All Topics / Help Needed! / Good buy for a potential subdivision?? or not??

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  • Profile photo of InvestingnoviceInvestingnovice
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    @investingnovice
    Join Date: 2011
    Post Count: 12

    Hey all,

    I could really do with an opinion or 20 on the following, my situation is as follows

    My plans:

    – Purchase a big block of land within 10 to 15 minutes drive from Perth CBD, preferably south (now)

    – Subdivide a large block of land to either a duplex or triplex (within the next 3-4 yrs)

    – Pure investment at this stage (rent out)

    What I have found:

    – approximately 760sqm, currently (zoned at R20 however, I believe i will beable to get it to R30 within the next few years)

    – Currently an old house is on there for a negative geared property until commencement of subdivision etc.

    – On a 2 lane main road (with a single lane T intersection, driveway directly opposite traffic light)

    – 2 minutes walk from train station

    – 1 minute from Freeway on ramp (however small u turn will be required to enter freeway)

    – Walking distance from 2 amazing schools

    – Amazing suburb

    Property information:

    – I have put in an offer for 550k (currently asking for 590k)

    – Weekly rent return approx $470

    – Approximate house price in suburb is 800k to 900k (4×2)

    The negatives about the property:

    – Main road and intersection

    – Driveway locations (when subdivided) will be in the no mans land of the traffic light and just before the traffic light

    Positives of the property:

    – suburb

    – affordable

    – schools

    – near parks

    – next to river (1km walk)

    – 1km from one of perths largest shopping centres

    – frontage is big enough for both units to be facing the road (if wanted)

    So the way i see it:

    The land: 550k

    Subdivision: 50k

    2 off 2 storey houses = 600k (complete)

    Estimated cost for building is:

    = 1200k

    Approximate value of houses (Today's market) 

    = (900k x 2) – 25% (derate by 25% due to main road)

    = 1,400k

    In todays market it seems like a lot of work for 200k (especially considering i need to fight for zoning). However in 5 years time i believe i will be renting out 2 off 1.2M for properties at least $900/week.

    If anyone has any suggestions, thinks i should offer a little more to secure the house or believe i have forgot any costings etc it would be great to get some other opinions. I feel this subdivision is the only way i am going to build instant equity into my portfolio and would appreciate any comments or suggestions.

    Thanks

    I.N.

    Profile photo of CorieCorie
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    @corie
    Join Date: 2009
    Post Count: 113

    Sounds like Booragoon…..you looking for a JV partner?

    Profile photo of InvestingnoviceInvestingnovice
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    @investingnovice
    Join Date: 2011
    Post Count: 12

    I assume that response means its a good investment idea ….. not at the moment still have to acquire the land

    Profile photo of FreckleFreckle
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    @freckle
    Join Date: 2012
    Post Count: 1,680

    Negatively geared on finance of 1mil and return on market val is a meager 3.3%. Projected margin is $100k/unit. The strategy is obvious. Build and sell but costs are going to have be carefully managed. I've seen profits disappear when cost analysis and cost control are executed poorly.

    You're other risk is that the market could move against your assumptions. Personally I believe the WA market is in for a few shocks. It's definitely not trading on fundamentals at the moment. The risk is that resource contraction and other economic head winds changes market sentiment faster than your ability to adapt.

    I live (rental) in Mandurah in a modern 4/2/2 in a relatively new subdivision (6 years). When it first opened people camped outside the sellers offices to be able to buy a block. Each release saw increased demand until the developers sold by ballot. Those who missed out twice where given multiple ballot chances at each successive ballot. This property has dropped around $80-100k over the last few years. It's been listed now for 5 weeks – not a peep. It's listed $55k under purchase value. 

    To me it signals the end of WA's RE boom. I expect to see the economy contract hard over the next 12 months. Property prices will follow in due course as unemployment rises  and everyone realises the resource boom is really really over.

    Profile photo of CorieCorie
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    @corie
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    Post Count: 113
    Freckle wrote:

    To me it signals the end of WA's RE boom. I expect to see the economy contract hard over the next 12 months. Property prices will follow in due course as unemployment rises  and everyone realises the resource boom is really really over.

    Freckle,

    In case you hadnt noticed the WA RE boom ended a long time ago. And that is especially evident in the city of Mandurah, and has been for a long time. Mandurah has been one of the hardest hit cities/suburbs in WA over the last couple of years.  What year was it when people were camping outside the office of sellers offices? Seriously!?!

    Property prices have been flat and in many places contracting for a many years i.e Mandurah, but to say that the resource boom is "really really" over is a major over statement! Statements like these sound like the scare monger tactics similar to something I would hear on "Today Tonight".  

