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Secondary projects, first-class profits

Let’s see if we can break a golden rule of property and still make some money.

Kieran Clair

‘Location, location, location’ is one of those catch phrases drummed continually into the head of anyone who even skirts close to buying real estate. From the agent, to the financier to the guy driving your cab, everyone will tell you, if the site isn’t in the right position, you’re creating a rod for your own back. If you look around, however, there are plenty of properties located in the most inauspicious spot just waiting for someone to turn a sow’s ear into a silk purchase. Despite what you may have been told, you can still make a good profit on a poor quality site – as long as you have the right information.

 

What is a secondary development site?

Think about where you wouldn’t want to live. Busy road fronts, train lines for neighbours, overhead power lines and nearby industrial estates. If those locations make your skin crawl, then they’ll probably do the same to your potential end user.

For developers, there are other considerations that can impact a project too. Craig Robbie, a residential development valuer with Herron Todd White, says the limitations of a second-class development site can be more than physical.

“It can relate to planning constraints as well and whether there’s development approvals or not. Also, any site where there’s uncertainty about the yield as well.

“If you don’t know how council are going to deal with the overlays it might have too. Whether they’re going to require a big Queensland blue gum to be kept on a proposed lot, or a demolition control precinct – those sorts of things, for example, can create a secondary site.”

Robbie says it’s uncertainty that makes for a less than perfect project, but for developers prepared to do some tough yards, there can still be good profits.

“Those who are willing to do the hard work upfront can end up with a good site at a low price, because those things that make a site secondary are things you may be able to overcome by working through the process.”

 

Cheap buy in

By their nature, secondary locations are the ‘also rans’ of the property world, and most buyers want to get the gold, not the bronze. There’s less competition from other developers, which equals a better buy-in price for you. When you’re a developer, it’s all about the numbers, so reducing your site’s purchase price improves the bottom line.

“With any development, the profitability starts the moment you buy the site,” Robbie says.

“You don’t have to make top dollar on the completed product in order for the project to come out OK.”

Imagination also pays with less-than-appealing projects. Tony Creighton is a small developer who came upon a few hurdles as he attempted to develop his north Brisbane holding. He had a hatchet block fronting a busy local road, but its shape would enable him to subdivide off the driveway portion of the property once his neighbour’s development was underway. This would allow him access to his home via a new street. Creighton says difficult sites require some lateral thought and vision. They’re not always for the faint-hearted. In his case, he was looking to adapt a site of unusual dimension that fronted a busy road, but found himself with a hostile council approval process, as well as needing to negotiate with a neighbouring developer to gain access to his balance land. In the end Creighton created an asset he estimates to be worth hundreds of thousands of dollars out of what was viewed by many as a near worthless parcel. That meant a very reasonable initial purchase price for the parent site.

“No one wanted it. I guarantee you no one could see the vision that I had for that piece of land when I bought it.”

 

Proximity to services and facilities

One indicator of a secondary site is its location is noise affected by transport infrastructure. Busy roads, train lines and flight paths can mean noise pollution, but often there is only a short stroll to transport hubs and high-street facilities – features that help counteract the negatives.

The solution to these problems can also be simple if a little common sense thinking is applied. In many cases, clever design can overcome the issues. Even if you are doing a renovate-to-sell project, some well placed fencing or rearranging the main living area to be further away from the noise can result in taking the property’s appeal up a few notches.

Also, if your looking to do a small subdivision or attached housing project, not every new title you create will be impacted by the parent parcel’s location. Those townhouses at the rear of the site won’t catch as much noise from the road, or you might subdivide a block to the front – well away from the train line at the rear. If this is your plan, remember to price you end product appropriately so as to maximise the returns from the better-positioned accommodation in your project.

“It comes back to creativity. If you’ve got a dodgy site, think about what you can do to make it work,” Robbie says.

“You’ve always got to design the product to best suit the site and maximise the value of the completed product. That becomes even more important with secondary sites.”

 

A better yield

They say you can have great capital growth or great rental returns, but not both. If your drive is to get as much cash flow as possible for a minimal outlay, less than prime property is well worth considering.

Tenants are often less bothered by adverse property positions. They see the ready access to services and facilities, and easy stroll to transport, as just fine. For tenants in these situations, they will mostly have a non-permanent mind set about the property, knowing that they’ll be moving on to bigger and better things in the future.

If you’re completing a small project with the intention of adding it to your property portfolio, then a poorly positioned site might be just the ticket.

 

Helpful town planning

Some councils are keen to accommodate new development on highly exposed properties like those on busy roads, so you may find yourself in a position to negotiate something a little extra from your local authority as part of your redevelopment project. Robbie says in some town plans, being close to a transport hub actually works in your favour.

“If they’re after transit oriented development, then for a lot of these sites, councils can be willing to push the yield up.”

Unfortunately, the reverse can be true as well. Creighton says because of the nature of his project, he came up against a council agenda, which caused problems. The lesson learned is if you’re in a position to have council onside, take it. If not, factor in plenty of contingency and be prepared to fight for your rights.

“You have a right to develop it (the site) a certain way. So keep pushing and pushing although they (council) don’t have to make it easy for you.”

 

More volatility, more profit

If you’re a sit-and-wait investor who is able to time the real estate cycle, secondary locations could be just the thing for maximising returns. Secondary properties are more prone to grand fluctuations in price and demand than better quality properties. When buyers are thin on the ground and disinterested, you can hardly sell a site with problems, so active purchasers will be dealing with a distressed vendor keen on getting out of a holding. The upside is when property is in vogue and there is no stock available for all the demand, you are selling real estate that has accrued a larger number of potential buyers. The gains can be substantially better than what was expected.

“Certainly secondary sites are going to be more volatile,” Robbie says.

For the top tips experts have revealed to API for secondary-site developers, check out the full report here: http://www.apimagazine.com.au/api-online/newsletter/13/october-newsletter-2/secondary-properties-first-class-profits

This article has been reproduced with permission from Australian Property Investor magazine, www.apimagazine.com.au

The downside – if you miss your opportunity, you may find yourself locked in for another seven to 10 years property cycle waiting for the next pick-up in demand, so make sure your watching the investment clock.

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