Five mistakes to avoid on your first residential development
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Property ownership is engrained in Australian culture and conversation surrounding the state of the market is a constant in social circles.
The general consensus amongst peers is that owning and developing residential property is the safest way to financial independence and after several strong years of market price growth, first time developers always emerge expecting good fortune. But things can get complicated very fast for those that are inexperienced and lack the clear understanding of what are the most important elements of a successful project. As a property development advisory firm, we’ve seen it all before, but a few mistakes can be easily avoided with a bit of due diligence and guidance. 1. Building the right consultant team around you Property development requires input from a vast range of consultants, all who boast different expertise in relation to their craft. It is critical to build a well-rounded team of consultants that are appropriate for the project you are undertaking. Prior to purchasing a site, there should be some detailed thought and strategy around who is appropriate to appoint when the project becomes live. Architects in particular have different styles and design personalities, so it is important to choose an architect whose design style will match with the buyer profile of the projects end-product. By engaging the entire team during the town planning stage and seeking early engineering and geotechnical advice, it’s less likely that you will need to continually amend the design and as such, avoid multiple town planning submissions. 2. Getting the product mix wrong There are a range of competing elements in design that can dictate the product mix of a project, that is, the spread of different types of dwellings such as apartment sizes and attributes. The most common example is the allocation of 1, 2 and 3 bedroom apartments within a project. Nowadays, it is common for projects to have a mix of townhouses, apartments, retail and commercial space, so agreeing on this mix is crucial to the project’s revenue potential and the timeframe it takes to pre-sell. The site itself will dictate the most efficient floorplate design, and then subsequently, the size and aspect of apartments can naturally be concluded. It is typical for developers to try and maximize the sellable area in each level to increase building efficiency, and this is achieved through minimizing common areas and internalising as much space as possible. However, the building envelope alone shouldn’t dictate the size and mix of dwellings. It is important to know exactly who the target market of the project is and the price points and areas they demand. There is no benefit in increasing apartment sizes and subsequently apartment end values, if there is a price ceiling that purchaser’s can’t afford. For example, if your project is targeted at first home buyers and investors, prices would typically be classified as entry level. Therefore, if you design 120sqm apartments that have an end value of $1.2m, the target market will not be able to afford them. It’s imperative to know and understand the unique attributes of your site and your target market, alongside the preferred apartment mix, sizes and price points. There is no substitute for research, understanding your buyer and designing specifically for them.
3. Buying a site with a permit that isn’t valuable Buying a site with a permit can substantially reduce the project’s risk profile and program, however some permits can be more valuable than others. Where permits have approval for the wrong product mix, have onerous conditions or design elements that are unrealistically expensive, there can be significant additional work required before you are ready to take your project into marketing. It can be costly and time consuming to formally amend a planning permit and it is important that first time developers understand the permit they are buying, and feasibility implications of improving and amending existing permits.
4. Not knowing the numbers
Development feasibilities models can vary substantially due to the assumptions of the author, some of which are objective rather than an exact science. It is not uncommon for inexperienced developers to leave entire cost line items out of their models or have calculation errors. Proceeding with a site acquisition with limited data can often eventuate in a misinformed view of land valuations, resulting in much less profit for the developer than initially thought. 5. Not knowing the impact of time The saying ‘time is money’ could not be more relevant to property development. It seems obvious that there are project holding costs such as rates, interest and land tax, all which accumulate the more a project is delayed, but many developers don’t understand the “daily cost of time.” This relates to the financial cost of a single days delay for the project and for medium density projects, this cost is typically $1,000-$5,000 per day. Therefore it’s important to have this front of mind when strategic decisions to save money come at the expense of the project’s program. It is critical to know the cost of time when making strategic decisions and looking at avenues to accelerate your program. Secondly, it is important to not lose sight of ever changing market conditions and how these will impact your project. Unnecessary delays can cause your project to spill into the next property cycle, increasing execution risk on your projects profit. Understanding market risk, and avoiding potential downside timing is critical to every project.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.