What does it take to become a successful property developer?

Property development is a currently a hot topic amongst investors. While some dream about making huge profits in a short space of time, others are simply looking to manufacture capital growth, putting them a step closer to achieving their long-term goals.

With many pockets in Perth and around Australia recently rezoned or in the process of being rezoned for higher density living, property development is now within the grasp of many everyday investors.

Despite what some people think, you don’t need to be a builder to be a successful property developer. Whether a development project involves building a few units or townhouses or something more substantial, there are always considerable risks involved.

While you can’t control everything, many risks can be minimised through having the right knowledge and skills. What does a developer need to know to succeed? Here are four critical knowledge areas.

1. Your Market

At its core, developing property involves producing a product for a particular market. Therefore, you need to have intimate knowledge of the market you are trying to serve. Who are the people that will buy or rent your property, and importantly, how much would they be willing to pay (when the time comes)? What specific features do these people expect and look for?

While it’s critical to understand your target market, it’s also important to be aware of the potential competition. What type of property would compete with yours and how much choice do buyers have?

One area where many developers falter is not matching the project to the site. In other words, they build a product that is either too expensive (overcapitalising) or not good enough (undercapitalising) for the specific location.

As a developer, you don’t want to be a trend-setter and try to break price records. This is a very risky strategy, as the market might not support your plan. It’s far safer to develop product that is already in demand and that is in line with market trends.

2. Money Matters

Property development is a aimed at making a profit sometime in the future and property developers need to be financially savvy.

Specifically, they need to be able to assess the financial viability of a potential project, taking into account the completed value of the project, transaction (buying and selling, if applicable), construction, holding and any other associated costs.

A key question when doing a feasibility analysis is whether the project provides an adequate level of return to justify the risk and investment of time and money.

Project financing also needs to be considered carefully, ideally with the help of a qualified finance broker. How will the project be funded? What level of deposit will be needed?

3. Project Management

Just because a project shows a potential profit on paper, it doesn’t mean this profit will come to fruition.

At the core of successful property development is project management. This is essentially the process of planning the project, developing appropriate budgets, procuring services and managing the project through to completion – hopefully on time and on budget.

Successful project management involves a detailed understanding of the various stages of the construction process, from excavation to the final fit out. Normally these stages are mapped out in a document, along with the associated timelines and costs.

In ensuring a project runs smoothly, an important role of the project manager is quality assurance, making sure every aspect is completed to the appropriate standard.

Project management also involves being aware of the roles played by each consultant, including architects, engineers, surveyors, accountants, and lawyers.

4. Council Regulations

A stumbling block for many inexperienced property developers is their lack of understanding regarding local council regulations and what it takes to obtain Development Approval (DA).

Many underestimate the amount of information that needs to be supplied and the seemingly endless conditions that must be met. Inevitably, the process takes far longer than expected, which often puts financial pressure on the project.

Understanding council requirements involves researching complicated and lengthy documents, and compounding the problem is the fact that every council operates differently.

Having this knowledge is not only relevant when assessing a potential project or trying to get a project off the ground, but also to ensure the project takes full advantage of the site. Often, subtle changes to a plan can dramatically increase a developer’s return.

Obtaining DA is a big step in any project and it is at this point that some developers choose to sell-on the project to another developer who wants assurance of having the DA in place.

Don’t know? Don’t worry

If you are genuinely interested in becoming a property developer and think your knowledge is lacking in any of the areas above, don’t be disheartened.

Many successful developers employ the services of a company, such as Momentum Wealth, that can manage the entire process for you. With the right team in place, even an armchair developer can achieve great success.

Next month we round up this discussion by outlining the characteristics and personal traits commonly shared by top property developers. Don’t miss it.

Selecting a mortgage broker

A few mortgage brokers in Australia have been behaving badly and the Australian Securities and Investments Commission (ASIC) isn’t happy about it, increasing efforts to stamp it out.

What sort of behaviour is being targeted? Misleading advertising is one. A number of brokers have recently been fined tens of thousands of dollars for making statements in their advertising that were deemed likely to mislead or deceive consumers.

Late last year, one of Australia’s largest broker franchise groups was hit with a $30,600 penalty following the airing of TV and online commercials that claimed the group had, on average, saved customers ‘$10,000 over five years’.

ASIC investigated the claim and found that no customer had actually saved $10,000 over five years (at the time of the advertisement being run). The figure was rather a projected saving based on calculations from a sample of around 300 refinancing customers over a six-month period. While the broker would save the clients’ money, it had not yet occurred to that extent.

In a serious example of bad behaviour, a few brokers have been singled out for submitting loan applications containing fraudulent documents. These renegades deliberately falsified documents to obtain loans, totalling hundreds of thousands of dollars, for themselves, clients and family members. Some of these brokers have rightly been criminally charged and convicted.

We welcome the moves to clamp down on dodgy behaviour and strengthen customer safeguards. Around half of all loans are done through a broker, so it’s extremely important to put protective measures in place.

As with any industry, there are always a few bad apples. Mortgage broking has around 10,000 people providing broking services, so there will be a few who don’t conform. Most brokers take great care and responsibility in their role and don’t step over the line.