    There are lots of people who have lost money in the Mandurah property market but the Perth property market is doing better than it has for quite a few years. And the fact that mandurah and perth are only 70kms apart says it will only be a matter of time before mandurah starts to feel the effects of the uptrend in Perth.

    Profile photo of FreckleFreckle
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    @freckle
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    I've been in the resource sector here for the last 6 years. The last 3 running my own gear. I've sold up and cashed out. I have friends with businesses hitched to the resource sector and several friends and family employed across the sector here. I can tell you quite categorically that the resources are contracting at a rate I didn't expect until later next year. The big service sector companies are warning of a 25% fall in earnings, unemployment is rising and businesses are grinding to halt as work volumes decline. 

    Mandurah may simply be the canary in the coal mine. It was actually quite buoyant here until about 4 months ago. Perth has its mini boom based on what? When reality sets in Perth will go flat then I believe it could decline by as much as 10%. 

    Resources constitute 75% of this states economy. It doesn't have to contract much to start hurting. Iron ore is slipping again. Now $126/dmt for FE62. Chinese buyers are reselling loads back into the market because of oversupply. Mines are starting to close and the budget puts exploration companies under the pump. There is absolutely nothing optimistic happening in the resource sector here in WA. 

    Profile photo of FreckleFreckle
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    Corie wrote:
    In case you hadnt noticed the WA RE boom ended a long time ago.

    I'm not sure what you define as a long time but Perths market has been fairly robust over the last few years. Basically the WA boom (although off its highs) was still intact in most places up until mid 2012.

    From the Residex Blog

    Perth is now clearly out of its correction phase as the impact of the resources boom has started to cause housing need imbalances (shortages). The graph ‘Monthly Trend Houses and Units – Perth’ presents the current position.

    The growth now being exhibited in this market is very respectable and we should expect the rate to slow a little.

    Profile photo of InvestingnoviceInvestingnovice
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    @investingnovice
    Join Date: 2011
    Post Count: 12

    Hi Freckle,

    Cheers for your input is definitely something to think about. This is just some info I have picked up from being in the industry for a decade.

    I maybe an investing novice however am very rehearsed with the resources sector. About 6 months to a year ago Rio started axing “Contractors” for PreFEED and FEED future developments. This reduction in future demand has put a massive scare through out the entire resources sector. Western Australia is not going to simply collapse in the following years. and you are correct the demand for Iron Ore itself is “plateauing”. There will always be a demand !!!

    The major Iron ore giants are slowing down in construction of new facilities but people fail to realise:

    – Existing facilities will still be running
    – Existing facilities will still require hardware and support (perth, Karratha, exmouth based vendors)
    – Other resources i.e. gold silver mineral sands etc.
    – Oil and Gas in WA has not boomed yet. There is oil everywhere in the world and the most accessible is the first retrieved. At the moment they still messing around with the North west shelf ( approx. 50m of water) and are yet to completely explore the canarvan basin (200-300m depth)
    – Perth will be the next resources hub Shell moving to foreshore development, Chevron acquiring another building, Rio looking at moving their head office
    – Another interesting fact you may not know is a lot of Norweign companies from the north sea are having a presence and moving to Perth
    – CSG is currently being explored in WA
    – Ports for antartica when the start exploring there (it will happen in 20 – 30 yrs most likely be perth based, but def somewhere in aus)
    – Pluto future expansion
    – Browse basin will go ahead it may not be an onshore facility however this will create 100s of jobs during vessel install etc.
    – The packers investment TEAM definitely see something still in perth with their future developments.
    – Construction is short term acquiring 10s thousands (and in most cases they fly in and out from easternstates)
    – difference between here and Aberdeen is perth is a very family friendly city with great weather. people will move their families over here for the boom and stay.

    Just a bit of information I thought id share with you guys nd something to think about before you rule out perth.

    Profile photo of FreckleFreckle
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    @freckle
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    I'm not sure where you get your info from but it reflects a lot of the misinformation and hype I've been hearing for the past few years.

    Once the mining expansion is complete about mid 2014 capacity in the Pilbara alone will reach around 800mt. The total global seaborn market peaked at 650mt. Throw in other global suppliers and you have in excess of 1000mt in capacity. So volume has to be rationalised somewhere and prices will invariably reflect the oversupply.

    China takes 60% of seaborn cargos. In the last economic quarter China pumped US$1T into it's economy. 50% to stimulate and 50% to roll over NPL's (non performing loans). Japan and S Korea are other major consumers of ore but have economies on the ropes.

