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The golden rules for choosing a property development site

31 March 2020
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Choosing a site for building is an important part of the process.

 We have consistently pursued a strategy based around a lower appetite for risk and the need to mitigate against the volatile boom and bust cycle of the Perth property market. Owing to wild fluctuations in immigration and capital expenditure from business and government in the state; many suburbs which seem like lucrative prospects can lose as much as 20% in value in an 18-month period.  Other suburbs see consistent growth year on year despite a declining economy and poor housing demand across the state. Why?

Here are three key metrics I have developed which I believe are formula for success. Each Suburb that has outperformed the state average consistently appears with each of these three characteristics.

Good Amenity

Good amenity can be perceived in simple language with the phrase ‘why would I live here?’.

Consider:

- Closeness to work and employment

- Closeness to family

- The beach or river

- Sporting facilities

- Being near tertiary education facilities and good school catchments

- Cafes, restaurants and bars

- Health facilities (aging populace and over 55’s)

- Low Crime rates and state housing numbers

If an area has good amenity it means there are many compelling reason to be in that suburb, hence fuelling demand. This will place upward demand on supply, and allow you to charge a premium for your product if the market is in undersupply in that area.

High owner-occupier rate 

This is an important metric. There are two reasons for this;

  1. Humans are group animals. They stay together. Biology and research support this. In fact, social psychology tells us that 80% of people move back to within 10KM of where they grew up or where their family was later in life. These buyers will pay a premium for these areas making developments in these areas easier to sell fro a higher price.
  2. All suburbs have profiles and cycles. This is largely determined by the type of people that live there. In a suburb with a low owner occupier rate, it means that housed that are not owner occupied are either vacant or tenanted. There are a few problems with this; there is generally less care for property amongst renters – the streetscape deteriorates and the overall appearance of the neighbourhood declines and the renters may not stay for long. There is less connection between neighbours; street awareness is non-existent, and crime is more likely to go undetected and as a result; rise.

The greatest risk to developers in low owner occupier suburbs is when an economy experiences a shock (like a mining downturn). Capital flow through the economy slows down and stock in these areas is dumped on the market quickly. You want to target suburbs with high owner-occupier rates arte more resilient to these shocks, and there is likely more demand for living in these areas for complimentary reasons, like amenity and/or stock scarcity.

It means other owner-occupiers will target the suburb – when you are selling to an owner-occupier you are selling to someone who is purchasing their primary place of residence. This is a long term, primarily emotionally driven purchase, which is ideal for you as a developer selling housing products. If someone falls in love with your product, logic goes out the window and there is o limit to what they are willing to pay for their dream home in their dream location.

Scarcity of available land and/or housing stock

The business of property development operates on the same basic principle of supply and demand of any economic activity. Where there is low demand and oversupply, real estate pricing contracts. Conversely, where there is high demand and low availability of product, real estate prices increase.

Returning to our rule of three, In a suburb with good amenity there is naturally going to be high demand. A high owner occupier rate also contributes to demand because of social factors discussed above.

Both good amenity and high owner occupier rate mean that less housing stock in that area is likely to be on the market. Owner occupiers are entrenched and unlikely to move. This produces a bottleneck on supply. When supply is constricted, and demand is high; we see price growth in a suburb. Any stock that does come onto the market will attract a premium price and will sell quickly. The benefits of this to property developers are obvious.

Summary

There are many different strategies to pursue in property development. These are primarily determined by personal objectives and appetite for risk. These factors will drive what you buy to development why you are developing. Some property developers actively pursue developments targeting first homeowners and renters. For the reasons outlined in this ‘rule of three’ article, it should make sense to the reader that developments are better pursued in areas that meet the rule of three. What and where these areas are is not static- this will change as time goes on, influenced by a variety of different demographic, social and economic factors. You need to keep a finger on the pulse!

The obvious relationship between the three metrics means that they will oftentimes be found together. As alluded to at the start, if you can find a suburb with two metrics, say a high owner occupier rate and a scarcity of stock, the third (being good amenity in this case) is never far away. These are potential growth suburbs which may not yet attract the premium for entry level investors; but which, in my opinion, still represent better prospects than a purchase in an ‘investment suburb’.

For those with the appetite and capacity, I would strongly encourage pursuing a property development in a suburb that meets all three criteria. This comes with a cautionary note that in all developments the profit is made in the purchase and not the sale. This concept, as well as site acquisition parameters and overall property development strategy, are discussed in more detail in our “Infill Developer E-Book” and accompanying Online Infill property development course.

The team at Subdivision experts are in fact very excited about their new E-book, " The Infill Property Developer: A Concise Guide to Small lot Subdivision and Development in Western Australia", which has been launched to coincide with the long anticipated start to recovery in the Western Australian property market.

The E-book has taken a year to put together, and has provided the missing link in the DIY property developer space: It is a thorough, comprehensive and technical document that is essential reading and reference for anyone looking to get into small lot residential property development in Western Australia.

The eBook explains everything you need to know about infill property development in 14 detailed chapters over 225 pages, complete with figures, tables, diagrams, worked examples and external links for further reading and reference.

 The chapters cover all important topics from start to finish of a property development, including:

  1. Development Strategy and Principles
  2. Taxation and Accounting
  3. Finance
  4. Development Instruments and Processes
  5. Statutory Compliance: State Planning
  6. Statutory Compliance: Local Planning
  7. Design Concessions and Variations
  8. Site Acquisition
  9. Feasibility Studies
  10. Feasibility Considerations
  11. Subdivision Applications (land development)
  12. Design, Tender and Construct
  13. Clearances and Title Production
  14. Sales and Marketing

The E-book is available from the courses and training section of their website at https://www.subdivisionexperts.com.au/property-development-courses/.

Post by Anton Flynn, Project Manager - Subdivision Experts

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