Brokers have a far greater selection of products than going to a bank directly, so it makes sense to use one for your loan needs. When you do choose one, it pays to go with a reputable company that you can trust and a broker who understands your specific requirements.

How selling agents can influence you and make you pay more than you should

Part of the role of a selling agent is to handle enquiries and manage buyers on behalf of the seller.

The problem is that sometimes buyers forget that selling agents aren’t on their side because they are being so helpful. This misplaced trust can lead the buyer into paying more than they should. I’ve heard of cases where buyers have paid $30,000 more than was necessary to secure a property.  Great for the seller but not so good for the buyer.

It might sound obvious to some, but selling agents represent sellers. They are legally obliged to act in the best interest of their client, the one paying for the service.  Of course, when you are selling you expect the selling agent to represent your interests.

Many agents are highly trained and know how to influence buyers with subtle tactics of the trade. Here are some of the strategies used by selling agents to steer buyers in a direction that favours the seller.

Act now!

Selling agents are masters when it comes to creating a sense of urgency. They know that people will make faster decisions when a deadline is looming and that the less time you have to make a decision the less opportunity you have to think about it.

A classic ‘deadline scenario’ used by selling agents involves encouraging early-bird buyers (probably from their database) to make an offer or increase an existing offer before the property hits the market or before the first home open. Fearing they will lose out to another buyer, these buyers often oblige.  In some cases, it may make sense to get in early, but make sure you aren’t being influenced against your better judgement.

Lots of potential competition

Smart selling agents know that to secure the highest possible price for a property they need multiple buyers to compete for the same property. Sometimes, a property naturally attracts a number of genuine buyers who are prepared to compete.

How does a selling agent generate competition? It may simply involve organising multiple viewings at the same time to show potential buyers how ‘sought-after’ the property is. When you notice other buyers hovering around a property, you’re more inclined to move quickly to snap it up.

Luring you in

Selling agents know that potential buyers are more likely to fall in love with a property when they see it in person. This is why they will go to great lengths to get buyers to a property.

Ever visited a property and were surprised when rooms were far smaller than they seemed in the photos? Put this down to ‘clever’ photographic techniques.

Remember, the best ally a buyer can have is a buyer’s agent, who has experience working with selling agents and is focused on protecting the interests of the buyer.

The vacancy rate in some mining towns is skyrocketing, but why?

If you have been keeping an eye on vacancy rates in mining towns across Australia over the past 18 months, you would have probably seen some crazy numbers.

While each town’s rental market has unique dynamics, causing different results, the general trend has been a significant increase in the number of properties available for rent.

Many of the larger towns in Queensland and Western Australia’s Pilbara region have recorded large increases, with Port Hedland’s vacancy rate now sitting at around 8%.

In smaller towns, which often rely heavily on one mining operation, vacancy rates have even climbed as high as 18%.

With more competition for tenants, rental prices have inevitably dropped, sometimes up to 20%. Places like Gladstone and Mackay have seen average weekly rents drop by more than $100 in 12 months.

So, what has happened?

In some areas, demand for accommodation has simply dropped as mining projects transition from a labour-intensive construction phase to an operational phase.

Over-inflated prices have also driven many potential tenants further out of town or to neighbouring towns. These workers prefer to commute some distance rather than pay exorbitant rents.

In some areas, the weak rental market is a result of an over-supply of property. During the last boom, developers responded to the strong demand by building more and more homes, which were sold to eager investors looking to cash in. This has dramatically increased the supply of rental properties.

Unfortunately, some areas have experienced both a drop in demand and an increase in supply.

Although it’s true that mining towns can deliver strong rental yields and capital growth, there are considerable risks. Market dynamics can quickly shift (for a variety of reasons) and leave unsuspecting investors in a cycle of falling rents and falling property values.

Proof of the high risks associated with mining towns is the fact that most of our largest lending institutions now carefully limit their exposure to these areas. Some have introduced a maximum rental yield of 8% when assessing applications for investment properties, believing that anything higher is unsustainable. Other won’t lend more than 80% of the property’s value.

While some mining towns will certainly bounce back in coming years, recent events will hopefully serve as a lesson to investors trying to strike it rich.

Two great opportunities to learn directly from Damian Collins

Later this month, people in Perth will have an excellent opportunity to learn new strategies directly from some of the country’s top experts, including our own Damian Collins.

And as a Momentum Wealth subscriber, you’ll receive a special deal on tickets.

The Home Buyer & Property Investor Show, which will be held on 22-23 March at the Perth Convention & Exhibition Centre, will provide a banquet of information for hungry investors of all levels of experience.

Attendees can choose from a host of free seminars, as well as in-depth workshops covering a variety of property investment topics.

Damian will be giving an insightful presentation explaining exactly where you should invest in order to profit. He’ll also explain why 97% of properties on the market are unsuitable for investors and how to find the 3% that can make you wealthy.

