Property Development In This Market? Absolutely.
The Melbourne housing market is undoubtedly in the worst shape it’s been in for over 5 years. Prices are down in many areas and flat in most others; Auction Clearance Rates are low everywhere; Investor demand has decreased dramatically; and, the banks are tightening up lending practices for everyone.
Ironically, now is the best time to tackle a residential property development in Melbourne.
Why? For the reasons listed above. Let’s tackle them one at a time…
1. Price are down in many areas and flat in most others.
Broad market corrections (like the ones we’re experiencing now) deliver up great buying opportunities. If you know how to track prices over time and across suburbs, you can identify those areas where prices have peaked, fallen, and plateaued – those who invest successfully in shares understand the concept of ‘buying at the bottom’, and right now, property developers in Melbourne are doing just that.
Similarly, with some basic statistical analysis, you can identify those suburbs that have underperformed relative to others over the last few years, and are therefore highly unlikely to experience price drops now or in the near future.
Purchasers who are getting good property development advice are seeing great value in specific suburbs across Melbourne.
2. Auction Clearance Rates are low everywhere.
Vendors today are less motivated by GREED than by FEAR. Gone are the days of buyers blowing the reserve price out of the water in emotionally-driven auction bidding. In fact, auctions with 3+ bidders are increasingly rare today, and many sellers just want to sell for a fair price and move on.
Look at the below graph – auction clearance rates have changed dramatically in recent months.
Ask any property development consultant in Melbourne…
The best possible time to purchase a property is a few weeks after auction, when the sellers are exposed, nervous, and simply over the open for inspections.
As an experienced residential property developer consultant, I was incredibly frustrated by the boom prices of recent years… I’d attend auctions, only to see purchasers spend 10-20-30% more than what I’d budget based on solid analysis and market knowledge. Inevitably, these buyers would either:
a) not know what on earth they were doing in regards to developing for profit, or
b) were happy to spend above market value in the belief that prices would continue to rise.
In both scenarios, I’d walk away saying to myself ‘he’s going to bloody lose money on that’.
3. Investor demand has decreased dramatically.
This is certainly an issue for developers of apartments and terrace townhouses, as these property types tend to ultimately sell to investors. But, it’s less of an issue for me and my clients, as we primarily target owner-occupiers with quality townhouse / detached house property developments…
First, property investors are very susceptible to changes in market dynamics like falling prices, increased interest rates, or the elimination of interest-only lending options. In a vicious circle, demand from investors tends to dry up at the same time that supply from investor-held properties increases (e.g. when interest-only lending options are hard to come by, fewer investors want to purchase while more investors need to sell due to mortgage stress).
Homeowners, on the other hand, typically buy and sell in the same market – they’re generally happy to sell for less in a tough market as long as they can buy for less in the same market. Demand from owner-occupier buyers tends to be pretty stable in different market conditions.
Second, property investors are very cost conscious, and less likely to pay a premium for quality design, space, and build specifications than are owner-occupiers. When I provide property development advice to clients, I want to under promise and over deliver, and selling to high-income, emotionally-driven home buyers provides much greater upside potential.
Selling houses to downsizers is a safer proposition than selling apartments to investors.
4. The banks are tightening up lending practices for everyone.
This is a nasty issue, and it’s likely to get harder off the back of the Banking Royal Commission. However, I recently met with a Commercial Banker to discuss lending options and changing parameters and walked away with some optimism.
Yes, banks are becoming much more discerning with how they lend money for property ventures, but this will disproportionately impact developers who lack experience, knowledge, and expertise. A comprehensive Project Feasibility conducted by a credible property development consultant is proving increasingly important to lenders.
Basically, Cowboy Developers and uninformed investors are being hit the most by tighter lending criteria. If you’ve got a decent balance sheet, and you work with experienced development advisors, then finance is available.
And, an added benefit to stricter finance is that existing owners of highly leveraged development sites are increasingly willing to on-sell their properties at low prices.
Yes, the market is definitely tougher to navigate today for residential property developers.
But, focus on these 4 things and you’ll be able to capitalise on current conditions:
- Study how house prices have performed in the specific suburbs you’re looking at, and how these trends compare to the rest of the market
- Treat auction campaigns as one long private sale campaign, and negotiate when you have some leverage
- Design your property development with owner-occupiers in mind
- Partner with experienced professionals to gain credibility with the banks
One last thing for property investors: Price growth is likely to be flat over the next few years, so now is the time to think about increasing your equity proactively through property development.