Seven factors that kick start a new residential development: Michael Matusik
Did you know that one in three proposed residential projects never starts in Australia?
Did you also know that two out of five new projects selling off-the-plan across Queensland did not report a sale over the past six months?
Or that one in five new approved detached homes across Australia has yet to commence construction? And did you know that this ratio lifts to one in two for new apartments and townhouses?
So what helps get a new project started?
There are seven things that – from our experience – help make a new residential development work.
Economically sound suppliers
Often a new project doesn’t proceed because the financial capacity of the developer and 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 owned more often than not by specialist professionals (it’s their family home or an investment property).
Lawyers and solicitors, in particular, seem quite pig-headed about such matters. Maybe that isn’t too surprising. I do feel a writ coming on.
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 and reduce your construction costs. Building less is, more often than not, more when it comes to new housing.
Each project also needs to have its own USP or ‘unique selling points’. 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 and effort must be invested in order to best match the built product with the site parameters. Sadly, this often isn’t the case.
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 venue. 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 and 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 and how they rip everyone off. Many are just scraping by.
Pricing
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% 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.
Local market
The dwellings being offered need to be designed to suit the first two largest local occupier groups. These markets are going to be, firstly an investor’s tenants and secondly (and importantly) potential buyers when it comes to resale.
So, if the largest local household group is say, single person households, followed by couples with no children – and assuming the site and general location supports such density – then buying a new one or two-bedroom apartment might have merit.
The product on offer needs to change according to local demographics. See here for more.
Valuation support
Unless it ‘sells and settles’ nothing happens in real estate. That is so true and the key to getting sales (and settlements) is to have bank valuation support.
One of the first questions we ask about a new development that is seeking our assistance is about valuations. Most of the time, developers have an overall project valuation (they need such to secure finance etc.), but not what the valuation industry call a ‘current market assessment’ for a selection of the dwellings to be sold.
Getting bank valuations done is vital when it comes to off-plan selling. New prices do not have to match the valuations – a 5% (sometimes up to 8%) variation is acceptable – but the closer they are the better. I like the 'within $10,000' rule.
Despite the public flogging that investment sellers seem to cop these days (yes, some deserve it), the more successful agencies selling investment property will only sell new stock priced within an acceptable range of independent bank valuations.
Flexibility
Many new residential developments take years to come to fruition. Some take over a decade. Even smaller infill projects – given the convoluted approval process these days – can take many years from concept to settlement.
Most new residential projects will go through several stages of the property cycle, some will go through several actual cycles.
In order to meet these changing conditions, new projects also need to be flexible. This flexibility comes in a variety of forms – product, price, incentives, marketing and timing to name just a few.
Final word
We do need to tackle one elephant in the room – what I like to call ‘survival of the unfittest’.
Sometimes it is not the better projects that get built, but the projects that look best on paper. Too often, new developments are promoted to such a degree and at such a high cost that sales are bought, buyers often duped, but presale targets are met.
More often than not, it is the project’s location that is hyped plus the timing of the property cycle that is oversold to investors, rather than the attributes of the project itself.
Promoters, advocates and forecasters have financial incentives to under-report problems/bad news and over-estimate benefits of the location, stage in the property cycle and sometimes the project itself.
Michael Matusik is the founder of Matusik Property Insights, which has helped over 550 new residential projects come to fruition.
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