Beware of costly extras in your development that won't help its sales price

As part of our property development project management process, after locating a suitable development site, we’ll then recommend to clients the type of design of villas that the development requires.  This is very important because there is a fine line between building for the market and overcapitalising.

We look at four things to determine the level of building investment required:

• Demographics for the suburb
• Surrounding properties to the site
• Tenant demand in the area
• Recent sales references in the suburb

Today I looked at a dual-occupancy site in a suburb that had a couple of different demographics: young families with one or two kids attending the local private school and retirees looking to downsize and live close to shopping facilities in low-maintenance properties.

I’d been given a build cost based on what had been built in this estate to date. It is an upmarket estate.  The build cost for a three-bedroom, two-bathroom duplex to the standard that had already been built in the suburb was around $400,000.

I knew we could build a similar duplex, slightly smaller without a walk-in wardrobe to the master bedroom (that the other duplexes have) for about $370,000. There were other small differences to the façade and finishes, but were they worth the difference of $30,000?  My take on it: nup, because tenant demand is high and we could get the same rent as the other, slightly “better” villas in the area.

A few years ago, I build some fabulous duplexes in an upmarket estate in the Lower Hunter region of NSW.  I wanted to build something of a standard above what was being offered in this estate. So I had the duplex architecturally designed with asymmetrical roof lines in lieu of a pitched roof and we included upgrades such as rendered external finish instead of brick, stone kitchen and vanity benches, shadow line finish to living areas, upgraded European appliances and smart-looking column fencing with aluminium slats.  I thought when the bank valuers see these villas they will see that they are higher in standard than the past sales references of three-bedroom, two-bathroom villas in the area.

Wrong.  The valuer looked at past sales of three-bedroom, two-bathroom attached villas and valued them at the same level.  The upgrades we’d included were not seen to be substantial enough, but of course they did add to the build cost.  A few years later the client decided to sell one of the villas, he was convinced by a local agent that the price was acceptable for three-bedroom, two-bathroom villas as that was what they had sold for before.   I’m sure if the client had “sold” the property to the agent, meaning he needed to emphasise all the points of difference that his villa had to the others, he may have sold at a higher price (mind you, a good agent would pick up on these “selling points”), but he didn’t and so his more upmarket villa did sell at the same price as the stock-standard ones.

So now I’m faced with the opposite opportunity. Can we build slightly below what is in the market, save on costs but end up with the same value on completion?   I reckon we can. Being a bit of a city slicker, I’d always thought higher cost means higher quality.  But I also have a “value for money” vein running through me.  I ran the numbers and our client is looking at making an additional $30,000 or so in equity out of this project for not much concession.

As a property developer, I think this can sometimes be a better option.  Look to build slightly below the market than the other way around.  But this is based on this particular location in a large regional country area.  It may be different in capital cities. My message today:  walk the fine line well and you could make more than if you pay for the fine upgrades.

Jo Chivers is director of Property Bloom, which manages property development.