If your next property development project pushes the development envelope and is likely to run into objections and planning concerns, you need to understand how to reduce risk.
Investment in residential property is one of several options for long-term financial gain.
It has advantages over other forms of investment including relative stability over time, availability of tax breaks for negative gearing, potential for leverage and capital growth.
The disadvantages include high initial capital commitment, low liquidity, particularly in a stagnant market, and susceptibility to sharply increased outgoings with escalating interest rates.
For a home purchaser, as distinct from an investor, the benefits of ownership versus renting over the long-term generally outweigh the disadvantages.
For an investor, the equation is less clear-cut, although superficially tempting perhaps because of the more concrete nature of property as compared to the more abstract ones of financial products.
Indeed, there are numerous and complicated traps associated with property investment, which sometimes confound even the experts.
It’s not advisable to become an investor without reading and researching extensively before risking your assets.
According to Peter Waxman, author of Investing in Residential Property: “the time and effort involved in locating and investing in a residential property, and the large amount of funds required, mean that before buying, the potential first-time real estate investor should have a good understanding of the market and its inherent risks, as well as the attraction of this form of investment compared to others.”
This article is mostly about one category of risk – that associated with planning.
If you’re simply intending to purchase a residential property and make no substantial changes, other than painting or refurbishment (i.e. you aren’t intending to make significant structural or architectural changes), then planning risk will be limited.
However, I’m assuming the typical investor will be intending to accelerate capital appreciation in various possible ways such as converting a house to a larger house or developing units either by subdividing or amalgamating land parcels.
This immediately moves planning risk to a much higher level, particularly if the project is pushing the envelope and likely to run into objections and planning concerns at the local level.
The 10 tips below have been prepared in a logical progression from initiating site searching through to developing specific options and assessing their viability.
In terms of risk reduction, these encapsulate a far preferable approach to that of making ad hoc purchases on particular sites on a whim or subject to the influence of persuasive marketing or tempting finance options.
CLARIFY YOUR OBJECTIVES – PERSONAL ACCOMMODATION OR INVESTMENT?
Is your objective to find a place in which you might choose to live or is it purely to make money or is it a bit of both?
You need to be clear on these alternatives at the outset.
If the quest is for an investment, your land selection preferences are likely to be different from those that define a place you want to live in long term.
On the other hand, there may be tax benefits at time of sale if you’re able to claim your property as a principal place of residence.
An inability to disconnect the alternative objectives of property investment and home ownership frequently confounds or compromises optimum investment decisions.
UNDERSTAND THE RISKS OF WHERE YOUR INVESTMENT IS LOCATED AND SELECT SITES ACCORDINGLY.
Select your site by a process of sieving on the basis of rational selection criteria.
Work from the macro to the micro.
Starting at the macro location scale might open up possibilities of international, or at least interstate, investment possibilities.
Personally, I avoid these because of various dangers I perceive, including unfamiliarity with local culture, law and rules, foreign exchange movements and reliance on others to manage matters effectively.
This is admittedly a conservative view.
I have friends who own residential apartments in Paris, which they lease on a short-term basis very successfully, and there are others who have championed opportunities in the United States where you could obtain houses for bargain basement prices in very recent times post-GFC.
With greater risks comes the possibility of greater returns, but also greater losses.
Only you can know how risk-averse you are and acceptance of risk will change at different stages in your life corresponding to different obligations, dependencies and cash status.
In the more risky milieu of foreign investment the need for constant monitoring and review becomes more important.
By confirming your investment to Australia, you have the benefit of greater familiarity with the market and economic climate, and access to excellent data sources to assist you in broad-brush selection processes.
One obvious example is the median house and unit price by locality table, which API magazine includes in its Databank section each month.
From this and other available data you can gauge whether an area has been growing rapidly or is stationary.
There’s great variability in this from one area to another.
You also need to check trends over the past decade to work out whether a recent spike is consistent with a growth pattern or just a flash in the pan.
Go for the former.
Try to understand what factors underlie sustained growth in particular areas.
UNDERSTAND THE LOCAL CONTEXT AND LEARN TO THINK OUTSIDE THE SQUARE.
This requires an understanding of how the land “lies” and how the surroundings are changing over, say, a 10-year timeframe.
As one example, I know of a house that’s located in a heritage conservation area.
It’s surrounded on one side by consistent heritage-listed cottages but in the near vicinity by intense commercial development subject to a state government plan that has designated it a “special development zone” with capacity to accommodate high-density residential as well as commercial development.
After purchasing the house some 10 years ago, large developments within the special development zone less than 200 metres away are just beginning to have an impact on the owners.
Ten years isn’t an unusual period for a new planning framework to progress from concept through to new development taking place.
An informed risk analysis might have identified the possibility of major changes happening in the fullness of time.
