Property seminars ‘canary in coalmine’

Investment Fears continue to grow that a bubble is developing in Australian property.

Jacob Greber and Duncan Hughes Pat Mesiti, whose mission in life is to create 10,000 millionaires before he dies, wants you.

The Sydney-based organiser of property seminars boasts he can show Australians the secrets of how he and his friends “built fortunes in real estate, starting from scratch with no special skills and not a lot of spare cash”.

All you need do is attend his “property millionaires” tour – in Melbourne this weekend – where you can learn how to develop, renovate and churn property.

“Many of you want to flip properties,” Mr Mesiti declares in a YouTube clip on his website.

“We want to teach you how you do that safely, securely, and make money.”

It’s the kind of pitch that worries analysts watching for signs the property market is overheating.

There are plenty of reasons to worry. Reserve Bank of Australia figures showed this week that investors now account for about 45 per cent of home loan approvals in NSW – a record and well above the previous peak in 2002-03.

RP-Data on Friday said Sydney house prices rose 1.5 per cent last month and are almost 15 per cent higher than a year earlier, a sign price growth may be accelerating.

Experts say an apparent explosion in property investment seminars is a warning parts of the property market are overheating.

“A pick-up in the property spruiking business is a signal things may be getting a little too exuberant,” said Paul Bloxham, HSBC Australia’s chief economist The former Reserve Bank official co-wrote a 2010 central bank study into the causes of the 2003 Sydney housing boom and bust.

Housing seminars are a common sight around hotel conference rooms, where they pitch to retirees or younger investors. Direct telephone marketing is also on the up.

Mr Bloxham’s original report noted that one of the alarm bells about Sydney’s overheating market a decade ago was a crackdown on property investment seminars and increased scrutiny by the tax office of rental deductions.

“Some of the tell-tale signs are there,” he said on Friday.

“The investor share of loans is at a record high, and higher than the very exuberant times of 2003, which ended with house prices falling and parts of Western Sydney doing it tough.”

He says the city appears to be following a familiar pattern, fuelled by record-low official and commercial lending rates that start with price rises based on fundamental drivers, such as a shortage of new homes and rising incomes.

“People then get overly excited about it and start buying assets because the price of those assets is rising.

“The solution is not to leave interest rates too low for too long. It’s one of the reasons the Reserve Bank won’t be cutting rates further and we have in mind they’ll be lifting early next year.”

Chris Curtis, a Sydney property buyers’ agent, said there was no doubt pushers were once again proliferating, but are more sophisticated.

They still use well-worn arguments to drum up business, such as negative comparisons to shares and a shortage of housing supply, while updating the pitch to emphasise affordability of property investments for self-managed super funds and the “globalisation” of Sydney as a haven for global capital.

“They’re quite appalling, and what’s happening now is that everyone is doing this property thing – it’s not just the Gold Coast white-shoe brigade: it’s now happening with credible brands,” Mr Curtis said.

The concern was echoed by last month’s David Murray financial system inquiry interim report, which said borrowing by self-managed funds would create problems if left unchecked.

Regulators, who say co-ordinating enforcement is tricky, fear much of the demand for off-the-plan apartments is being driven by double-digit commissions.

Cash payments of $40,000 are routinely made to advisers who recommend apartments, typically to selfmanaged super fund investors.

In turn, investors are promised double-digit returns, guaranteed tenancies, regular rental income and perks, such as “free” furniture, in a bid to invest in off-the-plan developments.

Tim Mackay, a financial adviser at Quantum Wealth, said high-pressure sales seminars promising easy wealth had become common.

“Aspirational investors should view it as a canary in the coalmine and tread cautiously.If in doubt seek independent advice,” he said.

Mr Mesiti, one of the spruikers, said that while there were pockets of overheating other parts were not “Property, like life, goes through different cycles at different times,” he told AFR Weekend.

“Everyone is entitled to their view. It think it is a great time to leverage and take control of your own destiny, of your wealth.”

jgreber@fairfaxmedia.com.au duhughes@fairfaxmedia.com.au A pick-up in the property spruiking business is a signal things may be getting a little too exuberant Paul Bloxham, HSBC Australia chief economist.

