While some may still be pining for those good old boom days, others have come to terms with the fact that a fairly flat property market lies ahead, for a while at least. So do you rest on your laurels and await the next value rebound, relying on the nature of cyclical trends and the fact that they will predictably take us back to more lucrative, asset appreciating times?
Astute investors are starting a new trend for the new times and, as Gary Pemmelaar, Civil Engineer, Licensed Builder, Developer and Proprietor of Raine & Horne Glenelg succinctly puts it; “It’s all about value adding now.”
Gary Pemmelaar contends that this run-of-the-mill investment method has had its day and the future of wealth creation lies in expansion and development. “With greater interest and media focus on real estate, recent years have seen an increase in demand to get into the market. This demand has had some positive influence on the market place, which has now flattened out in many regions. Rather than purchasing more to increase a property portfolio, the average investor might well look into their existing real estate to see if there may be opportunities to subdivide.”
All around the country, State Governments have been developing blueprints for future urban direction within their capital cities, suburbs and country towns. These are based on population projections which not only show general growth within the country over time, but also a vast increase in aged and single person household demographic clusters.
Gary predicts this is going to be an increasingly obvious trend and hence feels property development is, “a topical thing to be looking at, in the sense that you would expect subdivisions are going to become more prevalent in the future and it’s an aspect of housing that’s going to increase over time.”
Gary says; “The two primary reasons for that are what’s going on with growth boundaries in cities and density requirements for housing. Adelaide is a good example of that, where you have had significant urban sprawl and now with rising fuel costs, many people are now looking to move back into the inner and middle suburbs, which in turn will channel more people down the route of subdividing in terms of property investment.”
Secondly, Pemmelaar says, “We’re probably going to see this as a more viable investment option, simply because there’s been a massive increase in the price of land in recent times. This has been particularly occurring on the fringes of capital cities. This trend could direct people’s thinking more towards subdivision of an existing part of a portfolio they already own, rather than looking to develop a new block.”
He also points out that currently, “Housing markets are pretty tight and rental markets are quite firm. Hence, you have a situation where underlying demand for housing is strong, but you’re facing certain constraints such as land supply and the inflated price of land.
”People looking to invest in property are going to see an incentive there to supply the market, but within constraints that might promote more subdividing than we’ve seen in previous cycles.”
What is subdivision?
Subdivision necessitates active involvement from the investor, unlike passive ventures where you purchase a property and rely on long-term capital gains. It’s an endeavor that requires hard work and should not be entered into lightly. Subdivision can involve purchasing a raw parcel of land to create a small to large housing estate or building on an existing property with a second dwelling, such as duplex or dual occupancy sites.
It can also encompass purchasing an existing block of units to separate or strata the title, so that instead of one product, you have the bonus of selling single units within the complex. Subdivision may involve creating an entire new block of townhouses or units for the medium-density market on an acreage allotment in an area where a council encourages this activity.
Mr Pemmelaar of Raine & Horne Glenelg describes a recent deal he was involved in to illustrate how rewarding and simple subdivision can be; ”On behalf of a Client we found and purchased a 1950’s house on an 800m2 block, obtained planning approval to subdivide, project managed the subdivision, design and construction of a two semi detached dwelling”.
“They haven’t had to do any of the development work; it’s all been done for them by us. By using our project development and project management services they’ve had the advantage to buy wholesale in terms of purchasing the land and building the new dwellings at cost and then selling retail, by selling them off at completion.”
Gary walks us through the scenario whereby other Clients are currently using Raine & Horne Glenelg to manage their subdivision.
“Another example is where we are currently developing a five townhouse development on the southern beaches for a group of Clients; in this case we identified the site and carried out feasibility for development potential for our Clients. On their behalf we then purchased the site and then project managed the planning approval and subdivision, the design of the townhouse development and we are currently gearing up to call tenders from builders for the construction of the development.”
Gary added “The fantastic thing about this development is that the investors will sell down three of the townhouses to minimize their borrowings, and retain two remaining townhouses at a wholesale price that when rented will create rental cashflow from day one.”
Many experts believe that you can combine subdivision and being an active participant in literally building your property portfolio, with passive investment. So where do you start with this approach to wealth creation?
Gary suggests, “The most viable subdivision for the average investor to start with would be a small one. The smaller the subdivision, generally the less risk. A house on a large block suitable for two dwellings may be the ideal first time subdivision.
“Consideration then has to be given as to whether you’re building a second dwelling to keep the property long term or to sell it off and place the money back into debt reduction of an existing mortgage.” Setting up a scenario whereby developing a property can create positive cash flow that will assist in reducing debt on any existing loans and even purchasing further property to retain in your portfolio, is highly recommended by those who know best.
Should you want to know more about property development as a vehicle to building a positive cashflow portfolio, call Gary Pemmelaar of Raine & Horne Glenelg