26 Sep Property Development: When To Get Started
If there’s one thing I have learned from over three decades in the property industry, it is that markets are not static; in fact they are quite dynamic.
In defining a market for property development, we must not be too broad. There is no such thing as the Sydney property market or the Melbourne property market. Cities are large and diverse, and local markets in the same city can behave quite differently. Locality, demographics, socio-economic factors and infrastructure expansion all play a role. So, too, does product type. An area could be oversupplied with apartments yet undersupplied with townhouses or vacant land.
There are a range of fundamental drivers that influence market behaviour. Economics 101 relates to supply and demand, but what drives that?
Population growth, both interstate and overseas, is a primary driver. This has had much to do with underpinning recent high-capital-growth markets. Interest rates exert a strong influence, and sustained low rates in recent years have had a positive effect on affordability. The availability of finance is important, and we have seen a tightening within the banking sector under the influence of APRA being countered by a wave of private equity funders willing to step into the vacuum to finance development projects.
“You can make money from property development at any stage of the property cycle – you must just understand the fundamentals”
The cost of construction can ebb and flow depending on the strength of the market. While it increases during boom times, it can decrease during quiet times. Even the availability of developable land can vary depending on factors such as council zoning, willingness to rezone, and the extent of service infrastructure.
Then there are less tangible drivers such as public confidence, employment rates and job security. The point to be made here is that there are several drivers and they will vary from time to time, but they are never all good, and they are never all bad. You won’t find nirvana where interest rates are extremely low, banks are throwing money at you, construction costs are through the floor, development land is everywhere, and real estate products are in high demand and understocked. Nor will you ever find all the drivers are negative.
During boom markets the raw land values of sites increase and they become more competitive to acquire. Construction costs increase as builders get busier. Even approvals take longer as councils are busier. None of this matters as capital growth on completed products usually equals or outstrips the increased costs.
As the steam goes out of the market, dynamics change. Sale prices will slow and stabilise or even drop if there is oversupply. Site values will level out or even drop if there is oversupply. Construction costs will stabilise or even fall as builders slow down. Sales will slow, but stock levels and competition will reduce.
Having developed continually for over 30 years, my conclusion is that you can make money from property development at any stage of the property cycle – you must just understand the fundamentals in your market, build the right product in the right location, and buy the site based on a thorough financial feasibility study.