One of the beneficial aspects of the actual changes that have occurred is that land values have grown significantly in that 10-year period.
On the other hand, the intensification of the surrounding area wouldn’t appeal to everyone and that’s an important consideration if the investment purchase is one that you intend to live in yourself.
The moral of this example is that the investor must learn to think outside the square and foresee factors such as infrastructure or changes in density in particular areas as the basis of longer term increases in property value beyond the average.
This kind of thinking is particularly applicable to large existing centres where major works are on the cards.
REFINE YOUR SEARCHING
Perhaps from the above process you arrive at two or three locality options within your own city.
Now is the time for more specific research at the neighbourhood level to identify streets and sites that contain properties with development potential.
Check council mapping and aerial photography, real estate listings and the Google series of ‘earth’, ‘maps’ and ‘streets’.
This data provides powerful assistance in drilling down for particular land parcels.
Eventually you’ll “ground truth”, preferably on foot, a list of specific sites for further proofing.
Indicators of development potential include evidence of underutilised lots, improvements that are past their use-by-date, and general locational advantages.
Within the streets you’ll be observing signs of recent redevelopment or adaption with some variability in building types and scales emerging.
What are the neighbouring properties like in terms of condition or modification?
Are there signs of much sales activity in the stret that you can gauge either from building/landscaping activity or obtaining CoreLogic RP Data sales data.
Are there any For Sale signs up – check out the agent’s expectations.
Look for attractive landscaping and streetscapes.
Are there parks and convenience shopping nearby?
How near is the closest bus stop or railway station?
OBTAIN A PLANNING CERTIFICATE FOR A SITE THAT MEETS YOUR BROAD SELECTION CRITERIA.
You’ve found some specific sites that maximise your selection criteria.
For each of these you can obtain a Planning Certificate from the local authority that will detail all the planning controls that apply to the land and various other relevant matters as shown in the breakout box opposite.
In NSW, the certificate is called a “149 Certificate”.
Some of the most important factors with a bearing on how, and by how much, you’re permitted to change use or extend the building on the land will be referenced in the local environmental plan and development control plan that applies.
In NSW, these statutory plans and other matters listed in the certificate can be downloaded from the council website.
It’s an innovation that makes it much easier to uncover critical planning information for your development proposals.
SEEK FURTHER ADVICE FROM THE LOCAL AUTHORITY ON WHAT YOU CAN AND CAN’T DO ON A SITE BUT UNDERSTAND IT’S LIMITATIONS.
Whether you’re contemplating a major extension, an entirely new home or a multi-unit development you need to check various important restrictions on development.
These vary hugely from one locality to the next and therefore must be checked out with the local council’s advisory services (sometimes with the catchy name of ‘one-stop shop’).
Most one-stop shops will direct you to an officer responsible for the planning of the site you are interested in.
Broadly, the most important concerns might include:
- Changes of use that are subject to consent and therefore permissible subject to design restrictions or otherwise prohibited.
- Whether there are any special dispensations available – such as existing use rights or seniors living.
- Whether the subject land is located in a heritage zone or is already listed as an item of heritage that imposes special planning restrictions on making changes
- Whether or not more than one domicile is permissible on the land (also known as dual occupancy or duplex development in some places).
- The maximum density controls that apply to residential use including maximum height or storeys, minimum set-backs from property boundaries including side and rear boundaries and front building line maximum coverage maximum plot ratio (ratio of gross floor area to site area), minimum site area, frontage, soft soil landscaping areas as well as minimum parking requirements.
- Listen to planning advice from a council officer at this preliminary stage with caution, since it deals broadly in terms of what will or won’t be permissible. Also bear in mind that the person you’ll be consulting with is generally not in senior management in a planning department and most unlikely to be making any actual development decisions.
- Even when a development you have in mind seems to ‘tick’ all the planning boxes, it may be refused by a council for planning reasons such as ‘over-development’ or ‘incompatibility with streetscape’, and the most potent of risks – of neighbour objections or a petition mounted by many objectors.
ASSESS MAXIMUM DEVELOPMENT POTENTIAL SUBJECT TO LAND CAPABILITY RESTRICTIONS.
For each of the development options you’ve checked out it’s now possible to develop a back-of-the-envelope calculation of how much development you can fit on the site.
The usual procedure is to prepare a mud map showing the site boundaries, the setback areas and the minimum undeveloped area of the site.
What is left is developable in theory to the maximum height or number of permitted storeys.
That then translates into the total gross floor area you might achieve less the space that you may have to devote to onsite parking.
MAKE A MARKET ASSESSMENT OF ALTERNATIVE RESIDENTIAL OPTIONS.
Assess what might be the highest and best use that you could develop on your land.
This might involve consultation with market experts what form of housing is most in demand?