 

Australian Financial Review, Australia by Jacob Greber And Duncan Hughes

Top 9 Development Tips

Here’s the top 9 development tips from Margie Baldock. She was supposed to have 10 tips, but she skipped number 9 in her video!?

Tip 1: Start with the end in mind!

Build for the demand this is required. Speak with local agents and marketers as to what stock is in demand.

Tip 2: Have a really clear niche that you’re going to target.

Is your segment, residential homes, townhouses, units, aged care, commercial? It doesn’t really matter, but start with a niche in mind and know it REALLY well.

Tip 3: Know your numbers really well.

Whatever your niche is, know it really well. You need to know what the end sales cost will be, what the land costs should, what town plan costs are, building costs – so when you find a deal or brought a deal – you will know very quickly that the deal will stack up. This is particularly important in a rising market.

Tip 4: Know yourself well.

None of us are good at everything! Know what you’re good at, and outsource the parts that you’re bad at. Ie. Do you know all the current town plan restrictions? What about the most recent updates? If not – outsource that to a town planner. Keep the parts of the job that you’re good at and enjoy doing – such as marketing.

Tip 5: Ensure you have really clear goals on why you are doing the development.

Are you doing it for cash flow? Or are you doing it to build wealth? You need to know this clearly so when you do your feasibility, you’ll know if the numbers match your goals!

Tip 6: Make sure you always have multiple exit strategies.

A lot of people don’t even think about exit strategies, but it’s important to know who will be buying your new stock and how you will bring it to market. But, it’s also important to have a Plan B, a Plan C and a Plan D in case things out of your control happen. So what may start off as a lucrative market, may change over time – and you’ll need to be adaptable and flexible to find secondary markets if need be. An example might be you might start off marketing your project through local real estate agents, but if that fails, you’ll need to have contacts with project marketers, investment clubs, financial planners and a whole lot of other channels if your Plan A doesn’t pan out.

Tip 7: Ensure your finances are in place before you start hunting for sites.

It’s important to know how much you can borrow and what kind of conditions the banks will want. Over the course of time, the banks are constantly changing their lending criteria. If you are doing a JV, ensure your partners are ready to go and they know what kind of deal your hunting for and are happy with it.

Steve: I would also say it is important to know what your end game will be (buy/flip vs buy/hold) as this will determine what the best structure should be to buy the development site in.

Tip 8: Always use options if you can.

If you can secure a site under options, it will reduce your risk whilst you do your due diligence.

Tip 9: Have exceptional legal and tax advice.

In particular with contracts, some can be very complex. Even as your knowledge grows, ensure that every I is doted and T is crossed!

 

Property development pre-purchase checklist

1. Micro market demand

Most of us think we know which markets are in demand from an investor or owner-occupier point of view, but when choosing a small development site you need to take a microscopic view of the local market.

A great tool to use is REA Group’s Neighbourhoods. Enter the suburb name where your development site is located, and the profile gives you a wealth of free information on listing statistics and the overall average visits per property in comparison to the state average. This allows you to compare suburbs against each other as well as similarly priced development sites, which may be located in different suburbs.

Always choose “high demand markets” above any other choices, if your feasibility stacks.

enews-sam_1

Source: www.realestate.com.au

2. Vacancy rates

If you’re building a product aimed at investor buyers, you want your site to be in a market that will give them peace of mind with regards to one thing and one thing alone, “Am I going to have a long period of vacancy?”

Regional markets are notorious for high returns accompanied by higher vacancy rates. As profitable small developers, our goal is to minimise our own risk and pick an area that we are 100 per cent sure will sell and in a timely manner. A handy free tool I use on a daily basis is SQM Research’s Vacancy Graph. It’s important to look at two things on these graphs:

1) What is the current vacancy rate in the suburb?

2) What has the historical average vacancy rate been over the past few years?