In what is a rare and exciting opportunity, Damian will also present a 1-hour in-depth workshop demonstrating exactly how experts find the best properties in the market. Plus, he will show you how to negotiate the best possible price and contract terms. If you are looking to buy a property soon you can’t afford to miss this. Bookings are strongly encouraged due to limited seating.

http://www.homebuyershow.com.au/perth/visitor

City of Armadale may be the next hot spot

City of Armadale – Amendment 72 (allowing of multi-density development)

At the City of Armadale’s August 2013 meeting, the Council initiated an amendment to the Zoning Table and Clauses 5.2.3 to 5.2.6 of TPS No. 4 to enable the consideration of “Multiple Dwellings” across the residential zone, in accordance with the Residential Design Codes. The amendment is presently before the Minister for Planning for final adoption. Currently “Multiple Dwellings’ are prohibited within areas coded R30 and below and the change proposed is to a discretionary land use in the Use Table, allowing for increased apartment-style living. The amendment also enables the consideration of “Multiple Dwellings” on all dual-coded residential lots, which currently have only been receiving the higher split coding for grouped dwellings developments.

Change of the Town Planning Scheme increases development potential for residential blocks. By allowing apartment-style construction, the City will increase its amount of dwellings. The newer apartment complexes will remove some dated housing stock which detracts from the streetscape and helps improve the area.

In terms of how this amendment will benefit investors, it’s simple. It creates greater residential development opportunities. Currently under the town planning scheme many properties are in a split-density zoned area and can only be developed into villas or townhouses. This amendment allows for an increase in housing density, meaning more dwellings may be created in the same space. This can make previously unfeasible development properties, feasible, leading to a more active development environment. A savvy investor will consider investing in these property types now, anticipating this amendment passing. Once passed, the number of properties with feasible development potential will increase and their associated land values. Of course, there is no guarantee the amendment will pass, so investors should do their homework. Momentum Wealth’s team of buyers’ agents have been working with our Research Department and in-house town planners to identify opportunities in the Perth market not widely known of. If you are thinking of developing, you should speak to one of our expert team today.

5 ways to boost your rental yield

Rental growth in 2014 seems unlikely in some markets in Australia, but there are still ways for investors to increase the rental income from their existing properties.        

 After a period of impressive growth, the rental market in Perth came to a grinding halt in 2013 and in some areas rents even went backwards. Unfortunately for landlords, the prospect for rental growth in 2014 isn’t much better. There are, however, ways for investors to increase the rental income from their existing properties, even when the market is stagnant.        

1. Minor makeover

It’s no surprise that making improvements to your property will generally result in a higher rental return. But many investors don’t realise that even minor improvements can be worthwhile. Tenants are often happy to pay a bit more for things like new carpets or a fresh paint job, and these jobs can be done in between tenancies. Exactly what you should do varies from property to property, so ask your property manager for a list of recommended improvements.

2. Substantial renovation

For those investors with an appetite for a larger project and the right property, it may be worthwhile undertaking a more substantial renovation of the property, such as a new kitchen or bathroom, or even extending the floor space. Clearly, this sort of work can only be carried out while the property is vacant, but if planned properly it can dramatically increase both the rent and the value of the property.

3. Build a granny flat

With changes to the residential design codes in WA, you can now rent a granny flat (ancillary dwelling) to a third party. Adding a granny flat to your property can therefore boost your rental yield without having to formally subdivide your property. For around $100,000 – $140,000 you can construct a high-quality dwelling that will provide a secondary source of rental income. You can often secure more than a 12% return on the construction costs and increase your overall rental yield substantially. With interest rates as low as they are, you can see why building a granny flat could make such financial sense. 

4. Furnishing your property

Another strategy for boosting your rental yield is to furnish your property, but this is only worthwhile for specific properties and tenants. If your property tenancy targets are executives or university students, who require relatively short-term leases, it may be worthwhile fully furnishing your property and then asking for a higher rent. With the right circumstances, you can often obtain a strong yield on the cost of the furnishings.

5. Asking for more rent

Some investors are missing out on rent simply because their property is rented for less than fair market value. This situation often arises because the property manager is either reluctant to increase the rent (for fear of losing the tenant) or simply out of tune with the market conditions. By employing a different property manager who understands the needs of investors, you may receive an increase in rental income. However, it’s important to remain realistic with the rental asking price, especially when market conditions are soft.     

The best time to gamble on a fixed loan

When is the best time to bet on a fixed-rate loan and potentially save yourself thousands?

There is speculation that interest rates have bottomed out and that the next RBA movement will likely be to increase rates. Does that make it a good time to choose a fixed-rate loan?

Personal circumstances and preferences should always drive the decision to fix your loan, and you should discuss the pros and cons with your broker before doing anything.

But putting aside the relative differences between a fixed and variable loan, what’s the best time to ‘bet’ on a fixed-rate loan and potentially save money?

People naturally think about fixing when variables rates start to increase, but if you wait until then, you’ve almost certainly left it too late to get a good deal on a fixed-rate loan. If lenders expect variable rates to increase (due to an increase in the cash rate or other factors), they will inevitably price their fixed-rate loans accordingly, eroding any potential gain.

Clearly, the ideal time to lock in a rate is before variable rates start to increase, while fixed-rates are still relatively cheap.