If shop-top housing was permissible, how would that be favoured?
What sort of net sale or rental returns might be derived from such development?
How do those compare with the costs of acquisition and project development?
If the cost of the highest and best use that you might theoretically build exceeds the market expectation, you’d be advised to find an alternative development option to avoid overcapitalising on your investment.
BE DECISIVE AND UNEMOTIONAL IN DECIDING WHETHER OR NOT TO PROCEED TO PURCHASE YOUR PREFERRED DEVELOPMENT SITE.
Don’t get emotionally involved in a land purchase, but allow the planning concerns to help you to arrive at a rational decision.
Don’t be afraid to walk away and start again.
Do be prepared to invest in the best advice available from other experts at all stages of the project investigation, including project feasibility calculations.
It’s better to expend money on consultant fees than to risk losing substantial sums in making the wrong financial decisions.
CHOOSE YOUR ARCHITECTS CAREFULLY
Once you’ve finalised your acquisition and refined your general development objectives in terms of floor area and configuration it’s time to bring in a suitable architect to optimise your final scheme.
As in all professions, there’s a wide variability in capability in terms of design, project management and cost control.
A home developer I know recently invited five different firms to tender for the design and supervision of a new house in an area subject to heritage restrictions.
I was invited to examine the tenders and on that basis recommended one in particular.
The tender showed a sound level of practical knowledge and relevant project experience.
Similarly their costings of the various stages seemed reasonable and their website contained examples of projects completed demonstrating good contemporary design ability.
This form of selective tendering, possibly with the added inducement of a small fee, is strongly recommended.
While the steps I’ve outlined may seem complex, even daunting, they barely scratch the surface of real world example and procedures.
However, they do lead to a few important principles, which new and aspiring investors must bear in mind.
The first of these is to develop the mindset of an investor for which the main objectives must be to manage risk and to derive returns significantly better than might be achieved from holding your cash in a bank account.
Inevitably there will be areas of knowledge that you’ll want help with and you need to be ready to include the cost of consultants at all stages in your project financing.
With their assistance it’s vital to uncover areas with maximum development potential over the average relating to the impact of future government policy on infrastructure and planning.
In calculating what development, you might get onto a particular site, be realistic and don’t push the envelope too hard.
If the feasibility doesn’t work until the maximum envelope is achieved, the risk from a planning viewpoint is unacceptable.
The importance of research into finance, planning and other areas navigated during the development process cannot be overstated.
Property development expert Kevin Alker, director of Property Solutions, says: “if there was one basic piece of advice I could give, careful research is essential to reduce risk.
You need to go in with your eyes open.
“Property development isn’t simple.
There are lots of risks and you need to understand how to manage the risks including market changes and your capabilities to void the project ending up at a loss.
“You need to beware of overcapitalising on the investment and ensure that you’ve budgeted for all tax charges and costs that your investment project will incur along the way.”
Your first initial investment should be a small one because it’s part of a valuable learning curve and will be easier to derive finance and manage with a small team to completion.
Hopefully it will form a basis to grow and continue to develop successfully and sustainably.
EXAMPLE OF LOCAL COUNCIL PLANNING CERTIFICATE IN STRATHFIELD, NSW
Section 149 Planning Certificates are issued in accordance with the Environmental Planning & Assessment Act 1979. They contain information on how a property may be used and the restrictions on development. A person may request a 149 Certificate to obtain information about his or her own property, but generally a 149 Certificate will be requested when a property is to be redeveloped or sold. When land is bought or sold the Conveying Act 1919 requires that a section 149 Planning Certificate be attached to the contract for sale.
Types of Certificates
Strathfield Council’s Planning Certificates are issued under section 149 (2) and 149 (5) of the Environmental Planning and Assessment Act 1979.
A separate request can be made for a section 149 (2) Certificate which confirms whether complying development may be carried out under the State Environmental Planning Policy 2008 (exempt and complying development).
Information to be disclosed on a section 149 (2) Planning Certificate is specified under the Environmental Planning and Assessment Regulation 2000 (Schedule 4) and includes the following where relevant:
- Names of relevant planning controls i.e. SEPPs, LEPs, REPs, DCPs.
- Declared Status Significant Developments.
- Zoning and land uses under the planning control.
- Critical habitat.
- Heritage Information.
- Land reserved for acquisition.
- Coastal protection.
- Mine subsidence.
- Road widening and road realignment.
- Council and other public authority policies on hazard risk restrictions.
- Section 94 Contributions Plans.
- Matters arising under the Contaminated Land Management Act 1997.
The section 149 (2) Planning Certificate contains the above information.
The section 149 (5) Planning Certificate provides information on the last approved use.
This article was written by Rodney Jensen and was originally published in Australian Property Investor Magaine and has been republished with their permission
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