The current vacancy rate isn’t always the be all and end all as the figure could be slightly skewed due to the time of year. Vacancies in Australia usually increase over December and January due to the summer holidays, so if checking a vacancy rate during this time of year, I’d look at what the average vacancy has been in the suburb for the past three years. An average vacancy rate of three per cent or less is considered low, so an average of approximately three per cent would be a safe bet that investors won’t be stressing about not having tenants.

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Source: SQM Research

3. Planning regulations and precedents

Often the best opportunities are raw development sites with no approvals in place. But as with most things, the greater the opportunity, the greater the risk. However, there are a few things we can do to minimise this risk. There are two types of development scenarios with most councils – code assessable or impact assessable.

a) Code assessable development

Code assessable developments are scenarios that tick all of the council requirement boxes and are thus “by right”. The only thing that you need to be weary of is the actual size and dimensions of what you’re building, to ensure the plans comply with setbacks from boundaries and that you aren’t pushing your build envelope. A site that ticks the boxes for a code assessable development is usually safe to sign a contract with a minimal due diligence period.

b) Impact assessable development

When you’re trying to push the envelope with what council planning allows your application becomes impact assessable. Two things are important when purchasing an impact assessable site. Look for precedents set by previous developers. If the neighbouring site is carrying a larger project than what the local council allows, you have a precedent to do a development of similar size, though there’s still no guarantee that you’ll get approval from council.

Secondly, try and get a lengthy due diligence period in your contract on the land or better yet, try and make your contract subject to development approval. A subject to DA (development application) contract is safest but due to the timeframes involved, usually you’ll need to pay a premium for the land to secure it.

4. Flooding and bushfire overlay

You’ve found a site with a development approval in place, it’s been on the market a while, is discounted far below its actual value, ticks all of your boxes, has no easements or encumbrances and is flood free! If you ever find this site, please let me know as I can guarantee that it doesn’t exist.

With our climate and topography, our country is prone to flooding and bushfires. When you can secure a development-approved site in one of these zones, there isn’t usually an issue with going ahead with the development. The question is, will you be able to sell it?

Often there are raw blocks of land for sale with the correct zoning, at what would seem to be a reasonable price. In major cities, checking what overlays apply to a property can be quite simple. Brisbane has a negative stigma with historic floods but checking if a property flooded in 1974 or 2011 is easy, thanks to Brisbane City Council’s interactive Flood Awareness Map. Other councils have similar tools as well. Often searching for the term “PDOnline” and the local council name will provide you with this. The PDOnline mapping tools can be used to check the various overlays that may affect your potential purchase.

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Source: Brisbane City Council

5. First in best dressed

First in best dressed is usually a positive term in life. With property, this isn’t always the case. Plenty of markets in Australia consist of older properties in need of renovation or detonation and in many instances the local councils are pro-development with their planning. One of the problems we can run into is a lack of comparable new stock. This can cause issues with development finance, valuations for buyers when they attempt to settle and benchmarking.

Benchmarking usually affects investor buyers the most as they argue they can buy an old house on a block of land for a similar price or less than your brand new stock which you’re trying to sell. If you’re the first in an older suburb, ensure that it’s a high owner-occupied suburb, as you might be able to attract local downsizers to purchase. Otherwise, it’s best to let someone else get in first, suffer all the hurdles you would’ve faced, and follow in their footsteps at a later date. Check on property listing sites to see if there are new or near new properties for sale in a similar price bracket as your stock for an indication.

By Sam Saggers

Sam Saggers is the chief executive officer of Positive Real Estate www.positiverealestate.com.au

Is property development right for you?

We’re two years into this property cycle, which is now entering a mature phase where capital growth will be slower, leading many investors to consider how they can become more actively involved in growing the value of their property portfolio.

Simply sitting back and waiting for your equity to snowball is no longer an option, so proactive property investors are contemplating donning the developer’s hat and physically adding value to their assets in a bid to increase their profits.

Over the years, I’ve seen many developer-investors succeed in their endeavours, but unfortunately I’ve also seen many fail. Generally they all start out with the best of intentions, but some never make it beyond the starting line while others fail to reap any rewards at the completion of their project.

