Feedback needed for interstate townhouse development project

[Harris]

Hi,
I am in the process of acquiring a block of land couple of streets from the beach in S E Queensland in one of the fastest growing QLD areas' with the aim to build 10 townhouses.

All the similar sized blocks (in the street and surrounds) either have finished townhouses or in the process of being built with average selling time of less than 30 days.

I live and work in Melbourne and keen to find out if anyone else has managed an interstate building project with relative success of such magnitude, especially if it happens to be one of their first..!

I have 2 options currently - either to sit on the land for a couple of years and watch the market closely or engage a builder for a turn key development, however the numbers so far for a turn key development return a relatively low (around 14%) return on the project.

The local market, trends, local sales activity, RP data predictions, major infrastructure projects in pipeline and growth in population point to a very buoyant market in the years to come.

My goal is to sell 5 and keep 5 townhouses for a long term hold.

I would be putting link & details for the block of land and surrounding developments, once I go unconditional on the purchase.

In the meantime I would be very appreciative of any feedback from the forumites who have either successfully developed interstate or reasons if they started researching with that goal but did not end up building.

Regards

Harris

 

[MichaelW]

Harris,

Sounds ambitious! But I'm a bit chicken so am starting my development experience off with a local 3 unit development (1 townhouse, 2 units). I would love to do it remotely in the future but think there's so much to learn that you're better off doing something local if you can for your first one.

Why add the complexity of a remote development into the mix, and particularly if its such a big project?

My personal advice would be to either land bank that site until you get some local experience, or to let it go and just do something local first. I know its cliche'd but the deal of a lifetime comes along every day. Get some runs on the board with a local one in Melbourne, then consider inter-state stuff when you've got all the basics in place and know how to manage a development from go to whoa.

Just my opinion of course.

Cheers,
Michael.

 

[Sailesh Channan]

Hi Harry
Good luck with your purchase. I have been looking at various townhouse developments in the SE Qld area for the last 6 years. The majority of sites have shown returns similar to what you are getting. Therefore, we have overlooked all of them as we prefer returns over 20%. This is because the potential for things going wrong is higher in a development of this size. Therefore, if you are working with smaller margins then the risk of loss is greater.

Sometime ago, I formed the opinion that the only ones to make money from town house/ unit developments are land bankers and builders.

On the other hand if you where to speculate on growth then now is a great time as the market seems to have bottomed and is showing good signs of recovery with shortages of listings with agents and buyers scrambling.

 

[JFisher]

That's funny, we builders always joke about how much money the developers make from subdivisions....we sure don't get even half of those margins when building...we'd have no work if we did.

 

[Harris]

Thanks Sailesh for your feedback.

Over the last 2 weeks, I have been talking to multiple builders, real estate agents, valuers, project managers, town planners etc and the more reserach I have done, the more concerned I am becoming re the overall viability of the project.

I am not overly fussed about the potential returns of 14%, since I will try keeping as many townhouses for myself at the end for long term hold as I can. It is actually the margin of variance in the multiple initial quotes I have been getting from the builders and almost contradictory feedback from different valuers re the stage of property cycle the region is in currently..

Having supplied a plethora of info to builders on the size, build quality, fixtures, fittings, land scaping, potential design etc , the figures I have received back range from $1200sqm to $1480sqm for a turn key project, which means a range of return of 6% to 21%..!

My aim is to maximise the CG by holding the finished product or alternatively land bank at a cost of about $40k per year - however if the market does not show decent movement in the short term (if I decide to land bank), then it affects my borrowing ability to maximise CG in alternative areas close to home.

btw the area is Hervey Bay, if anyone has specific feedback on the area..?

Thanks
Harris

 

[rossv]

Hi harris,

please don't go there... those returns are not acceptable and from afar could easily go negative.

You should also note that CG should never form part of a feasibility for a development.

good luck.

rossv

 

[Harris]

Thanks Ross.
I was not relying on leveraging building time for CG to make the development profitable for me. If the numbers did not stack up as far as current project viability is concerned then I would have land banked and sat on it for a few years.

