Where and how property investors can maximise subdivision profits

Subdividing land for infill developments in suburbia is lauded as one solution to alleviating affordable housing undersupply and also presents an opportunity for investors.

Though not without barriers, typically due to government regulations, infill sites do offer positives, such as having water, electricity and internet, already connected.

Property investor benefits

“Many people have trepidation about building and investing in today’s market, with interest rates and inflation figures rising, but we know inflation is going to be high, so as long as interest rates are lower than the inflation rate, you’re still going to be in front,” Summit Development’s Senior Development Consultant, Ewan McConnell, said.

Summit Development Consultants Ewan McConnell, Adrian Johnson and Quentin Lau.

“The bigger picture is that Perth is still undervalued and other markets are starting to muscle in, which is why we strongly encourage our clients to consider a subdividable build-to-rent strategy, as you have the benefits of tax deductions, depreciation, compounding capital growth and rental income that could be paying off your repayments,” Mr McConnell said.

“Given these factors, it’s easy to see why Perth’s property market has been drawing the attention of astute property investors.

“Property is not a speculated, short-term investment, it’s a long-term, stable growth strategy and investors have the potential to maximise their potential and make the most of historically low vacancy rates.”

Perth’s premier rezoned target suburbs

Quentin Lau, Senior Development Consultant, Summit Developments, said investors in Perth infill areas should consider proximity to Perth’s CBD and infrastructure or proposed activity centres such as universities, hospitals, shopping centres and public transport.

“Generally, blue-chip suburbs are going to give you the best return on investment,” Mr Lau said.

A Perth duplex called Kardinya is 747m² with two single storey, 4x2 homes with theatre rooms. After purchasing the development site the client sought to achieve two street front homes to the 18.5m wide duplex site.

“Areas that have undergone rezoning or where there are proposed upgrading plans, such as shopping centre redevelopment sites, include Booragoon, Kardinya, Kensington, Wilson, Padbury, Craigie and Karrinyup.

“Areas such as Cannington, Beckenham, Gosnells, Kelmscott, Maddington and Armadale tend to have higher development costs in relation to site soil conditions and drainage requirements and, therefore, are not always favourable for developers.”

Melbourne’s top tip subdivision suburbs

Well before the fluid property climate of the 2020s, the Office of the Victorian Government Architect (OVGA) and Monash Architecture Studio (MAS) released in 2011, the Infill Opportunities report, based on research by MAS, Swinburne University and RMIT University for the Australian Housing and Urban Research Institute (AHURI).

Key findings included strategic locations for infill redevelopments in Melbourne’s middle suburbs being identified as within a seven to 25 kilometre radius of the CBD, being suburbs developed between 1950-1970s, having close proximity to public transport and being outside areas with heritage overlays.

The study focused on Essendon, Preston, Burwood East, West Footscray and Doncaster.

“Selection of lots by their width and depth, as opposed to lot area, is a more effective method of determining suitable development sites.

Common lot sizes in the middle suburbs range from 15-16m in width and 38-43m in depth,” the report suggests.

Long-term subdivision benefits

“Adding value via subdivision is, over the long term, a powerful and relatively safe option worth considering,” Steve Janes, an aussieproperty.com licensed real estate agent, said.

“I’m a huge advocate for engineering one residential home into two or three properties,” he said.

“Of course, subdivision isn’t without its challenges and the process can be complex, expensive, and time consuming, however, the accelerated uplift in capital value will over the medium term increasingly eliminate risk.

“This is despite what you initially pay for the property, within reason of course.

Steve Janes, Licensed Real Estate Agent, aussieproperty.com

“Also known as land banking, the strategy leans on maximising future profit by securing today’s land price.

From the purchase date (day the purchase contract is signed) the end development value shall appreciate at a greater dollar value than a single dwelling (without development prospect) of the same value,” Mr Janes said.

“Indeed, conditional on project delivery, the compounding effect is significant and is the main vehicle for above average performance.” 

Over time, uplift in land value can contribute toward construction funding and development completion, activating the tax efficiency of a brand-new investment property.

“In the long term, you can benefit from a diversified portfolio with two or more properties while having only paid one stamp duty.

“Subdivision can be a good property strategy for those looking to create value in a property, maximize its potential use, or invest in real estate,” he said.

Subdivision and housing affordability

Urban Development Institute of Australia National (UDIA) President Max Shifman says it is the right time for bold initiatives that bring all property providers together and bolster land supply to resolve the affordable and social housing shortages.

He acknowledges the Federal Government’s new National Housing Supply and Affordability Council Bill (HAFF) as a ‘golden opportunity’ for government, community housing and private providers to pull together to resolve these shortages.

“We now face the stark reality that Australia needs 45,000 new affordable and social housing each year just to keep pace, yet we are only managing around 8,500 dwellings through government and Community Housing Providers,” Mr Shifman said.

“The decades long decline in new housing supply is a result of a lack of development-ready land due to a lack of enabling infrastructure, increasing cost imposts and inefficient planning processes.

“In addition, up to 60 per cent of zoned housing land is prevented from being built on because of straightforward issues.

“The result is that it can take six years or more to finish building a new house because of planning and approvals,” he said.

Barriers to successfully subdividing

The Victorian Infill Opportunities research demonstrates a range of design strategies for improving the density, quality and performance of small-scale infill housing and identifies the existing planning controls and industry trends incongruous with achieving better redevelopment outcomes.

Current barriers include regulated building setbacks that limit the potential and restrict optimum use of typical suburban sites, plus a growing demand for ensuites to all bedrooms and an expectation of double garages integrated with a dwelling structure are challenge for well designed, smaller infill housing proposals.

A new barrier for Victorians is the recent state government announcement that it would not allow landowners and developers to claim deductions for the costs of rezoning land under its incoming Windfall Gains Tax.

Developers and landowners in Victoria will be subject to the new tax at the rate of 50 per cent of any value gain of more than $100,000 that occurs when land is rezoned, from 1 July.

Craig Whatman, Executive Director Tax Advisory Group, Pitcher Partners.

Craig Whatman, Executive Director Tax Advisory Group, Pitcher Partners, said not allowing developers to claim deductions for pre-rezoning costs would increase the price of house and land packages and act as a deterrent to development activity.

“It had been hoped that the Treasurer would use the power prescribed by the Windfall Gains Tax legislation to allow for deductions to cover a range of costs ordinarily incurred by landowners and developers in the lead up to a rezoning decision,” Mr Whatman said.

“Many of these costs are incurred as a result of requirements imposed by local and state

governments as well as other regulatory bodies and cannot be avoided.

“In our experience, increases in land value are not solely attributable to a rezoning decision nor are decisions to rezone likely to be made without the landowner and/or developer’s significant investment in the process,” he said.

“The government’s decision to ignore the costs incurred in the pre-zoning phase will result in an effective tax rate that is higher than the 50 per cent prescribed in the legislation and could ultimately discourage private investment in the rezoning process.”

Subdividing can be profitable with research

Perth house prices continue to rise and Summit’s Senior Development Consultant, Adrian Johnson, says there’s no better time than now to look into subdivision strategy in that city.

“After three years of record growth, Perth remains the most affordable capital city in Australia to buy property in and on top of that, the state continues to face a housing and rental crisis, with Perth’s vacancy rate dipping to a historically low 0.4 percent.”

aussieproperty.com’s Mr Janes concludes it’s important to carefully consider the potential benefits and challenges before embarking on a subdivision project.

“Work with experienced professionals who can guide you through the process.

“With the right approach, subdivision can be a powerful tool for outperforming market growth and without the need of hoping for a significant market correction that may or may not arrive.”