Mona Vale Townhouse Development - Update

[MichaelW]

Hi guys,

In the other thread about whether people are still buying IPs, I posted that I'm putting the breaks on the build of my Mona Vale development until I have more certainty around the direction of the Sydney property market as linked below:

http://www.somersoft.com/forums/showpost.php?p=376469&postcount=10

To which asdf posed the following question:

Have you tendered the job for quotes? Interested to find out what they are coming in at. Speaking to a builder who was building a nice resi (with a lift in a 2 storey resi!) for one of his clients and its coming in at around $2500 /m2. He told me don't start anything without pricing in a minimum $1500-$1700/m2. Ouch!!

I thought I'd answer in this thread to keep the other one on topic...

Here's what an REA who works in this space gave me the other day:

Costs:
GST 170,000
Agency Fees/Marketing 60,000
Council 50,000
Holding Costs 100,000
TOTAL 380,000

Construction Costs
x 430 sqm @ 2,300 989,000
@ 2,500 1,075,000
@ 2,700 1,161,000

Lets assume 2,500 per sqm

TOTAL COSTS - $1,075,000 PLUS $380,000 = $1,455,000

ADD CONTINGENCY - $45,000 = $1,500,000

So, it seems he's in line with your builder too at $1,500/m2. That adds $1.5M on top of my $750K site and makes my total cost $2.25M with a Gross Realisation projection of $2.625M which makes for a very tight margin in today's market. Might need to let the market do some work for me for a while and just sit on my DA. Mind you, if I intend to hold then a lot of that $380K goes, probably just back to $100K odd and releases another $280K margin. All up, that puts my margin at around $650K which is still nice enough. Would just like some certainty around that as a minimum before I commit to the build.

To me, this is another important lesson in being a successful business-person. Knowing the risks and working to mitigate them. There is definately a perceived risk of property downside in this high interest rate environment and with the whole sub-prime issue still playing out. The US is in recession and Australia may yet follow it. I lose very little by waiting for six months to see what happens to the Australian economy, and that is a very cheap risk mitigation strategy IMHO in the current economic environment. To those following this development closely, rest assured that I will keep the updates coming, but that the timeline is not something I intend to rush and risk the big prize I've got sitting at the end of this rainbow.

Cheers,
Michael.

 

[WillG]

To me, this is another important lesson in being a successful business-person. Knowing the risks and working to mitigate them.

Your contingency of $45k is only 3% of your construction & other costs. Is this a bit low ? Have you factored in interest rate rises on the holding costs ?

How will you know when the right time will be to begin construction ? What indicators will you be looking for ?

 

[MichaelW]

How will you know when the right time will be to begin construction ? What indicators will you be looking for ?

The two main things I am looking for are:

1. Stability in global credit markets; and
2. Strength in the Mona Vale unit market.

The second is dependent to some degree on the first. So, basically, I'm just waiting for the implications of the sub-prime market contagion to play out and see where that leaves credit markets and my Mona Vale property market. I am quietly optimistic on both fronts, but six months should make things a lot clearer.

And to your first point, I also think there is some contingency built into the $2,500/m2 cost assumption which will flush out when I actually take it to tender. These are still somewhat rubbery numbers until tendered and contracted. Then I will need to consider just how much contingency is appropriate and whether that leaves sufficient margin to proceed.

Cheers,
Michael.

 

[lizzie]

what will be your additional holding costs if you end up holding for another 6 months? how much will that eat into your projected profits?

i'm marching on with our development because we're going to keep the lot for rentals - and rents are only going up around here - but to sell? the market is pretty dead in everything that "over $350k" range. up to around 6 months ago the top range ($1mil+) was still powering along, but even that has died in the last six months ....

 

[MichaelW]

what will be your additional holding costs if you end up holding for another 6 months? how much will that eat into your projected profits?

OK, here it is for a six month delay:

Holding costs of $5K
Increased cost to develop assuming 3% inflation is $16,500
Total increased costs of $21,500

But, assuming the property market does grow at 10% pa for this sort of property as it did last year in Mona Vale...

Increased gross realisation of $131,250 (Current GR is $2.625M)

So, the net impact of delaying is an improved margin of about $110K. Time is on my side on this one, and given current credit market uncertainty, I think a little delay might be warranted.

Cheers,
Michael.

 

[Land]

Finally Got Our Site!

G'day Michael,

I haven't been posting for a while because we've been busy picking up our own development site. Exchanged last week on a dual occ site in Panania, got it from the Dept of Housing for about $30,000 under current market (gotta love RP Data), so very happy indeed.