While comparing current fixed and variable rates is a useful tool in deciding which way to go, you really need to compare fixed rates and consider what you think variable rates will be throughout the period of the fixed term. This is obviously a much more difficult proposition and highlights the gamble involved with choosing a fixed rate.

Theoretically, even if fixed rates are similar to, or higher than variable rates, it could still be beneficial choosing the fixed option if variable rates increase substantially during the term of the fixed-rate loan. However variable rates may have to increase substantially before you’ll save with a fixed-rate loan.

Choosing a fixed-rate loan is always a bit of a gamble. You should make sure that you intend to be in the loan for the period of time you are fixing (given that there can be substantial penalties for early exit). If you prefer the comfort of certainty in your loan repayments and rates are towards the lower end of a normal range, then fixing may be a good strategy for you.

Have Perth investors missed the boat?

With the Perth market producing solid value growth over 2013, many would-be investors are asking whether they have missed the boat.

While it’s true that growth may slow this year from last year’s growth rates in some parts of the market, the good news is that there are still fantastic opportunities available. Here are my tips for making the most of those opportunities.

Focus on the long-term picture

In the long term, you certainly haven’t missed the boat. Perth is a rapidly-growing city with strong fundamentals, including a solid economy and a rapidly-growing population.

The market hasn’t overshot those fundamentals by any stretch of the imagination. Demand for housing still remains strong, evidenced by the fact that rental yields are still good, even after last year’s growth. Perth is still in a recovery phase.

Always be picky 

You should always be picky when it comes to investing your hard-earned cash, but if you want to see growth over the short and medium-term, you need to be particularly astute with your investment decisions. Specifically, you need to understand what really drives values in the market and look for more localised growth drivers rather than relying on the whole market to shift.

Choose areas that are being re-assessed

Look to invest in areas that are being re-assessed by the market. What do I mean? Imagine there was a ladder of suburbs in Perth with ‘best suburb’ at the top and ‘worst suburb’ at the bottom. What you are looking for are the suburbs that are moving up the ladder, the ones that are changing both physically and in the minds of buyers and renters. There are many examples of such areas in Perth that will outperform the rest of the market.

Keep an eye on supply

The supply of property in some parts of Perth is expected to increase, which will put the handbrake on growth for a number of years. Consider how much future supply an area has before deciding to invest there.

Give yourself the option to manufacture growth

Even if you plan to buy and hold for the long-term, it makes sense to choose a property that has value-add potential. This way, when the time is right you can manufacture your own growth through renovation or development.

Accept the bumps in the road

Emotion is the enemy of investing. It’s important, therefore, to always remain level-headed, regardless of the events that may unfold. When economic conditions take a turn for the worst, creating headwinds for the property market, it’s important not to be spooked into selling what could otherwise be a fantastic long-term investment. Similarly, when the market is red hot you shouldn’t rush in and pay above the odds just to secure a property.

Will we see growth in the rental market this year?

After a lacklustre year, what can we expect for the Perth rental market in 2014?

As far as landlords are concerned, 2013 marked a year of solid capital growth but a year of flat to declining rental returns. So what can we expect for the Perth rental market in 2014?

Let’s look at the major factors at play. Although the population is still growing at an impressive pace, growth has started to slow, putting less pressure on the rental market. Demand is also being affected by the fact that many renters have recently become home owners, reducing the pool of potential tenants. Plus, the situation has been further compounded by an increase in investor activity, which has created more supply.

The vacancy rate now sits at above 3% and while this figure is representative of what many would consider a balanced market, it certainly highlights how things have changed. Go back to the end of 2012 and the vacancy rate was 1.9% and rents were growing at around 15%.

There are simply more properties now available for rent, and for this reason, opportunity for rental price growth will be limited until the situation changes.

Some areas, which are still undersupplied, will record growth in rents, but areas that are oversupplied will suffer, particularly those with a high concentration of investor-owned apartments.

With supply catching up to demand, landlords should think carefully about increasing the rent in the current market and avoid taking unnecessary risks.

A glimpse of the future spurred this young investor

With a level-head and the drive to build a successful financial future, Coby Dawson isn’t your average 24 year old.

While others in similar high-paying jobs indulge in new cars and other extravagances, Coby understands the importance of saving your money and spending wisely, values instilled in him by his father.

Even before entering the lucrative mining industry, Coby was always eager to get onto the property ladder. Scraping together whatever money he had, he purchased his first property, with a friend, in the suburb of Cloverdale.

Yet it wasn’t until a ‘crystal ball’ moment years later that Coby would step up his wealth creation journey.

Speaking with older colleagues, he realised that despite earning good money, many had very little to show for it in terms of assets. Some still rented and others even had to come out of retirement after running out of superannuation.

He wanted to take a different path and use his wages to build wealth, which would provide financial security in the long term and allow him to live his chosen lifestyle. Simply, he wanted his money to work for him.

He says that despite what many people think about the high wages you can earn as a fly-in-fly-out worker, “It’s not all it’s cracked up to be”. Working four weeks on and one week off, Coby has very little down-time to spend with friends and family. “It’s a tough job and I don’t want to have to do it forever”, said Coby.