There’s no doubt that the risks of undertaking a development can be great, but if done correctly the rewards can be even greater.

So what is property development?

One definition of property development is “the continual reconfiguration of the built environment to meet society’s needs”.

Infrastructure that we take for granted, like roads, sewers, houses, office buildings and shopping complexes don’t just magically appear. Somebody must motivate and manage the creation, maintenance and eventual recreation of the spaces in which we live, work and play.

Clearly the focus of PSD is on a specific classification of development that’s achievable for the “average” investor contemplating getting their hands dirty.

Rather than get into the complex world of high-rise apartments and major developments, in my regular column I’ll look at how to succeed with small to medium projects.

I always suggest investors “cut their teeth” on smaller projects when starting down the road of property development. Ideally, your first foray will be something as basic as renovating an existing property in your portfolio that could use a bit of updating. After one or two of these you might progress to a duplex or small townhouse development.

In my mind, in order to be successful at property development you have to crawl before you walk. Most mistakes are made with the first few projects you undertake, so it’s best to learn from these so you can survive and move on to larger projects.

Ambition is a crucial asset for any property developer, as is the ability to think big, but over-confidence can be your worst enemy. So remember to start out small and learn about the development process with a few initial projects that won’t make or break your entire investment career.

It’s also important to note that any project involving the construction of three or more dwellings on the one site will be considered a commercial endeavour by the banks and can therefore be more complex to fund.

Is property development for you?

Property development is an extremely creative process, therefore property developers must be creators by nature. As a developer, your role is to take a project from the conception of an idea, right through all the stages of design and approval, financing, construction and marketing and eventually the leasing or sale of the project.

Successful property developers are a bit like movie producers.

They assemble a highly talented team of people and skillfully lead them to develop a profitable outcome. Developers need to be proactive and make things happen. They must also be creative, flexible and adaptive to take their project through the development maze, not to mention all of the bureaucratic red tape that’s involved with council applications, zoning restrictions and the like.

As a developer, you need to work hard, have patience, remain focused, and have a burning determination to succeed. There are a few key basics you are going to have to undertake as you move along the path towards becoming a successful developer.

You must:

  • Educate yourself.
  • Take your time.
  • Do the research.

Developers are investors who commit their equity, expertise and talents to convert land from its current use to a higher and better use. They require a good understanding of the town planning and construction process and marketing of real estate projects.

The developer carries the financial risks of the project but stands to reap the rewards if it’s a success. In other words, the buck literally stops with you!

To become a successful property developer you need to be a good coordinator, because you must assemble a team of talented people and proficiently lead them to deliver a profitable outcome.

Developers are more than just property traders who buy low and sell high; they are knowledgeable in their field, have good negotiation and people skills and understand how to optimise profits while managing risks.

As a developer, it’s your responsibility to make sure the risk you’re taking on is equal to the potential reward at the end. That is, the higher the risk, the greater reward you should aim to achieve.

Why should I consider property development?

With our population growing at around 400,000 people a year there’s a strong demand for new properties.

Sure there’s an oversupply of dwellings in some parts of Australia, but there’s also a dire need for accommodation in others and with Australia’s population likely to grow by 10 per cent in the next five years alone, someone is going to have to create all the new housing stock.

But in my mind property development shouldn’t be seen as a way of making trading income. I prefer it as a way of buying my investment at “wholesale” and not paying retail for the properties in my investment portfolio.

Property development is all about creating your own equity

My preferred investment strategy is to buy an old house past its “use by date” in a good location and with development potential. Then add value by developing two, three or four townhouses that are becoming the preferred style of accommodation for a growing demographic of Australians.

But rather than making a quick trading profit, I keep these properties as I aquire them at “wholesale prices”, because I’ve added substantial value, thereby creating significant equity. I then use that equity to refinance and borrow more, giving me the opportunity to undertake further developments to add to my portfolio.

By Michael Yardney

Michael is director of Metropole Property Investment Strategists,www.metropole.com.au. His books are available from www.businessmall.com.au

Five vital keys to a profitable development site selection

The most important step in selecting a profitable development site is knowing your target market. In particular, you want to know who’s going to buy your stock and why they’ll want to buy it.

