Decade of Growth Ahead for WA
The Western Australian economy has been given a massive vote of confidence in a recent report from Deloitte Access Economics.
The state is expected to remain the fastest growing economy in the country over the next decade and the positive long term outlook hasn’t been dampened by the Governments’ credit rating downgrade.
Astonishingly, there is a quarter of a trillion dollars being invested in the state, primarily on major gas projects that more than half of which are currently underway or committed.
As mining construction subsides, housing construction is expected to step up driven by strong population growth.
“In terms of population growth rates, the west has long been a national leader, but now the state is growing so rapidly it is seeing absolute population growth levels running close to those in the three eastern states,” Deloitte said.
“Construction sector employment – even beyond the heavy engineering sector – remains a strong growth area, suggesting there is capacity to expand the state’s housing stock to meet current demands.
“So despite the doom and gloom in some quarters, our analysis indicates the medium term outlook for Western Australia is broadly positive.”
The Changes That Could Make or Break the Fortunes of Property Developers
The market is throwing up some magnificent opportunities thanks to a number of important changes. But it’s not all good news. Some of these changes could significantly devalue existing development sites and impact on the fortunes of developers.
If you like the idea of substantially increasing your wealth in a relatively short space of time, property development could be a viable option. Depending on your goals and how well the process is managed, a development project can increase your equity, boost rental returns or make you a very healthy profit.
Changes to R-Codes
Earlier this year, the West Australian Planning Commission (WAPC) released a new edition of the Residential Design Codes, otherwise known as the R-Codes. The R-Codes essentially provide a framework for controlling development and population density in residential areas and are therefore of critical concern to property developers.
The new codes outline a series of changes that property developers should know about. One of these, which we have spoken about previously, is the fact that granny flats (ancillary dwellings) can now be occupied by a non-family member, opening the door to new income streams.
However, perhaps the most significant changes relate to the reduction in the average and minimum lot sizes that are permitted under some of the R-Codes. For instance, under the new R20 code the average lot size has been lowered from 500sqm to 450sqm, and under the R60 code it has been lowered from 180sqm to 150sqm.
Minimum lot sizes have also changed. Lots with a minimum site area of 350sqm are now permissible under the R20 code, 300sqm under the R25 code and 260sqm under the R30 code. Bear in mind that although minimum lot sizes have been lowered for many of the codes, lots must still comply with average size regulations. So unless the average lot size requirement has also changed (as with R20 and R60), the reduction in minimum size simply allows for greater flexibility in lot design rather than necessarily increasing densities.
Let’s take a look at a simplistic example to demonstrate how changes to the R-Codes could create opportunities for developers. Under the new R20 zoning, given that the average lot area has been lowered to 450sqm, it means the minimum lot area for subdivision is 900sqm (2 x 450sqm). Previously, you would need at least 1000sqm to subdivide. Under the current rules, a 5 per cent variation may also be allowed, meaning it could be possible to subdivide a lot as small as 855sqm.
But it gets even better because of the reduction in the minimum lot area. Let’s say a landowner wanted to subdivide their 900sqm lot while keeping the existing house. This could have been quite difficult under the old rules unless the house was positioned just right on the lot to allow enough clear land for the second lot.
With the minimum lot area now decreased to 350sqm, the land could potentially be subdivided into a 350sqm lot and a 550sqm lot (average remains 450sqm), allowing for greater flexibility to keep the existing house and potentially make for a more profitable development.
The changes to the R-Codes provide a great opportunity for savvy investors. Those who understand the codes (or employ someone who does) may be able to find a property with a land area large enough to be subdivided but whose price doesn’t factor in the property’s true development potential. Given the right circumstances, an investor could make a nice profit instantly.
Changes to local housing strategies
When a local council introduces a new local housing strategy, the changes have enormous potential to benefit property developers, especially those who are ahead of the knowledge curve. The overriding purpose of these strategies is to increase housing density through rezoning. More specifically, they generally aim to increase density around certain activity centres, transport nodes and corridors in order to provide an opportunity for increased diversity of housing.
