Subdividing and building on a development block can be profitable but experts warn some areas in Perth are becoming overheated. Source: News Limited
THE Perth market has "gone crazy" for properties with development potential, causing prices to jump more than $250,000 in some areas in just two years, analysts say.
But investment experts warn prices for development blocks in areas such as Belmont and Joondalup have become overheated.
Many investors had been priced out of those areas and the potential returns were now too low to warrant the risk.
While development still remains a profit path of choice for many, like anything, it comes down to the sums.
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The latest development surge was sparked by zoning changes in 2010, which meant big blocks could be developed with multiple dwellings.
Investors Edge Real Estate director Jarrad Mahon Source: News Corp Australia
Investors Edge Real Estate director Jarrad Mahon said it took the market 18 months to realise the blocks' value.
"The zoning changes effectively made it possible to get approval to build seven to eight apartments on what is only an 800sq m duplex block," he said.
"With the extra density possible, it took returns from 15-20 per cent for doing a 'retain and subdivide' to fetching 35-45 per cent for a small group of apartments."
The resulting strong demand meant prices were boosted in areas such as Kalamunda, which had a zoning change around the town centre.
"I have seen development properties priced at $450,000 in 2012 go to $700,000 in today's market," Mr Mahon said.
"I think we all wish that we had bought more of these properties then.
"It is still possible to get 25-28 per cent returns for apartments and 15-20 per cent returns for a 'retain and subdivide' in the outer suburbs located 15-40km from Perth."
Mr Mahon said the Perth market's growing acceptance of higher density living over the past two years had also made it possible to readily sell apartments off the plan.
"This was essential for most investors to be able to get their finance to construct," he said.
Other areas where zoning changes have just been drafted, such as Coolbellup, have yet to be recognised by investors, Mr Mahon said.
The "holy grail" of development properties was 700sq m to 1000sq m in size, zoned at or above R30, near a train station and amenities.
Momentum Wealth managing director Damian Collins said level blocks with the right zoning, where most of the value was in the land, were highly sought.
"Proximity to public transport makes a development more desirable as it may be eligible for parking concessions," Mr Collins said.
"People favour corner sites also as it usually makes development easier."
Hegney Property Group chief executive Gavin Hegney's tip for buyers would to make sure they're buying real value not "hope" value.
"Lots of people bid the price of those sites up in expectation of gain," he said. "Then they need the market to rise to make a profit."
HELEN and Allan Hodgson are first-time developers who owned a 1950s house on a 980sq m block in Tuart Hill.Helen and Allan Hodgson are among a growing band of people developing big blocks in established Perth suburbs. Picture: Theo Fakos Source: News Limited
The couple have rented the home out for the past 10 years while they lived in Sydney, but two years ago decided it was time for a change.
"It was the house that I'd grown up in and that Allan and I had bought from my dad in 1987," Ms Hodgson said.
"But when we thought about moving back to Perth last year we knew we didn't want to live in an old house on a big block.
"We also recognised that we had an opportunity to free up some land and do our bit to help address the housing shortage by taking on our first investment project."
The couple enlisted the help of Dale Alcock Homes to manage the project.
The group helped them subdivide the block into three new parcels – one 360sq m lot and two 310sq m lots.
They also sorted out the planning approvals and the design and construction of three new homes.
"We didn't actually move back to Perth until February so we weren't here while much of the planning and design work was in progress," Ms Hodgson said.
"This meant all the communication was done remotely via email and phone and it worked really well.
"I flew over for the pre-start meeting, the slabs went down just after Christmas and we are on track for completion in a few months' time."
Their new home will be a three-bedroom, two-bathroom on the biggest of the subdivided blocks.
"As this one will be our home we chose a higher specification than we did for the two investment properties, both of which have been geared towards a variety of renters, including young families and downsizers," Ms Hodgson said.
"We also made sure that the three new homes each have different external characteristics and features.
"We didn't want to adopt a cookie-cutter approach and have them all looking the same. Privacy for each was essential. That's why there aren't any shared walls."
Dean O'Rourke, general manager of the Dale Alcock development divisions, said homeowners could usually realise more potential by subdividing and building than they could by subdividing and selling a vacant parcel of land.
"More and more people are looking for a home close to the city because they don't want to spend hours commuting to work, and this is creating great investment opportunities for both seasoned developers and first-timers," Mr O'Rourke said.
Tips for getting it right
WHAT IS A DEVELOPMENT BLOCK?
A block with development potential is a property where you can add more than one dwelling to the site.
Identifying a block starts with zoning and land use classification.
Residential lots are zoned with an R-Code, for example, R30.
You then need to understand what can be developed and how to complete a feasibility analysis.
Usually the house on the site is of limited value.
If the value of improvements is too high compared to the land value, the block may not be suitable for development.
IDENTIFYING BLOCKS
A feasibility study is the ultimate form of measurement for developments.
Complete a planning investigation to see what you are able to develop.
Then work with your plot ratio or density allowance to create the highest and best use for the development.
From there, estimate profits from selling each unit, minus the estimated holding costs, construction costs, consultant fees, the estimated cost of the land and GST.
The remainder is the potential profit.
PROS AND CONS
PROS: YOU are not reliant on market capital growth.
RETURNS often better than other strategies of renovation, building a single house-and-land packaged or buying off the plan.
PROFIT potential increases with size of the development.
POTENTIAL to sell for a profit or create equity. Land customarily increases in capital value quicker, so the more value in the land, the greater the capital growth prospects.
CONS: LOWER rental return and quality of tenant until developed.
REQUIRES good borrowing capacity and $200,000-$300,000 equity to fund a 6-8 apartment group, or around $150,000 to fund a "retain and subdivide".
WILL likely have to do a renovation if you are retaining the house.
RISK increases with size of the development.
CAN be a challenge to find profitable properties.
THE COSTS
Apart from the site purchase costs, common costs are broken into three key areas.
Construction costs: Include head works, site works, power connection, landscaping and construction of the dwellings.
Consultant fees: Include design, statutory fees and charges, strata unit entitlements, soil testing, surveyor fees, strata body set-up, planning and development project management fees.
Other costs: Selling fees, conveyancing, council contributions (can be expensive), rates and taxes.
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