While some developers target the top end luxury market I prefer to focus on the affordable segment of the market. This is because there are only a few wealthy people, and generally these people have very discerning and particular tastes that can be difficult to predict.

1. Affordability

There are vast numbers of working and middle class people. So I try to create product that’s suitable for first-timers, down-scalers and investors. This means I’m always looking to develop product that’s around the median price, or even slightly below the median, in a targeted area. This has proven to be a very stable niche because even during crises like the GFC, people still wanted housing and so the affordable segment didn’t go backwards, unlike the top end, which took a beating.

2. Location, location, location

The second vital key to site selection relates to that age-old adage of “location, location, location”. You simply can’t go wrong by starting with an in-demand location. This means knowing where the property cycle is at and targeting general regions that are due for a run on capital growth. Over the past eight years I’ve developed in Perth and Sydney, as they were the hotspots at the time.

However for the time being I’ve turned my attention firmly on southeast Queensland as it’s clear this region is due for a strong run for the next few years as it plays catch up with the rest of the nation. Where else can investors get a three-bedroom, two-bathroom brand new townhouse just 17km from a major Aussie CBD for $339,000? It’s just outstanding value for money and so selling it is a breeze. The stock that we’re currently creating for our clients is positive cash flow from day one ($54 per week cash flow for a person on $55,000 a year income and more for those on higher incomes).

3. Research

Once you’ve made your target region selection, the third key is narrowing the field of selections to find the best site you can for your buyers. In my case as I’m creating stock with investors in mind, I’m always looking for sites that have superior capital growth prospects, and which also will be neutrally or positively geared. So how do I go about doing that?

I use a free app that anyone can download off the internet. You simply type in an area you wish to research and the app will tell you how your area compares with 15,000 other suburbs and 30,000 markets (as it does units and houses). The creator of the app says the tool can allow investors (and presumably us developers too) to select the top one per cent of all property investment hotspots. My latest project is a 33-townhouse development at Doolandella in southeast Queensland. It was selected in part because it got a really great ranking in the app.

Behind the summary number, which is a predictor of the capital growth potential of a suburb, you can also drill into the statistics for your chosen area and look at things like gaps in supply and demand; vacancy rates; days on market; auction clearance rates; vendor discounting and so on. This data is critical in determining that area is about to outperform.

4. Infrastructure

My fourth vital key to selecting a great site is to ensure the area you’re targeting has great infrastructure investment going on that will attract new people to the area over the long term. This means that it needs to have great transport, ideally rail, bus and road.

It needs access to great schools and shops as first-timers and tenants are going to demand this. You also need to ensure your particular piece of land has access to the various services your properties will need. This includes things like sewer, water, electricity and so on. Generally a call to your local council can kick-start that process and give you the relevant utilities you need to connect with to confirm access points for what you want to achieve at your site. If the site already had a development approval all the service access points and limitations will generally be detailed in the development conditions.

5. Healthy profit projections

The final part of your research is ensuring the particular site is going to yield a sufficient profit that the banks will fund your project. Remember banks only lend to viable projects and developers with a track record of successful delivery, therefore you’re going to need to demonstrate that you know your numbers in great detail. Getting fixed price quotes from civil contractors and builders will go a long way to demonstrating to the bank that you’ve done adequate research and that you’re able to deliver a successful project.

If you’d like to see an example of a detailed research report that’s going to make the banks love you, and have buyers knocking down your door, then feel free to drop me an email at Margie@bgdevelopments.com.au with the subject: “SEQ Research Report” and I’ll happily show you the depth of research that we put into our projects before we go unconditional on any development site.

Margie is a property developer, entrepreneur and professional investor, who has completed $60 million worth of property projects including renovations, subdivisions, construction, options and project marketing in the past eight years. She is always looking for new projects and joint venture partners. www.prosperdevelop.com

By Margie Baldock

http://www.psdmagazine.com.au/2014/07/5-vital-keys-to-profitable-site-selection/