Coby knew he had to do something, so he set out to speak to others who had already achieved what he wanted to achieve. Like many people, he wasn’t sure who to turn to. A real estate agent? A financial planner? An accountant?

After a few bad meetings with various professionals (including one financial planner who admitted to being broke), Coby was left feeling rather discouraged. However, all this changed when he met with Mark Casey, one of the buyer’s agents at Momentum Wealth. “Everything that Mark said was on the money,” explains Coby. Mark provided exactly what he was after, someone to walk him through the process of building wealth through property, while also sharing his knowledge and experience.

With Mark by his side, Coby purchased his first investment property in early 2013 in the popular northern suburb of Heathridge. The property was purchased below market value and the suburb has already seen 14% growth.

Coby describes the process as “one of the easiest things ever” and that he never once felt pressured.

Mark and the Momentum Wealth team gave him all the information he needed to make an informed decision, and handled everything from the finance through to property management.

What does the future hold for this focused twenty-something young man? Keen to continue investing and building his asset base, Coby wants to finish renovating his Cloverdale home (which he now fully owns after buying out his friend) and then use any available equity to purchase another property. He’ll only stop when he has a substantial portfolio that can support him in the future.

With a passion for health and fitness, Coby is now studying to become a personal trainer. This will allow him to spend more time in Perth and do what he loves to do, even if it means he’ll have to take a pay cut, but that’s why he is investing.

When asked whether he will work with Momentum Wealth again, his answer is an emphatic, “One hundred percent!”

For someone who never knew anything about equity or leveraging your money, Coby now sounds like a seasoned investor and is happy to pass on advice to friends and family.

A riverside suburb currently in hot demand

Named after a major horse-racing track located within the suburb’s boundaries, Ascot is bigger than most people realise.

Previously part of Belmont and Redcliffe, Ascot is a relatively new suburb established in 1991. It covers a narrow strip of land along the southern bank of the Swan River, around 10 km from the Perth Central Business District (CBD).

Named after the Ascot Racecourse, a major horse-racing track located within the suburb’s boundaries, Ascot is bigger than most people realise, stretching out some distance along the river.

Generally considered to be an up-market suburb, Ascot has many luxury homes, some with direct river access, as well as a popular marina development. Uniquely, it also has an area specifically catering to the equine industry, which allows horse stables to be kept.  Adding to the mix of property, west of Tonkin Highway, are several apartment complexes and small townhouses.

Although located close to the city, some parts of the suburb wouldn’t be out of place in the countryside with mature trees and beautiful greenery. Located right on the river is the popular Garvey Park Stables, a park providing for a range of recreational pursuits.

According to the latest figures from REIWA, the median house price in Ascot is $762,500 with the highest sale price being $1,850,000. The median unit price is $502,500, which reflects a growth of 12.8% over 2013.

Based on data from realestate.com.au, Ascot is considered to have a ‘high demand market’ given that there is an average of 97 people looking per property. The WA average is 14.

The City of Vincent has a new Town Planning Scheme

With the City of Vincent recently releasing a draft of town planning scheme changes, there are some opportunities for astute investors and developers.

The City of Vincent has prepared a new draft town planning scheme, which has been adopted at a recent council meeting. A town planning scheme dictates zoning and land uses and also guides development throughout the council. The Minister for Planning has granted consent to advertise the draft town planning scheme between February and May 2014 as the first process to initiating the new town planning scheme for comment.

There are many changes proposed by the new town planning scheme. These  include changes to the zoning of more than 400 properties, the addition or removal of various development standards within the scheme and the change of allowable land use for certain properties and zonings.

The new town planning scheme is proposing higher densities and a greater mix of land uses along major roads, close to train stations and high-frequency bus routes. This is consistent with the State Government’s “Directions 2031” planning policy. The new town planning scheme reduces the number of planning precinct areas from 15 to 5, which will result in a more consolidated approach to development controls. The removal of the R 80 zoning in the Cleaver precinct, coupled with the removal of the multiple-dwelling development restriction may allow for apartment-style housing to be constructed. This denser style of living is an example of a change that may positively affect property values.

A change of town planning scheme gives those with the knowledge the ability to capitalise on the lesser-known information affecting specific properties. It gives the savvy investor an opportunity to get in before the prices reflect the real development potential.

RBA update

Many economists were not surprised that the RBA decided to leave the cash rate unchanged at 2.5 per cent. Rates have now been steady since August last year and they are at a 60 year low.

RBA Governor, Glen Stevens said “In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction.”  He believes that the monetary policy is appropriately configured to foster sustainable growth in demand.

The Australian dollars jumped more than one full cent after the RBA made the announcement.

In Australia the only area of concern is inflation which is expected to be higher than what was forecasted three months ago, but it is still within the 2 to 3 percent target range.

This is good news for many property owners as it will keep mortgage repayments down and it may also allow them to use the equity from the increased value of their investment properties to purchase another property.

It seems likely that if the economy keeps tracking the same way for the next six months and inflation doesn’t increase considerably that the rates may stay consistent for the rest of year.

Decade of Growth Ahead for WA

The Western Australian economy has been given a massive vote of confidence in a recent report from Deloitte Access Economics.

