Successful property development in Australia is a product of local experience, logic and reliance on trusted research and relationships. Whilst there have been spectacular successes announced during 2015 by foreign investors, there have been many who have been stranded with dud sites. How can foreign investors mitigate their risks with an informed eye towards profitability for 2016?
To find these answers we seek counsel from Mark Pomeroy, CEO of leading Development and Project Management Company, Pomeroy Pacific, as to the “keys” to buying right and ensuring smooth project delivery.
TAE: There are currently a large number of development sites on the market with agents typically telling you that each is a fantastic buy. How do you approach site selection and what issues do you need to resolve along the way?
MP: I always advise my Clients not to rely on gut-feel or initial reactions to a given site. It is vital to take the time to undertake a detailed analysis of all project risks and opportunities. We typically refer to this as a ‘robust due diligence’.
Let me summarize some key points Developers should always consider before buying a development site.
- Prepare an architectural schematic design supported by independent planning advice to understand exactly what the site can really Beware that designs often provided by estate agents may not in fact be achievable.
- If buying a site with an existing Permit, beware that subtle permit conditions can have a material impact on building costs and result in reduced Your Development Manager should always analyze permit conditions, and the approved building design should be assessed for buildability, design inefficiencies and potential yield optimization.
- Prepare a robust feasibility supported by independent objective advice. Be realistic about sales revenue and costs, based on comparable sales data and building rates. Remember to include all foreseeable costs, allow for generous sales commissions and the engagement of only quality proven Spending in the right places will save you money and time, every time. You are always better to buy a site expecting to make a lower return than to think you are buying a site that can yield an acceptable return, only to find out that the site is unviable and un-bankable.
- Having a great site is not always a guarantee of a great result from a profitability point of view. Always remember, project success is nearly always only as good as the quality of the team you There should be no compromise on this point. Consider carefully the selection of the right Development and Project Managers, architects, builders and selling agents. We can advise in this area.
- Take the time to understand everything that surrounds the site that could affect your future development.
TAE: The mainstream media seem to propagate a view that the Melbourne market is saturated with apartments. What are you advising your Clients about 2016?
MP: Yes, we have heard this view over and over again during 2015, but I have yet to come across this mythical “over-supply” monster. I maintain with all my Clients that a well-designed product with good internal and external amenity, priced at market competitive prices will sell within a reasonable time frame. The simple fact is that Melbourne needs to find homes for 100,000 people per annum and residential growth in inner Melbourne and the CBD remains strong, as people want to live and work close to the city centre. According to Plan Melbourne, Melbourne needs to supply 45,000 new dwellings per annum and our pipeline of projects is nowhere close to this.
For foreign investors new to the market, getting the right local advice to extract the greatest value from a chosen site is the most sensible thing to do. If they do this, common mistakes can be avoided.
TAE: What specific advice do you provide to Clients about apartment design to avoid unnecessary delays when seeking planning and building approvals?
MP: The authorities that grant approvals for apartment projects such as local and State Government and legal bodies such as VCAT, are becoming increasingly stricter about apartment design and internal amenity. It is vital to understand prior to acquisition the key issues that authorities are closely examining which have a material impact on available yield. Below are some of the key design related issues being scrutinized by the authorities:
- One bedroom apartments less than 45 sqm and two bedroom apartments less than 60 sqm
- Bedrooms with no direct windows but which draw natural light from elsewhere (“borrowed” light)
- Bedrooms that are less than 3 metres wide
- “Saddleback” layouts where a bedroom draws natural light from a narrow corridor further away
- No natural light or natural ventilation to corridors
- No communal areas for the occupants, e.g., the need to include shared roof-top garden, library zone, meals area, etc.
- No garbage chutes
- Balconies less than 8 sqm
- No provision for bike storage and or storage cages for personal belongings
- Building design that does allow equitable development for the adjoining property
- Internal light wells to provide light into rooms
- Insufficient light penetration into living areas
Having a detailed understanding of these limitations and more are crucial steps to avoid delays and disappointments when seeking a town planning permit or more importantly when undertaking your initial site assessment pre-acquisition.
TAE: What about protecting your Clients’ rights and exposure to “issues” with builders, purchasers and throughout the entire development?
MP: This is a very large area for discussion and, as a trained lawyer myself, we guide our Clients to ensure that their rights are protected through carefully-worded building contracts and meticulous attention to contract of sale documentation.
However, to truly protect our Clients from potential project risks requires a lot more than seeking appropriate legal documents from the legal team. I am always reminding my Clients that future risk is best mitigated by the decisions we make today and this goes much further than relying simply on a set of legal documents. As such, we ask at every step of the project, how can we mitigate risk and maximize profit through the decisions we make? This is how real project value is created and enhanced.
TAE: What impact do you see the Government’s Foreign Investment Review Board (FIRB) Reform that came into effect 1 December 2015, having on the market in 2016?
MP: The new FIRB Act Reform introduces (amongst other things) an ‘administration fee’ payable by all foreign persons applying to FIRB for approval to purchase Australian real estate. There has also been the introduction of an ‘administration fee’ payable by developers when applying for an advance off-the-plan approval.
Despite these increased costs to both offshore developers investing in Australia and local developers looking to sell off-shore, my personal view and based on our recent experience with our Clients, is that this will have minimal impact on the market.
On the surface, the new rule may initially discourage off-shore developers and off-shore purchasers by sending the wrong message, i.e. that Australia is not open for foreign investment. However, after extensive discussions with our Clients and the continued flow of new Clients seeking development opportunities, our view is that the new imposts are negligible in the context of development project costs and the levy will not have an adverse impact on the development community.
TAE: There has been much debate about the introduction of minimum design standards / the internal amenity of apartments. Can we expect more debate and discussions in the public arena during 2016?
MP: Absolutely. Your readers may be aware of the state government’s new ruling, C262 as well as the “Better Apartments” discussion paper released earlier in the year that demonstrates a strong commitment towards more equitable development amongst sites, and a desire to implement new apartment standards which would materially change the way apartments are designed in the future.
My best advice is to understand exactly the impact of the C262 amendment and to recognise that the current controls, whilst interim, may in fact be more generous that the permanent controls that will be released later in 2016. Furthermore, the internal amenity and apartment design debate will continue to stir debate and commentary into 2016 and I expect new minimum standards to be introduced some time throughout 2016. It is therefore critical that Clients engage an experienced project team that is well-aware of the amenity discussion and new interim controls. The right team will work to integrate key elements within the design to limit risks and maintain flexibility remaining focused on driving profits and maintaining a quality outcome.
TAE: What do you see ahead for the property market for 2016?
MP: I believe that the market will continue its growth trajectory, and investment opportunities will abound for developers for 2016. I do note, however, that the debt markets are tightening and therefore there may be some good buying opportunities from those unable to raise the additional equity needed to satisfy the banks’ requirements.
Furthermore, I am seeing a continued increase in demand for townhouse and subdivision projects amongst our Clients and I expect this trend to continue strongly into 2016.
Business Development Manager( China Market)