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A sensitive topic: development site flipping

With Melbourne driving 46 per cent of Australia’s apartment development, it’s a good time to be a developer in the world’s most liveable city. And in theory, it’s also a good time to be a purchaser as apartments flood the market, increasing stock and therefore theoretically driving down pricing. It’s the age-old story of supply versus demand.

According to the Australian Bureau of Statistics, by 2020 Melbourne’s population will rise to five million, making it the largest city in Australia and sparking even more demand for more housing and apartments.

As a relative newcomer to the Melbourne property development scene, I’ve been striving to create innovative and affordable developments that provide people with access to purchasing property. Many of my friends work typical jobs, and I’d like to think they should be able to afford to live in said developments.

From my reading of the current situation and listening to debates play out in state and federal politics, it seems that access is currently at the core of the public debate and, more specifically, affordability to access.

I take the concept of affordability very seriously and in my position I’m fortunate to have control over providing reasonably priced property in the current market.

What is concerning from where I stand is the ability to deliver this. Hear me out because this is a very different point of view – one which isn’t discussed often in the public domain.

That is: the emergence of a new sub-market within the property market that is focused on acquiring land, receiving permit approval and selling without intention of going into construction.

While there are of course examples where the economy changes and you may not be able to build as planned, I think more and more permits are being sold and people are taking advantage of the demand for permit approval and selling at inflated prices.

This is where I find myself in a quandary. Of course, I agree with a free market and I applaud those who find new opportunities to create value out of the property market – this is innovative and entrepreneurial. 

However, as a developer who is trying to develop projects that are in the reach of everyday working people, I see how this practice limits what developers are able to do in terms of minimising the cost base of development.

If a vendor is selling at an inflated price, it creates a tricky situation for the buyers. The developer who purchases the site with the intention to build is forced to sell apartments at a higher price to meet their targets, which ultimately comes out of the purchaser’s pocket.

On the other side of the coin, selling at this inflated cost means local developers cannot afford to invest and that many of these sites can only be purchased by foreign developers. Therefore, the majority of the stock will be sold offshore to purchasers who can afford to buy at these inflated prices.

To put it very simply, let’s use the below example to articulate.

An original land owner has obtained a permit to build apartments on a site. Assuming the original holding cost is $10 million, the apartments could be sold to purchasers for around $8,000 per square metre.

The original land owner sees there is risk in developing and decides to sell the site to generate windfall profits with no associated risk. The site is then sold to another developer for $40 million. The new land owner will now have to on-sell apartments to end purchasers for perhaps around $10,500 per square metre in order for the development to provide a return.

As you can see, this trend is creating a vicious cycle. This begins with the permit approvals and leaves developers like us with no choice but to consider whether to follow the crowd, despite understanding the implications on affordability and local investment for the world’s most liveable city. 

With decent apartments in the city now all but out of reach of first homebuyers, it is now up to developers, agents, consumers and the government to intervene and look at limited restrictions that at least deters this flipping sub-market or to encourage developers to actually…develop.

Many people will fiercely disagree with my opinion on this sensitive topic, but this is out there now.

We should conduct ourselves for the future, not as a singularity.  

Mohan Du is the Managing Director of Capital Alliance Investment Group.

2 comments

Daniel Lyne's picture

Surely this relies on it been a sellers market, that people can simply sell their product (property) for whatever their wholesale price plus a margin endlessly.

Theory.
Permits have a value based on time and risk, that value is rapidly increasing, 10years ago the process was 9months, it's now 18months average give or take a bit. The number of consultants involved in getting a permit has increase by about 4 fold (who did a daylight study for an apartment in 2006), with this there is a 4 fold increase in cost and risk (each consultant could generate a new list of potential issues that could change the outcome.

There has also been an increase in risk driven by rapid zoning changes, notably CBD plot ratio's etc, even if this isn't a risk it's a perceived risk.

Lastly, there's been a change in the market from family style developers to development funds driving the market. These funds are driven by yield vrs time, time blow outs due to planning risks are huge when trying to quantify yield.

Surely this creates a new product not simply the same product with added costs.

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theboynoodle's picture

The developer who purchases the site with the intention to build is forced to sell apartments at a higher price to meet their targets, which ultimately comes out of the purchaser’s pocket.

Housing is not priced on a 'plus' model, it is priced at the market clearing level. Combine this with 'location scarcity' and you broadly end up with everyone willing to pay the most they can afford to live in the best area they can. This is why the main drivers of property pieces are the cost and availability of credit, wages and taxes, and the general costs of living.

A developer paying more for land doesn't get to charge more for the housing they deliver. That's not how it works. A pair of identical properties will sell for the same price even if one cost $300k to build and the other cost $400k.

The 'flipping' issue will be a problem for developers because if they buy the site after permission has been gained then they lose the windfall profit on getting that permission. Of course that will impact the economics of their project, particularly if they are willing to work on tighter margins.

To me, flipping illustrates the failure of government to properly capture the value released by issuing planning consent. Much more of that value could taken be for public benefit.. increasing amenity and public services without increasing those property prices which are set by a largely unconnected group of factors.

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