I read with interest the number of people looking to complete their own developments. I think it is great and people should be encouraged to do so. However I read with interest the margins people are prepared to accept. I would think that for it to be viable and for people to have a margin of safety you would seek a minimum of 20% margin (not mark up on costs) I wonder if we are not going to see a number of sad and sorry developers in the next few years. I recently read on another forum about a first time developer coming unstuck in a 3 unit development. Interested in others comments
yes you woud need 20% as a minimum as there is always somehting you miss! on the other hand, cap growth on a delayed project usually compensates cost over runs – in fact a bigger development over a few years can result in most of the profit being just cap growth. the tax implictions of this really bite tho – there is no 50% CGT reduction and you are stung for GST, meaning you would have been better just to buy a dev site, focus on your day job and then flick the block off to an ambitious developer to suffer all the headaches [grad]
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Originally posted by bill johnson:I read with interest the number of people looking to complete their own developments. I think it is great and people should be encouraged to do so. However I read with interest the margins people are prepared to accept. I would think that for it to be viable and for people to have a margin of safety you would seek a minimum of 20% margin (not mark up on costs) I wonder if we are not going to see a number of sad and sorry developers in the next few years. I recently read on another forum about a first time developer coming unstuck in a 3 unit development. Interested in others comments
Some astute comments Bill.
Property development is very different form buy and hold investing and you need a higher potential profit to cover the risksSo what are the types of risks involved in property development?
Some of the significant risks I have come across include:-
• A downturn in the property market leading to lower property values or increased holding costs until the development properties are sold
• Increases in interest rates resulting in increased holding expenses;
• Increases in construction costs during the project. This was particularly obvious during the recent boom. Many inexperienced developers think they have entered into a fixed price contract yet are hit with cost variations;
• Changes in the supply and demand ratio for real estate market such as we are currently seeing in the inner city apartment market which depresses property values;
• Unexpected disputes with building or trade contractors or unions which can cause costly delays to a project;
• Changes to the laws relating to property development such as the laws relating to zoning and town planning restrictions on land use, environmental controls, landlord and tenancy controls, user restrictions, stamp duty, land tax, income taxation and capital gains tax. Changes to any of these could adversely affect the profitability and viability of your real estate development project;
• Unexpected delays and increased holding costs may be encountered when town planning (DA) approval is required for a development. Councils are currently very slow in assessing development applications and they reject many development / town planning applications. Not obtaining an approval or obtaining one on unfavourable terms is a growing risk for developers. The cost of obtaining approval or fighting council’s rejection in a court of appeal is continually rising;
• Some inexperienced developers find that some of the improvements they have made to their properties do not result in an increase in value. They learn the hard way that increases in value do not necessarily occur in line with expenditure on improvements;
As you can see many of these risks are outside the control of the developer.
I know, because at Metropole we are property developers for our own projects and act as project managers for many clients (we are currently involved in over 90 development projects in Melbourne.)
We are aware of the risks involved in a development project and this helps us minimise them so that our clients do not get any unpleasant surprises.
Most of our projects are very successful, but I have to be honest and admit that we also run into the same problems in some of our projects and these are not as successful as we initially hoped.
We must learn from all our developments. Learn what went wrong and minimise the risks of this occurring again and learn from what went right and repeat this if possible.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
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FREE subscription http://www.PropertyUpdate.com.auHi Michael,
Many thanks for your honest insight and comments about development. They are very invaluable for a novice like me.
By the way, Could you handle a development project in Sydney, in the near future?Cheers,
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