The state is expected to remain the fastest growing economy in the country over the next decade and the positive long term outlook hasn’t been dampened by the Governments’ credit rating downgrade.

Astonishingly, there is a quarter of a trillion dollars being invested in the state, primarily on major gas projects that more than half of which are currently underway or committed.

As mining construction subsides, housing construction is expected to step up driven by strong population growth.

“In terms of population growth rates, the west has long been a national leader, but now the state is growing so rapidly it is seeing absolute population growth levels running close to those in the three eastern states,” Deloitte said.

“Construction sector employment – even beyond the heavy engineering sector – remains a strong growth area, suggesting there is capacity to expand the state’s housing stock to meet current demands.

“So despite the doom and gloom in some quarters, our analysis indicates the medium term outlook for Western Australia is broadly positive.”

The Changes That Could Make or Break the Fortunes of Property Developers

The market is throwing up some magnificent opportunities thanks to a number of important changes. But it’s not all good news. Some of these changes could significantly devalue existing development sites and impact on the fortunes of developers.

If you like the idea of substantially increasing your wealth in a relatively short space of time, property development could be a viable option. Depending on your goals and how well the process is managed, a development project can increase your equity, boost rental returns or make you a very healthy profit.

Changes to R-Codes

Earlier this year, the West Australian Planning Commission (WAPC) released a new edition of the Residential Design Codes, otherwise known as the R-Codes. The R-Codes essentially provide a framework for controlling development and population density in residential areas and are therefore of critical concern to property developers.

The new codes outline a series of changes that property developers should know about. One of these, which we have spoken about previously, is the fact that granny flats (ancillary dwellings) can now be occupied by a non-family member, opening the door to new income streams.

However, perhaps the most significant changes relate to the reduction in the average and minimum lot sizes that are permitted under some of the R-Codes. For instance, under the new R20 code the average lot size has been lowered from 500sqm to 450sqm, and under the R60 code it has been lowered from 180sqm to 150sqm.

Minimum lot sizes have also changed. Lots with a minimum site area of 350sqm are now permissible under the R20 code, 300sqm under the R25 code and 260sqm under the R30 code. Bear in mind that although minimum lot sizes have been lowered for many of the codes, lots must still comply with average size regulations. So unless the average lot size requirement has also changed (as with R20 and R60), the reduction in minimum size simply allows for greater flexibility in lot design rather than necessarily increasing densities.

Let’s take a look at a simplistic example to demonstrate how changes to the R-Codes could create opportunities for developers. Under the new R20 zoning, given that the average lot area has been lowered to 450sqm, it means the minimum lot area for subdivision is 900sqm (2 x 450sqm).  Previously, you would need at least 1000sqm to subdivide. Under the current rules, a 5 per cent variation may also be allowed, meaning it could be possible to subdivide a lot as small as 855sqm.

But it gets even better because of the reduction in the minimum lot area. Let’s say a landowner wanted to subdivide their 900sqm lot while keeping the existing house. This could have been quite difficult under the old rules unless the house was positioned just right on the lot to allow enough clear land for the second lot.

With the minimum lot area now decreased to 350sqm, the land could potentially be subdivided into a 350sqm lot and a 550sqm lot (average remains 450sqm), allowing for greater flexibility to keep the existing house and potentially make for a more profitable development.

The changes to the R-Codes provide a great opportunity for savvy investors. Those who understand the codes (or employ someone who does) may be able to find a property with a land area large enough to be subdivided but whose price doesn’t factor in the property’s true development potential. Given the right circumstances, an investor could make a nice profit instantly.

Changes to local housing strategies 

When a local council introduces a new local housing strategy, the changes have enormous potential to benefit property developers, especially those who are ahead of the knowledge curve. The overriding purpose of these strategies is to increase housing density through rezoning. More specifically, they generally aim to increase density around certain activity centres, transport nodes and corridors in order to provide an opportunity for increased diversity of housing.

There are a number of these new strategies at various stages of progress throughout Perth’s 32 local councils. Some are currently out for public comment or awaiting approval by WAPC. If and when these new strategies are eventually implemented, properties in the designated zones will have their zoning increased (to a higher R number), which means some will instantly gain subdivision potential or greater potential than they had.

Remember that having the right zoning doesn’t automatically ensure that a property has development potential as there are many requirements that need to be met to obtain development approval.

Keeping abreast of what is proposed under these draft policies and tracking their progress can produce enormous opportunities.  It does however require considerable time and effort, not to mention a clear understanding of planning regulations. Momentum Wealth employs a team of specialists to research and track these changes in order to identify opportunities for our clients.

Before you rush out and buy a property because it is located in an area marked for rezoning, keep in mind that it can take many years (even a decade) for the policies to be introduced. Also, there can often be numerous changes to the policies before they are finally implemented.

A major worry for developers 

You may recall that Directions 2031 and Beyond, the framework for managing the growth of the Perth metropolitan area, sensibly calls for 47 per cent of new housing to come from infill development.

