With the population of our city seemingly burgeoning to new highs, you may have noticed that over the past few years, infill development has become a new normal in many Brisbane suburbs. This sort of development typically is in the form of new townhouses and units being built on traditional suburban house blocks. Where once a family home may have proudly adorned 2 lots of 405sqm, now sits 12 units or 6 townhouses.
New development is made possible by the zoning which the Brisbane City Council has allocated to a particular property or area. As of August 2018, typical suburban zoning that is conducive to development includes the Low-Medium Density Residential 2-3 story mix zone (LMR2 or LMR3), medium density and high density residential zones. In all of these zones, a mix of townhouses and apartments can be built. It’s no surprise, that the BCC specifically zones properties for higher density living in areas that are close to transport nodes such as high frequency bus routes and train stations, as well as in close proximity to neighbourhood shopping hubs. You can check the zoning of your property by searching the Brisbane City Council’s PD Online website.
When it comes to selling a property in an area that is undergoing development, you will probably need to consider selling as either a development site or simply as a house. The reality is though, that developer buyers and home buyers are very different beasts and therefore you may need to have the flexibility to accommodate both in your marketing campaign.
Will a developer pay more for my property?
When a developer undertakes a project, there are 3 main factors that affect its feasibility. These are, the final selling prices of the developed stock, the build cost and price paid for the land. Generally speaking, everyone is approximately paying the same amount for their build price in the market, so this presents a level playing field. Developers are also selling their newly completed stock for similar prices to their competitors. If you do see something that is priced higher or lower than the market average, this is usually very clearly reflected in the quality and design of the build, the inclusions, and level of finish and therefore comes back to build price. Therefore, this leaves the price paid for land as the real variable that can affect the viability and profitability of a development. As the market has the greatest influence over the other 2 development input costs, developers are continually looking for innovative ways in which land can be used and therefore purchased competitively. When a developer comes up with a really innovative or desirable use for a piece of land, this is what makes that land more valuable than it previously was.
There is a general misconception that, if a developer is going to buy a property, they will pay a premium because they are cashed up and will make a lot of money at the end of a project. Let’s explain why this can sometimes be a misguided view. Developers are chasing a risk weighted return. As executing a project entails many risks, every developer is going to seek a return that will compensate them for the risks taken. Typically, this return is upwards of 10% for a return on costs.
Some of the major costs involved in completing a development project include:
- Land cost per lot
- Construction cost per lot
- Consultant’s costs
- Infrastructure and local council charges
- GST on the value of completed stock
- Agent’s commissions
Looking at this list, there are many many more costs associated with completing a development than first thought and at the end of the day, the end product has to be sold for more than the sum of these costs to make a profit. Going back to the point earlier, most of these costs are fixed and set by greater market parameters, with land remaining the best instrument for controlling cost.
The Brisbane property market in mid-2018 is running at 2 speeds. In one sense, houses are becoming more valuable than ever, whilst growth in apartment prices has stalled for the time being. This creates a predicament for developers as the price at which they can buy land is increasing, whilst the end value of their new product is not. As a consequence, in Brisbane, houses for sale with development zoning are presently more valuable as family homes than they are as higher density development sites.
Over the next few years, as the city’s population inevitably continues to grow, developers and home buyers are going to have to continue to battle it out when buying property in our suburbs and find the right balance in maintaining the great Australian dream whilst also housing all the lovely people that want to call Brisbane home.
If you are thinking about selling your property soon, take the time to first see what has recently sold on the market and whether the agents that have made the sales have cited development potential as a future use for the block. The next step would be to contact local agents to see if they have sold any properties to developers recently and if so, for what pricing and terms. By doing your research, you should be able to get a fair idea of what a developer is willing to pay for your property. Getting the price of your property wrong up front can mean sitting on the market for months and often selling for less than initial offers received.
When selling a development site, it is also worth noting different contract terms and clauses developers seek. Generally speaking, developers might want a longer settlement term than for a standard house buy with 90 day settlement terms not uncommon. Don’t be surprised either to see 6 to 12 month settlement time frames. This settlement period provides for an extended finance clause as obtaining development funding is a lengthier process than for residential. It also allows the developer to conduct their due diligence and make the necessary enquiries to be satisfied of the site’s potential.
Without continual exposure to the selling and development site market, it can be challenging to decide how your property should be marketed and for what price. At Red & Co. our team has experience across all aspects of property development, finance and sales. If you speak to us, you can be sure that you’ll receive a frank and honest opinion of your home’s potential based on our own dealings in the market. If you wish to speak to an expert, call Anthony Oddo on 0430 028 254 ([email protected]) for sales enquiries or Greg Turner on 0417 698 345 ([email protected]) for development and finance enquiries.