Having said that there are probably too many variables that appear to be fluctuating and outside my control hence I am leaning towards pulling out and perhaps develop something closer to home first.

thx again
Harris

 

[Sailesh Channan]

That's funny, we builders always joke about how much money the developers make from subdivisions....we sure don't get even half of those margins when building...we'd have no work if we did.

To clarify my point further about builders and town house developments. If for instance a development shows a return of 14% to a developer after normal construction cost...a builder will be able show a higher overall margin as they are able to do the development at cost. Therefore, if he operated at a profit margin of 15% then the overall development profit to him is 29%.

Most builders I have come across in the Brisbane area will work on a profit margin of 15% or greater.

I am not sure of your particular circumstances as to why you operate on lower profits than usual. One of the reasons may be to keep housing affordable in your region as higher material costs and potentially labour costs due to your location may be pushing prices too high. So, one way of keeping a viable construction industry going is to lower profit margins.

 

[XBenX]

Hi Harris,

Not enough fat in it IMHO.

For your feasbility are you using Devfeas or similar?

XBenX

 

[Harris]

I have notified the agent and vendor's solicitors re my inability to purchase the block, just before the cooling off period expiry at 5pm today..!

At the end, the catalyst was the distance (and risks with remote management) not the low yield.

For those interested, following was the block:

http://www.realestate.com.au/cgi-bin/rsearch?fslm=1&a=o&id=103698238&t=res

Thanks to all of those who provided the valuable feedback.

I have bought residential prop in Hervey Bay on good rental yield so if the area picks up at over 16% p.a growth for the next 5 years (as predicted by RP Data), I would atleast get some gains from the market.

In the meantime melb market seems to be pointing in a recovery phase, so I would keep my focus at home.

Cheers
Harris

 

[Harris]

I have notified the agent and vendor's solicitors re my inability to purchase the block, just before the cooling off period expiry at 5pm today..!

At the end, the catalyst was the distance & too varied build cost range (and risks with remote management) not the low yield.

For those interested, following was the block:

http://www.realestate.com.au/cgi-bin/rsearch?fslm=1&a=o&id=103698238&t=res

Thanks to all of those who provided the valuable feedback.

I have bought residential prop in Hervey Bay on good rental yield so if the area picks up at over 16% p.a growth for the next 5 years (as predicted by RP Data), I would atleast get some gains from the market.

In the meantime melb market seems to be pointing in a recovery phase, so I would keep my focus at home.

Cheers
Harris

 

[JFisher]

To clarify my point further about builders and town house developments. If for instance a development shows a return of 14% to a developer after normal construction cost...a builder will be able show a higher overall margin as they are able to do the development at cost. Therefore, if he operated at a profit margin of 15% then the overall development profit to him is 29%.

Most builders I have come across in the Brisbane area will work on a profit margin of 15% or greater.

I am not sure of your particular circumstances as to why you operate on lower profits than usual. One of the reasons may be to keep housing affordable in your region as higher material costs and potentially labour costs due to your location may be pushing prices too high. So, one way of keeping a viable construction industry going is to lower profit margins.

Don't tell my husband Sailesh, he has been wanting to move to Qld for a couple of years. Not one builder I know works for margins with two digits, most in this area work on half of what you are quoting. The majority of large builders in this area started off as developers and now develop and complete the whole project. That to me is where the money is. The couple of builders I know in Melb do not put business margins on anywhere near that either so I would imagine that it is a supply and demand thing in Qld. Half their luck I am jealous.

 

[Norwester]

Julie,

Are you serious about the margin that you work on? When I was an electrical contractor I worked for about 15 - 20 different residential builders all over Melbourne and none of them would touch anything under 12%.

Now that was about ten years ago.......so has it gotten tougher in the game in your location or has it been a case of long term devaluation of labour input and absorption of material increases?

ciao

Nor