Walter emailed me in March last year, enquiring about our property development services.
He’s an Australian citizen living overseas, and is widely experienced in property development across the globe. Intending to settle back in Melbourne in a few year’s time, Walter (not his real name – he’s a private guy) wanted to get some projects going.
He respected and understood our aversion to apartment developments, and was enthusiastic about our analytical approach and real-life experience.
A purchase budget of +/- $1.2m was agreed. Plan A was to fully develop a site and sell upon completion of construction – about 24 months. Plan B was to offload the site with Planning Permissions – about 12 months.
A profit motive in development is quite different to an investment motive. To achieve a 20% Return on Investment in 24 months, we look to specific areas > suburbs > neighbourhoods; some of these aren’t as suitable for long-term investment as others. But that’s for another day…
Development sites that have been on the market for a long time are often overpriced or difficult.
When searching online portals, I’m a big fan of sorting properties from ‘Older to Newer’ to find a good buy. The number one reason that properties languish on the market is overpricing. Too many vendors have unrealistic price expectations, particularly when their properties are suitable for development; the uninitiated tend to arrive at a price by doing some quick maths around sale price, build cost, and resale price, failing to account for things like stamp duty, holding costs, council contributions, professional fees, selling fees, GST, etc. An inflated price at the beginning of a campaign almost always leads to a long campaign.
Some properties can languish on the market because they’re ‘difficult’. Sites can be deemed difficult for a wide range of reasons: required street and neighbour setbacks, vegetation on and around the site, slope of block, neighbourhood character, onerous planning overlays, limited site access (think busy streets), etc, etc. Inexperienced developers either don’t take these difficulties into account, in which case they overpay for the site, or are scared off by them. Experienced developers can identify and log them in minutes, and any offers made are usually heavily discounted.
I examined about 12 sites for Walter, and recommended 2 as worthy of further consideration. He ruled one out immediately due to proximity to freeway and powerlines (I factored these into prices, but hey, if the client doesn’t like something, then best to move on). I conducted a full feasibility on the second, but ruled it out together with him at the last hurdle because the return just wasn’t there.
For months, I’d been tracking a particular property, but didn’t initially consider it for Walter because it was out of his price range. I made contact with the agent, and long-story short, purchased it for Walter – after conducting a full project feasibility, complete with council feedback, informal advice from a Town Planner I know well, and a valuation from a non-listing selling agent.
We bought in mid-April, and, as agreed previously with Walter, I began immediately assembling a team required to design the development and attain planning permissions. [All quotes and invoices from team members were sent to Walter, with my payment only coming once permits were achieved.]. Development design is a challenging, iterative process, that, if done with appropriate consideration and deliberation, takes a few months.
We lodged our formal application with council in early August.
Council took months to reply with a Request for Information. They later raised some concerns with flood levels that delayed things. But, after considering a couple minor objections from neighbours regarding window screening, our plans were finally approved last month – just under a full year since purchase.
At the time of purchasing, I shared some analyses with Walter that demonstrated the high level of demand in our suburb for permitted sites (i.e. properties that a builder can purchase, and begin building immediately). This high demand, coupled with very low supply, means that a significant premium could be achieved.
I caught up with Walter over lunch a couple weeks ago, to discuss this project amongst other things. I ran him through some recent sales of permitted sites, as well as feedback I had quietly attained from two local agents.
The numbers speak for themselves:
PURCHASE: $1.155m (including stamp duty, buyer advocacy fee, legal)
PLANNING: $50k (including professional fees, holding costs, and my project management fee)
SALE: $1.60m (less selling fees)
Walter is seriously considering cashing in now, and why wouldn’t he?! Over $340,000 profit in 12 months equates to a 30% Return on Investment and a 78% Return on Equity after GST.
The keys to achieving this amount of profit in such a short time…
Buy in an area that is statistically likely to see above-market Median $ Price Growth in the near-term.
Buy in an area where demand for permitted sites is high, but supply is low.
Conduct a comprehensive feasibility quickly.
Negotiate effectively, to attain the property at below market value.
Design well, with a mind towards end buyer demographics and wants.
Manage the planning process diligently but respectfully, ensuring your team and Council are on top of things.
And (I would say this), consider appointing a Buyer’s Agent who understands development and where best to find suitable sites in Melbourne.