    I don't think you need to be a rocket scientist to understand that this is not going to end well.

    Oil and Gas. There is no follow on boom coming. The gas boom is over. Significant future projects have been canned or suspended indefinitely. Gas and oil represents little more than 30% of WA's resource economy. Iron Ore is the main game. Globally we have a gas glut and there are still some very big fields yet to come on line even though we are currently building 7 of the 12 global gas projects.

    There is no CSG in WA it's a shale gas resource here and I just don't see that getting any legs as the US shale gas experiment is looking like a disaster in the making for them. CSG on the east coast only has to put one foot wrong and that'll be the end of that industry here.

    Shell is trying to master offshore processing so I'm dubious about any foreshore talk.

    I come from the logistics side of the industry. I saw the writing on the wall 2 years ago and last year thought it was time to bale before it was too late. A mate didn't agree and wanted to buy my gear. I told him he was crazy and should sell his own gear and downsize. I forward sold my gear to him at a good price. That was the end of last year. All that gear and his is now up for sale either on consignment or at the auctions. The sales yards are full of trucks, trailers and machinery. They're at the point of turning gear away because the volumes are difficult to move. My friend is chasing 3 companies for outstanding debt from last year. 

    When I say there's going to be a 10% contraction in resource activity I'm being very conservative.

    Mining canaries dropping like flies

    Garnaut warns, BHP and Rio cut

    China is in the middle of an economic transformation that will result in less infrastructure investment and much lower growth in imports of iron ore, other metals and energy, he says.

    Australian policymakers need to make an “immense adjustment” if the country is to avoid a deep recession brought on by the end of the China resources boom, according to prominent economist Ross Garnaut.

    “It’s going to be very tough and Australia will only get through that with a radically lower real exchange rate…Monetary policy is critical to this…

    .

    The ANZ has produced the latest gloomy report into the approaching mining investment cliff in its semi-regular major projects report. This one is a doozy, more bearish than any before it:

    MAJOR PROJECTS PIPELINE REVISED LOWER AGAIN: MINING AND RESOURCES INVESTMENT EXPECTED TO DECLINE SHARPLY FROM H2 2014

    Easy come, easy go for LNG

    Woodside Petroleum has ended talks with other owners of gas fields that could supply gas for an expansion of its $15 billion Pluto LNG venture in Western Australia, signaling another potential growth venture is on indefinite hold.

    Woodside had gone quiet in recent months on prospects for a deal on third-party gas supplies. But the formal advice on Thursday that talks have ceased confirms that the possibility of an expansion of Pluto has faded and is now several years away.

    “At present, there are no active discussions with other resource owners with regard to Pluto expansion,” Woodside said in its quarterly report on Thursday, which showed a 55 per cent leap in March quarter production from a year earlier.

    .

    NAB's report: Will mining investment fall off a cliff?

    http://www.scribd.com/doc/129026790/2013-03-07-Mining-investment-pdf

    • Mining in Western Australia, together with the petroleum industry in the state, accounted for almost 90 per cent of the State’s income from total merchandise exports in 2008-09
    • Western Australia’s mineral and petroleum industry, in 2009, had a value of A$61 billion, of which 48.2 billion were created by the mining industry.

    Many expected the mining/resource boom to wind down to more sustainable levels however few really understand what this means. The info above merely talks about construction but there is another side to the contraction most aren't talking about and that's the cut backs to operational expenditure as revenues begin to fall.

    • Rio Tinto is also in the middle of a belt-tightening exercise, looking to cut $5 billion in costs, including $1 billion from its exploration budget, by the end of next year.
    • BHP Billiton boss Andrew Mackenzie used his first major investor presentation as chief executive this week to flag severe cuts to capital spending. He said the miner would cut capital and exploration expenditure by 18 per cent. Ominously for contractors banking on a recovery in mining investment, Mackenzie said BHP's spending would continue to ''decline substantially'' in subsequent years.

    There are 3 dimensions to this contraction;

    • falling state revenues as ore volumes and prices decline
    • project cancelation or suspension and
    • expenditure cutbacks in the face of falling revenues.

    So for anyone who thinks things will muddle along ok and that any correction will be modest and manageable I say good luck to you but I'm cashed up and cashed out and heading for more secure pastures.

    Profile photo of FreckleFreckle
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    @freckle
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    Something else I was reading a while ago and came across again just recently that set off a red flag. Australia tends think of its debt profile as fairly benign but that's far from the case. A relatively mild decline in economic conditions could generate negative occurrences within our economy that many would not think possible. Our potential Achilles heel is private debt.

    Argus warns on Australia’s private debt load

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