hate these types of questions because they seem so straight forward on the surface, but they are far from this.

I would like the 30% profit, however the timeframe lag is 6 months difference which means you have more risk in the market. As I am pretty conservative I would not like to be on a project longer than 18 months, I would prefer to take my money and run, even if it means I make 20%. Its also dependent on how much money you have in the deal, more money, higher risk IMO.

OK, now you can tell me your choice.

I always look at various scenarios as you mention above. I cant get to the bottom on various scenarios until I speak the experts in the area and my designer as to what can be achieve and what will work in the area. I think as we are in a down market its really important to build what people want in the area. I will get to the bottom of this soon and post various scenarios.

MTR

 

You should be able to knock off 10% off that estimated build cost. You can probably do better than $1500 per sqm finished plus site costs.

 

Agreed, it's possible @MTR might be able to get away with less but it depends on how much she wants to stand out and spec level. I think $700k all up inc siteworks/demo would be feasible.

I don't know how to do squares (ie 18sq) but I worked out that she has around 150sqm of site coverage per villa which is a decent sized villa.

@MTR with coverage like that you might choose to do 2 of them at 3 x 2 and the third be a 3 x 2 with theatre/4th bedroom/study

 

That's a good idea. Do two 3x2 at 140sqm and the third unit do a 3x2 plus theatre/bed/study at 160sqm. Should bump up the value of the third unit, with build costs ~$600k plus site costs.

 

I have mixed feelings on using current value vs purchased value on feasibility. I tend to use purchased value simply because it's a static amount and is the amount of money actually spent on the project and use it for my own figures

I understand how yield/ROI etc do use current value but it tends to work better for buy and holds rather than development.

 

I actually think its more pertinent to developments.

Take for example you've got a site worth $450k in the current market. Development of 3 units costs $650k all up. End values are $400k each.... Which means $100k profit on $1.1m costs. You wouldn't go ahead with this project since its got less than 10% margin.

Say you bought the block 10 years ago for $150k. If you did the feasibility on purchase costs, then the cost base is $800k, with end value of $1.2m. If that is the case, then it works out to be 50% margin!?!!!! This method does not make sense to me.

 

very good idea, I was actually thinking about theatre room today, if I do this with villa 1 potential could be an extra 50k on end value

 

But you would have added in 10yrs of holding costs.

Anyway if you had purchased it 10yrs ago then I would develop it now in that scenario if the holding cost kept the end return over 20%. Would you forgo $400k profit just because it's current day value is higher?

The only time I wouldn't is if I had borrowed against that property and the debt on it was much higher. That along with holding costs must be taken into account.

 

Holding costs would be negligible as it almost certainly CF positive over that period.

You're not forgoing $400k of profit. If the market value is $450k, then you've already made $300k of equity.

Take a simpler scenario. You bought the site for $150k 10 years ago. It's worth $450k in today's market. It'll cost $650k to build 3 units. However, the end value is worth total $1.1m.

If you did the feas on present value, then there is 0% profit. If you did the feas on the original purchase price, then there is 27% profit. There is no way you would go ahead with this project as it is creating a false economy. You are spending $650k of additional capital to create $0 of additional value.