In the sixth instalment of his in-depth series on property development Bryce Yardney, Property Strategist at Metropole Property Strategists, explains how to source and secure the perfect site for your project in order to maximise potential profits.
Securing the perfect property is critical for the success of any investment career.
Acquiring a piece of real estate that ticks all of the right boxes according to your investment strategy and long term goals is of paramount importance.
Of course when it comes to property development, site selection is even more essential as a large portion of your profit margin will be determined as soon as you make that initial purchase.
The bottom line is, overpaying for a less than desirable site will see you invariably “chasing your tail” as you try to account for added expenses; not only of the inflated purchase cost, but also additional stamp duty paid as well as possible blowouts to the construction budget if the site proves problematic to build on.
As with all aspects of property development, at this crucial stage you should never lose sight of the big picture and that all important fact; the profit really is in the buying.
Finding the perfect site
To buy a great development site you need to find a “diamond in the rough.”
In other words, you must be able to identify a site with potential that others may overlook.
While this may sound straightforward enough, it requires a lot of time, effort and patience.
In the current climate, with our property markets experiencing less investor and buyer activity, would-be developers with ready cash have the opportunity to hunt down and secure a great development prospect.
You just have to know where to look and what to look for.
Essentially as a developer, your aim must always be to buy below market price.
If you pay too much for the site, you will get yourself into trouble before you even begin.
Sourcing good development sites is all about knowing your market and I don’t simply mean having an understanding of the many property markets out there, but the bigger economic picture as well.
Because a development project has a life of at least one year, or more frequently two to four years, if you want to be a successful developer you need to inform yourself about not only the property markets, but economics in general.
Then you will need to make an educated decision about where you think the markets are heading over the next few years.
Good research means you will make informed decisions instead of just throwing a dart at a map.
It helps you focus your search for a potential site based on the many factors that affect the residential housing sector.
Additionally, you need to keep an eye on demographic trends and research the type of property that is going to be required by the people who want to live in the area you are considering.
Will your target tenant and/or buyer pool consist of single professionals, young couples, retired couples or established families?
Are they looking for apartments, townhouses or detached accommodation on blocks of land with room for the kids to play?
It is essential that you take the time to research and educate yourself about people and places; how and where people want to live and what sort of spaces they want to live in.
One example of changing demographic trends that all developers should consider these days is the increase in single person and couple only households.
It is estimated that 3.4 million Australians will be living alone in the next decade.
Reflecting this transition is the growing demand for lower maintenance, higher density accommodation, particularly in and around our major capital cities.
In knowing your market thoroughly – and remember you have to get to know the market of tomorrow in your chosen area as your development may not be finalised for two to four years – you will have far more chance of securing the most appropriate site on which to build the most appealing style of dwelling for your prospective tenants and buyers.
You need to consider what infrastructure is in close proximity to any potential site you consider and how that infrastructure might positively or negatively impact on your completed product and its desirability.
Essentially, it all comes down to…
Location, location, location
While it might read like a tired cliché, location, location, location is critical when it comes to selecting the best development site.
In good times, people are prepared to pay more for property in highly sought after, quality areas and in bad times; real estate in prime suburbs will continue to sell well, whereas properties in secondary locations can languish on the market and lose value.
Logically, it is easier to construct successful developments in more expensive locations as there is a greater potential profit margin in these areas.
Premium locations can have low demand at prices that seem ridiculous, but keep in mind that it only takes one cashed up buyer to make a sale.
Hence, in a street of houses worth $1 million plus, it is common for one particular house to go for $1.5 million if it appeals to a certain buyer.
On the other hand, undesirable locations have a very tight price band.
In one street of houses selling for around $450,000, it would be unlikely that doubling the property size and doing a complete makeover would raise the value much above $485,000, as there is a hard value ceiling that is difficult to break and restricts potential gains.
Logically, there is more room to move when it comes to profit margins in an area that does not have an identifiable affordability ceiling so to speak.
That is, locations that are so highly sought after and desirable that people are willing to pay whatever it takes to secure premium property in that particular suburb, even if it comes at a record breaking price tag!
Another reason to undertake developments in areas that support higher property values is that the cost of doing a development is much the same whether you are building in a high value or low value area.
Many of the costs remain comparable irrespective of the final value of the dwellings, such as sand, cement, pipes, cable and plaster.
This means that building a premium property development may only cost 15 to 20 per cent more than a standard development, but the finished product could fetch much higher prices.
As a developer, it is important to understand the law of supply and demand that drives property prices.
You need to be able to identify areas that are always in strong demand due to overall desirability and ease of access to amenities and services such as transport, shops, schools and recreation and entertainment. Generally speaking, these are suburbs within close proximity to major capital cities.
Another good thing to watch out for when sourcing your site are suburbs in transition; older run down suburbs that are being gentrified.
Often you will find younger people are moving into these areas to buy and renovate older, character homes and in doing so, breathing new life into a tired suburb.
Business is often attracted to the area in the form of upmarket cafes and restaurants and boutique shops to cater for this new wave of cashed up residents.
Watch prices keenly to spot suburbs you believe might be undervalued and ripe for such transformation; often they are right next door to a suburb that has been going great guns for some time, where younger buyers have been priced out due to rapidly rising property values.
A word of warning
As with any type of investment, property development should be approached with the aim of securing long term financial gains in the form of strong capital growth and solid rental yields.
These two outcomes can only be delivered in areas that have always held their own and historically delivered an average of at least 7 to 10 per cent growth per annum, regardless of overall market ups and downs.
The availability of cheaper land in secondary locations can be an enticing lure for the first time developer, but beware!
There is a reason development sites in areas such as regional towns and outer suburban fringes are going for a song.
The truth is, completed projects will always take longer to tenant or on-sell in these secondary locations due to the fact that there is often greater supply than demand.
These areas are often too far from major CBD’s to hold that enduing appeal of inner city postcodes and amenities can be limited.
Financially speaking, there is too much riding on any type of property development to risk having your completed project languishing on the market or not being able to hold its value in the long term.
I would suggest to budding developers who feel that the cost of a site in a prime, high demand area is so prohibitive that they have to look to small country towns or outer urban areas with large Greenfield tracts of developable land that you start with a smaller, inner city renovation project and work your way up from there.
In the long run you will reap far greater rewards by doing so and risk far less.
If you want to learn more about the property development process you may be interested in How To Get Started in Property Development