Despite this fact, however, some of the councils in Perth, including the City of Stirling, are taking a backward step. They are trying to introduce amendments to local planning laws that effectively ban multiple dwellings being built in areas already zoned for development at less than R60. This move, if it gets approved, will remove or substantially limit the development potential of some lots.

What could happen if these changes go ahead? It spells disaster for some property owners. Here’s an example. If the City of Stirling gets what it wants, multi-residential sites within the City that currently allow up to 6 apartments or 3 units to be built could be downgraded to have only duplex potential. This equals a significant financial loss for people with those sites. The value of these sites will drop instantly if this down-coding takes place, which could severely impact the financial plans and retirement nest egg of owners.

Worse still, even before these proposed changes are implemented (while they are out for public comment), the council can take them into account when assessing new development applications. This is likely to result in the rejection of previously sound development applications.

I don’t agree with the council’s move and strongly encourage anyone who thinks they may be affected to speak to our Planning and Development team to get advice and see what can be done. One option, for instance, may be to lodge a development application right away, which would provide up to 2 years to develop even if the zoning changes take place.

Conclusion

Clearly, knowledge is a powerful weapon when it comes to property development, especially in regard to the changes that are taking place in our city. If you can identify opportunities (or threats) before others, you may be in a position to profit handsomely.

However, identifying the opportunities and turning them into reality are two very different things. Property development is a significant undertaking requiring both broad-based and specialist skills. It comes with significant challenges and often involves large sums of money, which is why it’s almost always best to get expert help along the way to ensure a successful outcome.

Property Acquisition: The Location Within the Location

Choosing the right suburb is critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb.

When looking for an investment property in Perth that will achieve strong capital growth, it makes sense to spend considerable time researching the suburbs that will outperform the wider market. But this is only a part of the process.

Choosing the right suburb or macro-location is of course critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb. This is the location within the location, or the micro-location.

Statistics show that not all properties in a suburb perform at the same rate when it comes to capital growth and the differences can be quite significant. Commonly, some pockets of a suburb or certain streets will always perform better than others. Even one side of the street may prove to be a better investment than the opposite side.

But why is this so? What are the features that cause a part of a suburb to be a strong or weak performer? Firstly, let’s look at the negative features that may cause a micro-location to underperform.

Some parts of a suburb will always be closer to a main road than others and the resulting noise and traffic problems can easily drag down values. Similarly, some parts may have closer proximity to undesirable landmarks, such as industrial complexes, petrol stations, cemeteries, or certain types of shops or venues. The existence of hi-rise apartments and concentrations of state housing can also adversely affect certain parts of a suburb.

You might argue that a property’s poor location (within a suburb) is factored into its value and doesn’t necessarily cause it to underperform in terms of capital growth. While there is some truth to this argument, in many cases the negative features of a micro-location consistently dampen buyer demand making growth far more difficult to achieve. And these negatives are often permanent issues that can even worsen over time, such as with noise and traffic levels.

While these negatives can adversely affect the demand for housing, they can also offer opportunities if you believe the negatives will diminish in the future. For instance, you might notice that a shabby part of the suburb is being improved through public and private investment. Or maybe an ugly commercial area or old school is being knocked down and transformed into an attractive residential estate. In some cases, the uglier parts of a suburb may actually end up outperforming the rest of the suburb because of this gentrification.

What are some of the features that can make one part of a suburb more appealing than others? Clearly, the parts that are closer to the city, coast or river will typically attract more attention from buyers. Many suburbs also have an ‘expensive’ side, which might border a more prestigious suburb. Views, attractive streets, low levels of traffic, and good access to amenities can also raise the desirability of a micro-location, as is being within the zoning for a sought-after school.

Remember, the better parts of a suburb won’t necessarily achieve higher rates of growth than the cheaper parts. It depends on whether the demand for properties in these parts will increase at a greater rate relative to the supply. Determining this requires careful analysis and can involve looking at demographic changes, local area planning and the potential for future supply.

Even once you’ve identified the areas within a suburb that have the best potential for capital growth, individual property differences can also play an important role. But this is for another discussion.

Finance: Why Every Borrower Needs to Know About “Comprehensive” Credit Reporting

Australia’s credit reporting system is in for a major shakeup and it has the potential to affect your ability to get a loan. The change involves the introduction of “comprehensive” credit reporting and it will be here in March 2014.

The new regulations will give lenders far more information about your credit history, allowing them to more closely scrutinise your credit worthiness and calculate the risk of you defaulting on a loan.

What sort of information will be available to lenders? They will be able to view the last 24 months of your credit repayment history on all open credit accounts in your name. This could include your mortgage payments and credit cards.

Lenders will also be able to see all of your past and current credit accounts and enquiries, meaning they will know how many credit accounts you have and when each account was opened and closed. This information will clearly be useful when determining your ability to take on additional debt.

How do the new regulations compare to the current arrangement? At the moment, lenders can only access a limited amount of information about your credit history, such as your recent credit applications, any major credit infringements or whether you wrote any cheques for $100 or more that have been dishonoured twice.

Lenders currently can’t find out whether your previous applications were approved or declined or whether you actually pay your loans on time, just that the applications were submitted.

