Top tips for successful subdivision in changing market

To coincide with the release of a major report into the state of the subdivision industry in Australia, Australian Property Investor Magazine sought advice from an industry expert on the top six tips for those looking to subdivide.

Subdividing has long been seen as a relatively simple concept, whereby you buy a property, chop it into bits, do some building and sell the components for more than the initial outlay.

This goal remains as relevant as ever but as IBISWorld’s Land Development and Subdivision in Australia Industry Outlook (2020-2025) highlights, COVID-19 has moved the goalposts. 

The land development and subdivision industry's revenue growth is expected to be significantly affected by the pandemic this year, with construction delays stemming from disruptions in the supply chain for building materials and the supply of skilled labour likely constrain the industry's performance.

The report stated: “Construction services are highly labour-intensive and as a result, industry operators may need to change their work practices to ensure compliance with social distancing regulations and the appropriate use of personal protective equipment (PPE). 

“These practices can limit the number of workers on a construction site and delay the construction process. 

“The outbreak of COVID-19 and the resulting economic uncertainty and job insecurity are expected to discourage local and foreign property developers from investing in new building projects over the short term.”

Compounding the situation for subdivision profitability is the flight of people from smaller, crowded properties to the regions, as work-from-home arrangements become more entrenched and accepted and urban subdivisions less in demand.

Opportunity still abounds in the subdivision space but now more than ever, careful planning and skilful execution will separate a worthwhile profit from a loss-making venture.

Trent Fleskens, managing director of subdivision consultancy Strategic Property Group, hosts a weekly radio program on the property sector and shared with Australian Property Investor Magazine his top six tips to achieving subdivision project success.  

1. Understand your zoning – every property in the country has its own density zoning system, which (dependent on block size) determines the how many dwellings into which that original lot can be subdivided. The local council will either have an online mapping system or pdf’s that can be downloaded. Be sure not to assume your property is the same as the one next door, as a small mistake like this can have huge implications on the profitability of the project.
2. Understand local council build requirements – If you are planning to build on subdivided land, you need to ensure you carve the lots into dimensions conducive to functional outcomes. It’s rarely the case that splitting your lots evenly will generate the best outcome, as each lot will have different setback impediments and garage orientations.
3. Understand the costs – The most common mistake first-timers make is underestimating the cash needed to undertake a subdivision. This cost is generally in the tens of thousands of dollars and covers works such as demolition, retaining walls, soil replacement, engineer reports, surveying works, government fees and infrastructure upgrades. Most of this won’t be financed by the bank, so make sure to set aside enough cash to cover these costs – otherwise you’ll be dead in the water!
4. Understand the project length – As easy as subdivision looks from the outside, there are a lot of multi-level government processes to wade through, which take months at a time. These add up to a median subdivision time frame of about 12 months. Development that includes construction can stretch this to 18-24 months. It is important to understand that this commits you to the market for that timeframe, so if the market already seems too heated, be sure you won’t be stuck holding the plates when the market turns.
5. Don’t forget holding and tax costs – Given the length of time a subdivision takes to complete, and the fact you are often demolishing the existing residence, you must include interest costs from the bank. At the end of the development, when you sell, you may also be subject to GST liabilities and capital gains. These should be factored into your profit and loss feasibility.
6. Understand your market – We don’t just subdivide and develop for the sake of it. We do it because we are providing a new housing product for a certain market. Generally, we want that market to be downsizers, as they are less price-sensitive and more interested in making a lifestyle investment decision. Therefore, it is important to ensure that even if the lot is zoned for subdivision, the location is conducive to a downsizer lifestyle with a good walk score to amenities such as shops, public transport, water and schools. 

Tide is turning 

The IBISWorld report offers some tentative hopes of an improvement in outlook subdivision projects nationally. 

Average industry ‘growth’ in the subdivision sector has actually been a decrease of 7.2 per cent over the past five years according to IBISWorld, but the expectation is that 2020-2025 will bring improved subdivision and land development profitability.  

The industry’s revenue performance is forecast to improve due to a projected recovery in residential building construction, as the economy eventually emerges from the current recession.  

The report forecasts that the median value of residential land will rise in response to pent-up demand for new housing and a projected rise in residential housing prices.  

“However, a steady decline in demand for land in the non-residential building markets will likely constrain the pace of industry expansion over the period.  

“The industry's long-term expansion is forecast to continue to be limited by the trend for smaller housing lots, which corresponds with the growing preference for higher density dwellings,” the report concludes. 

The analysis also identified the biggest industry players in the segment, none of which had a market share greater than five per cent. The top six companies were AVID Property Group, DevelopmentWA, Infrastructure NSW, Satterley Property Group, AV Jennings, and Development Victoria.