Anyway, it's fantastic to be finally in the game (our one existing IP in the Blue Mountains has gone no-where yet for 3 years), and we are full steam ahead with it. Got the survey done today, meeting the architect (a mate from the industry) tonight, already written the Statement of Environmental Effects. Got the stormwater engineer lined up as well as the builder.

We're gonna get straight into it primarily because the existing 2 bed fibro house really wouldn't rent for much, and the rents are absolutely going off, so our holding costs at completion should be in the order of about $100 a week after tax/depreciation etc.

I would have thought that rents would have been your main consideration given that you're not intending to sell? Same as what Lizzie mentioned. If the market is rising out there, wouldn't it make more sense to get straight into the development so that you can realise the CG and access it for your next investment?

I know you've probably been stung pretty badly with the old Navra fund - I hope that hasn't deterred you? Incidentally - how was the last distribution on that (I remember you talking about an 18% distribution not long ago) and did it cover your borrowing costs? (PS. If these questions are too personal, my apologies, don't mean to be rude).

Cheers

Aaron

 

[Plan_Trader]

Michael,

What rental yield could you achieve if you built now? Just interested.

Thanks

 

[MichaelW]

What rental yield could you achieve if you built now?

Hi,

My yield would improve from:

4.2% ($31K on $750K) undeveloped to
6.5% ($130K on $2M) developed

But, given the greater level of debt, the cash shortfall on rent versus mortgage at 8.0% would be much the same. i.e. Shortfall of $29K today versus shortfall of $31K developed. There might be some upside in those rental projections, but today's market is $830pw each. These are touted as rising 10% this year so all upside whether developed or not. But, if developed, a 10% lift in rents has a much bigger impact on yield than if not developed.

My yields with a 10% lift in rents in each scenario would be:

4.6% undeveloped ($34K on $750K) versus
7.1% developed ($142K on $2M)

And the shortfall then varies significantly too from:

$26K undeveloped to
$17K developed.

A lot of variables and a lot to consider. Hence why a little patience for yields to improve and gross realisations to improve before I borrow another $1.2M odd and develop it. I could go now on the assumption that those two things are going to occur, but I'd like to see some assurance first. Waiting isn't too big an expense in the scheme of things.

Cheers,
Michael.

 

[pieman]

looks like you're doing the right thing Michael give the current economic uncertainties and you've certainly done your fair amount of due diligence.
pieman

 

[Plan_Trader]

Michael,

Thanks for the info - yes, waiting a while would be the best 'risk adjusted' decision.

 

[asdf]

Wow! Thats exxy to build. So each unit is only 140m2 odd internal. Plus a double garage I imagine of about 35m2? Which will take each site up to about 180m2?

I think waiting is the right approach at this point in time and see they fall out of sub-prime. Theres still a lot of cobwebs that needs to be dusted in 08. Most experts predict Oz to be fairly resilient in 08 cos China in the near term is still firing at a cracking pace but as for medium term predictions, no analyst can confidently say we're going to come out of this unscathe.

 

[MichaelW]

Hi guys,

One other consideration, though minor, is the likelihood that the state government will step in and reduce section 94 contributions by about 40% and take the proceeds off local council. This has been touted in the local media for a little while now and the councils are understandably up in arms at the loss of revenue. They tend not to spend it on local infrastructure as it is intended, but pocket it instead and use it to fight developers in the LEC...

But if this does happen, then the 40% reduction in s. 94's would be another $15K off my build cost. These are paid at the prevailing rate when the Construction Certificate is signed off as I understand it. The rates stated in my DA are not binding.

Cheers,
Michael.

 

[FinFreedom]

Michael - You'll also get a higher premium come sale time by holding off rather than building and renting. 'Brand new' will sell better than '1-2 years old'. Sit tight until you're comfortable to give the green light.

Fin.

 

[Peter 14.7]

Not bad advice Fin.

I guess MW would need a cost benefit analysis, and this is not straight forward as there are many variables and risk such as:

• Build Now and Rent
• Build Now and Sell
• Waitand Sell with DA
• Wait, Build Later and Sell
• Wait, Build Later and Rent

Got to consider:

• GST
• Cap Gains Tas
• Equity gained for future investments
• Removal of Risk
• Servicing Compnent
• Increase in Building Costs

Etc...

I reckon do that to give yourself a % mark on all options . You may find Build and Rent and Hold as Long Term Investment better as rents will rise to cover the holding costs. And there are GST benefits of 10% on a five year CG invesment.

If you have to sell your PPOR to fund it, well that a personal call, but I would consider the overall equity positon. If your equity goes up from 25% to 40% and it grows faster as the larger base grows, then it may be the Winner.

My 2c, Peter

 

[7DD4]

great read
wonder whats happened over the past year ??

 

[Perp]

The update's here, welshman.