An inevitable outcome of lenders having more information about credit applicants is that it may become harder for some people to obtain a loan. If you have black spots in your credit history, it’s going to be nearly impossible to hide them.

But are there any potential benefits to borrowers? Theoretically, yes. Firstly, if the new regulations allow lenders to better assess risk and minimise defaults, it could drive down the overall cost of credit. Secondly, lenders may start to offer discounts and incentives to borrowers with good credit histories.

All this extra information will give lenders a more comprehensive picture of people’s overall financial position, which could perhaps lead to the development of more tailored products.

Only time will tell how the new regulations will impact the marketplace. But clearly everyone needs to be more conscientious about keeping a clean credit history. It’s never been more important to make sure you pay your bills on time because a bit of carelessness could easily end up affecting your ability to get a loan in the future.

Also, it makes sense to regularly check your credit report, so you can resolve any issue before they become a serious problem.

Property Management: Is Property Management a Team Sport?

Property management companies differ in the way they structure their human resources and this can affect the experience of owners and tenants.

For most property investors, the decision of whether or not to appoint a property manager is a relatively easy one. If you want to protect your valuable property asset and don’t have the time and expertise to do it properly, then it makes sense to rely on a professional.

Property managers perform a wide variety of vital tasks, from finding and screening tenants to conducting inspections and organising maintenance. Plus, all of this must be done within strict legal guidelines, which is why the majority of investors appoint a property management company.

The decision of which property management company to appoint, however, is a more difficult one. While on the surface many companies appear quite similar, dig a little deeper and the differences soon become apparent.

One of the differences, which is rarely spoken about, relates to the amount of human resources available to the company. While some property management companies operate a team, with multiple property managers and assistants, others prefer the one-man-band model.

What are the advantages of a team? Firstly, a team can better accommodate temporary absences, such as when a property manager is unwell or attending court. There’s nothing more frustrating for tenants and owners than not being able to get in contact with someone who has the right information at hand.

Similarly, a team is better positioned to manage staff turnover, which unfortunately can be a frequent reality in the property management industry due to the high stress levels involved. If a company relies too heavily on one staff member, you can image the massive upheaval when that person leaves.

Another significant advantage of having your property managed by a team is the opportunity for greater specialisation of tasks. Different individuals can focus on different tasks, honing their skills and increasing efficiency. For instance, some teams include a dedicated trust accountant or new business consultant.

Although there are differences in the way that property management teams are structured, commonly each property manager is allocated a particular portfolio of properties. This means that property owners have a dedicated property manager, just as with a one-man-band operation. The difference is that property managers within a team will have access to far greater resources and better processes.

The “does it all” property manager is often extremely busy trying to perform a catalogue of different tasks. While these individuals can be highly skilled and excellent at their job, the limitations of time and space eventually get the better of them and slow turnaround times result.

Everyone likes a personal touch, but a one-man-band will inevitably struggle to keep “in touch” as much as many owners and tenants would like.

Property Development: Should you Sell or Hold Your Development?

For many property investors, the appeal of property development is the promise of creating enormous capital gain in a short space of time. Most people assume that to make money out of property development you need to sell the properties you develop. Is this a common misconception?

The decision of whether you should sell or hold the properties you develop depends on a number of things, including your financial position, the market conditions and the type of development you are undertaking. But primarily it comes down to your objective in doing the development in the first place. Some property developers aim to increase rental returns, while others seek to make a cash profit or simply increase and unleash their equity. Developing property can also be a way of obtaining new property at wholesale prices. It’s important that you are clear on your objective prior to starting a development as it can influence many aspects of the development.

People often sell properties they have developed because they think they have to sell to make money or “realise the profit”. However, by refinancing you can still access the equity you have created. Why might this be a better option than selling? It comes down to the risks and costs associated with developing to sell. Developing to sell requires expert market timing to get the property cycle right. Plus, if you sell properties that you have developed you will likely have to pay Sales Agents Fees and Marketing (3-4%), GST on the Profit Margin (2% if a 20% margin), and Income Tax (as much as 9% if a 20% profit margin).

It’s clear that if you develop and sell, transaction costs will eat away at your profit. For that reason, I believe developing to sell should not be the first choice in every instance. You could be far better off by hundreds of thousands of dollars by holding the properties. Many of the most successful property developers, such as Frank Lowy (developer worth $6 billion who has built a worldwide shopping centre empire) rarely sell.

So when should you develop and hold? The simple answer is when it is feasible. Depending on the type of development you do, you will generate either additional rental income over and above the interest costs OR you will generate additional equity. But preferably you will do both.

So when is the best time to develop & sell? Being a successful property trader requires focus, commitment and a lot of time. You need to do much more market analysis and it is inherently more risky as you are timing the market. To justify continual buying and selling, you need to generate high returns to warrant the transaction costs (agent fees, stamp duty, income taxes). You also have to be prepared to “landbank”, which is common amongst developers, who may hold land for 10 or more years.

Depending on the project there may be an opportunity to develop and hold some of the project (e.g. 3 units of 6) and sell the rest to pay down some debt. Professional developers can make a lot of money developing and selling, but it is a full time profession. Most developers still hold some part of their portfolios for long term investment.