There are a number of these new strategies at various stages of progress throughout Perth’s 32 local councils. Some are currently out for public comment or awaiting approval by WAPC. If and when these new strategies are eventually implemented, properties in the designated zones will have their zoning increased (to a higher R number), which means some will instantly gain subdivision potential or greater potential than they had.
Remember that having the right zoning doesn’t automatically ensure that a property has development potential as there are many requirements that need to be met to obtain development approval.
Keeping abreast of what is proposed under these draft policies and tracking their progress can produce enormous opportunities. It does however require considerable time and effort, not to mention a clear understanding of planning regulations. Momentum Wealth employs a team of specialists to research and track these changes in order to identify opportunities for our clients.
Before you rush out and buy a property because it is located in an area marked for rezoning, keep in mind that it can take many years (even a decade) for the policies to be introduced. Also, there can often be numerous changes to the policies before they are finally implemented.
A major worry for developers
You may recall that Directions 2031 and Beyond, the framework for managing the growth of the Perth metropolitan area, sensibly calls for 47 per cent of new housing to come from infill development.
Despite this fact, however, some of the councils in Perth, including the City of Stirling, are taking a backward step. They are trying to introduce amendments to local planning laws that effectively ban multiple dwellings being built in areas already zoned for development at less than R60. This move, if it gets approved, will remove or substantially limit the development potential of some lots.
What could happen if these changes go ahead? It spells disaster for some property owners. Here’s an example. If the City of Stirling gets what it wants, multi-residential sites within the City that currently allow up to 6 apartments or 3 units to be built could be downgraded to have only duplex potential. This equals a significant financial loss for people with those sites. The value of these sites will drop instantly if this down-coding takes place, which could severely impact the financial plans and retirement nest egg of owners.
Worse still, even before these proposed changes are implemented (while they are out for public comment), the council can take them into account when assessing new development applications. This is likely to result in the rejection of previously sound development applications.
I don’t agree with the council’s move and strongly encourage anyone who thinks they may be affected to speak to our Planning and Development team to get advice and see what can be done. One option, for instance, may be to lodge a development application right away, which would provide up to 2 years to develop even if the zoning changes take place.
Clearly, knowledge is a powerful weapon when it comes to property development, especially in regard to the changes that are taking place in our city. If you can identify opportunities (or threats) before others, you may be in a position to profit handsomely.
However, identifying the opportunities and turning them into reality are two very different things. Property development is a significant undertaking requiring both broad-based and specialist skills. It comes with significant challenges and often involves large sums of money, which is why it’s almost always best to get expert help along the way to ensure a successful outcome.
Property Acquisition: The Location Within the Location
Choosing the right suburb is critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb.
When looking for an investment property in Perth that will achieve strong capital growth, it makes sense to spend considerable time researching the suburbs that will outperform the wider market. But this is only a part of the process.
Choosing the right suburb or macro-location is of course critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb. This is the location within the location, or the micro-location.
Statistics show that not all properties in a suburb perform at the same rate when it comes to capital growth and the differences can be quite significant. Commonly, some pockets of a suburb or certain streets will always perform better than others. Even one side of the street may prove to be a better investment than the opposite side.
But why is this so? What are the features that cause a part of a suburb to be a strong or weak performer? Firstly, let’s look at the negative features that may cause a micro-location to underperform.
Some parts of a suburb will always be closer to a main road than others and the resulting noise and traffic problems can easily drag down values. Similarly, some parts may have closer proximity to undesirable landmarks, such as industrial complexes, petrol stations, cemeteries, or certain types of shops or venues. The existence of hi-rise apartments and concentrations of state housing can also adversely affect certain parts of a suburb.
