id you know that one in three proposed residential projects never start in Australia?
Did you also know that two out of five new projects selling off-plan across Queensland did not report a sale over the past six months?
Or that one in five new approved detached homes across Australia have yet to commence construction? And did you know that this ratio lifts to one in two for new apartments & townhouses?
So what helps to get a new project started?
There are seven things that – from our experience – help make a new residential development work.
1. Economically sound suppliers.
Often a new project doesn’t proceed because the financial capacity of the developer & builder is much less than the project actually requires.
I have seen this many times. Sometimes a developer’s latest project is the sum of all previous outlays.
One must view a new development as a business – a new 50 apartment project is typically a $25 to $30 million venue, yet it isn’t often treated as such. If someone was going to get involved in a $25 million business, most would do a lot of investigation before they proceed.
Sadly, for some reason, that doesn’t always apply to new housing projects – especially infill redevelopment sites, which are often owned by specialist professionals (it’s their family home or an investment property).
Lawyers & solicitors, in particular, seem quite pig-headed about such matters.
Maybe that isn’t too surprising. I do feel a writ coming on.
2. Project matches the site.
Maximising development yield can often be a big mistake.
Too many developers still do this. It is a logical thought process if the intention is to sell the site. But that often backfires too.
If an owner really wants to develop the project, then it is often best to reduce the overall density & reduce construction costs. More often than not, building less is more when it comes to new housing.
Each project also needs to have its own USP or ‘unique selling points’.[sam id=43 codes=’true’]
I often ask a developer, on initial meeting, to explain their project’s USP to me. Sometimes I get told, “That is what we want you to do”.
Now whilst that might sound like a lucrative business opportunity for us, our experience is that we will most likely not end up working on that project.
What’s being built needs to match the site.
It is pointless trying to build an A-grade project on a C-grade site. Even in the same street, sites are all different.
Time & effort must be invested in order to best match the built product with the site parameters. Sadly, this often isn’t the case.
3. Limited construction costs
There is a simple matrix which helps to determine, quickly, if a new project has a chance of actually going ahead – ratio of construction costs to total sales revenue. If the construction costs are half (preferably less) of the gross realisation, then that new project has a chance of actually being built.
Quite a few recently completed residential projects – especially those conceived & committed to prior to the GFC – actually made a loss. I often chuckle when I hear how rich developers are; how much money they make & how they rip everyone off. Many (not all, true) are just scraping by.
Project success needs fast pre-sales. This often happens – not just by spending money on sales commissions or marketing – but because the pricing is right.
New residential projects sell best if they are priced at, or just below, the prices being achieved for more established property in the same area. Potential buyers seem comfortable with this equation.
Buyers looking at a new apartment or townhouse expect a slightly higher pricing differential – between 10 & 20 per cent less than the price of the established detached housing in the area.
Developers can achieve higher price points – especially on great sites – but in the main, this general rule applies.
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.