You might argue that a property’s poor location (within a suburb) is factored into its value and doesn’t necessarily cause it to underperform in terms of capital growth. While there is some truth to this argument, in many cases the negative features of a micro-location consistently dampen buyer demand making growth far more difficult to achieve. And these negatives are often permanent issues that can even worsen over time, such as with noise and traffic levels.
While these negatives can adversely affect the demand for housing, they can also offer opportunities if you believe the negatives will diminish in the future. For instance, you might notice that a shabby part of the suburb is being improved through public and private investment. Or maybe an ugly commercial area or old school is being knocked down and transformed into an attractive residential estate. In some cases, the uglier parts of a suburb may actually end up outperforming the rest of the suburb because of this gentrification.
What are some of the features that can make one part of a suburb more appealing than others? Clearly, the parts that are closer to the city, coast or river will typically attract more attention from buyers. Many suburbs also have an ‘expensive’ side, which might border a more prestigious suburb. Views, attractive streets, low levels of traffic, and good access to amenities can also raise the desirability of a micro-location, as is being within the zoning for a sought-after school.
Remember, the better parts of a suburb won’t necessarily achieve higher rates of growth than the cheaper parts. It depends on whether the demand for properties in these parts will increase at a greater rate relative to the supply. Determining this requires careful analysis and can involve looking at demographic changes, local area planning and the potential for future supply.
Even once you’ve identified the areas within a suburb that have the best potential for capital growth, individual property differences can also play an important role. But this is for another discussion.
Finance: Why Every Borrower Needs to Know About “Comprehensive” Credit Reporting
Australia’s credit reporting system is in for a major shakeup and it has the potential to affect your ability to get a loan. The change involves the introduction of “comprehensive” credit reporting and it will be here in March 2014.
The new regulations will give lenders far more information about your credit history, allowing them to more closely scrutinise your credit worthiness and calculate the risk of you defaulting on a loan.
What sort of information will be available to lenders? They will be able to view the last 24 months of your credit repayment history on all open credit accounts in your name. This could include your mortgage payments and credit cards.
Lenders will also be able to see all of your past and current credit accounts and enquiries, meaning they will know how many credit accounts you have and when each account was opened and closed. This information will clearly be useful when determining your ability to take on additional debt.
How do the new regulations compare to the current arrangement? At the moment, lenders can only access a limited amount of information about your credit history, such as your recent credit applications, any major credit infringements or whether you wrote any cheques for $100 or more that have been dishonoured twice.
Lenders currently can’t find out whether your previous applications were approved or declined or whether you actually pay your loans on time, just that the applications were submitted.
An inevitable outcome of lenders having more information about credit applicants is that it may become harder for some people to obtain a loan. If you have black spots in your credit history, it’s going to be nearly impossible to hide them.
But are there any potential benefits to borrowers? Theoretically, yes. Firstly, if the new regulations allow lenders to better assess risk and minimise defaults, it could drive down the overall cost of credit. Secondly, lenders may start to offer discounts and incentives to borrowers with good credit histories.
All this extra information will give lenders a more comprehensive picture of people’s overall financial position, which could perhaps lead to the development of more tailored products.
Only time will tell how the new regulations will impact the marketplace. But clearly everyone needs to be more conscientious about keeping a clean credit history. It’s never been more important to make sure you pay your bills on time because a bit of carelessness could easily end up affecting your ability to get a loan in the future.
Also, it makes sense to regularly check your credit report, so you can resolve any issue before they become a serious problem.
Property Management: Is Property Management a Team Sport?
Property management companies differ in the way they structure their human resources and this can affect the experience of owners and tenants.
For most property investors, the decision of whether or not to appoint a property manager is a relatively easy one. If you want to protect your valuable property asset and don’t have the time and expertise to do it properly, then it makes sense to rely on a professional.
Property managers perform a wide variety of vital tasks, from finding and screening tenants to conducting inspections and organising maintenance. Plus, all of this must be done within strict legal guidelines, which is why the majority of investors appoint a property management company.
The decision of which property management company to appoint, however, is a more difficult one. While on the surface many companies appear quite similar, dig a little deeper and the differences soon become apparent.
One of the differences, which is rarely spoken about, relates to the amount of human resources available to the company. While some property management companies operate a team, with multiple property managers and assistants, others prefer the one-man-band model.
What are the advantages of a team? Firstly, a team can better accommodate temporary absences, such as when a property manager is unwell or attending court. There’s nothing more frustrating for tenants and owners than not being able to get in contact with someone who has the right information at hand.
Similarly, a team is better positioned to manage staff turnover, which unfortunately can be a frequent reality in the property management industry due to the high stress levels involved. If a company relies too heavily on one staff member, you can image the massive upheaval when that person leaves.
Another significant advantage of having your property managed by a team is the opportunity for greater specialisation of tasks. Different individuals can focus on different tasks, honing their skills and increasing efficiency. For instance, some teams include a dedicated trust accountant or new business consultant.
Although there are differences in the way that property management teams are structured, commonly each property manager is allocated a particular portfolio of properties. This means that property owners have a dedicated property manager, just as with a one-man-band operation. The difference is that property managers within a team will have access to far greater resources and better processes.
The “does it all” property manager is often extremely busy trying to perform a catalogue of different tasks. While these individuals can be highly skilled and excellent at their job, the limitations of time and space eventually get the better of them and slow turnaround times result.
Everyone likes a personal touch, but a one-man-band will inevitably struggle to keep “in touch” as much as many owners and tenants would like.
Property Development: Should you Sell or Hold Your Development?
For many property investors, the appeal of property development is the promise of creating enormous capital gain in a short space of time. Most people assume that to make money out of property development you need to sell the properties you develop. Is this a common misconception?
The decision of whether you should sell or hold the properties you develop depends on a number of things, including your financial position, the market conditions and the type of development you are undertaking. But primarily it comes down to your objective in doing the development in the first place. Some property developers aim to increase rental returns, while others seek to make a cash profit or simply increase and unleash their equity. Developing property can also be a way of obtaining new property at wholesale prices. It’s important that you are clear on your objective prior to starting a development as it can influence many aspects of the development.
People often sell properties they have developed because they think they have to sell to make money or “realise the profit”. However, by refinancing you can still access the equity you have created. Why might this be a better option than selling? It comes down to the risks and costs associated with developing to sell. Developing to sell requires expert market timing to get the property cycle right. Plus, if you sell properties that you have developed you will likely have to pay Sales Agents Fees and Marketing (3-4%), GST on the Profit Margin (2% if a 20% margin), and Income Tax (as much as 9% if a 20% profit margin).
It’s clear that if you develop and sell, transaction costs will eat away at your profit. For that reason, I believe developing to sell should not be the first choice in every instance. You could be far better off by hundreds of thousands of dollars by holding the properties. Many of the most successful property developers, such as Frank Lowy (developer worth $6 billion who has built a worldwide shopping centre empire) rarely sell.
So when should you develop and hold? The simple answer is when it is feasible. Depending on the type of development you do, you will generate either additional rental income over and above the interest costs OR you will generate additional equity. But preferably you will do both.
So when is the best time to develop & sell? Being a successful property trader requires focus, commitment and a lot of time. You need to do much more market analysis and it is inherently more risky as you are timing the market. To justify continual buying and selling, you need to generate high returns to warrant the transaction costs (agent fees, stamp duty, income taxes). You also have to be prepared to “landbank”, which is common amongst developers, who may hold land for 10 or more years.
Depending on the project there may be an opportunity to develop and hold some of the project (e.g. 3 units of 6) and sell the rest to pay down some debt. Professional developers can make a lot of money developing and selling, but it is a full time profession. Most developers still hold some part of their portfolios for long term investment.