Banks vs WA developers
APRA – the body that oversees our banks, building societies, credit unions and the like – has recently introduced reforms to keep banking risk in check.
The new measures certainly have their place, but are they having unintended consequences in the WA market?
Have we ended up with a blunt Australia-wide tool that will do more harm than good in WA? Are we trying to work with a one-size-fits-all approach in a two-speed economy?
Let’s look at some of the evidence.
The WA economy is showing signs of recovery, with employment growth in the mining sector. According to the ABC, the first green shoots of recovery are being seen. That’s good news.
There’s more good news, too.
The WA property market is at (or very near) the bottom of the property cycle, with a significant amount of surplus stock on the market. This is in direct comparison to our eastern states neighbours who could well be nearing the top of the cycle, according to a recent roundup of Corelogic data across the country.
What does all this mean for property developers?
It’s an interesting exercise to look at the number of developments that have been approved vs those that are actually ‘coming out of the ground’ and being built. That’s because many larger developers fail to reach the presales needed so that their projects can go ahead.
On the flip side, purchasers are being drawn to smaller, well-located developments, particularly those aimed at downsizers. Chances are sales will be ticking over nicely if the development meets the needs of a unique market or it’s in a unique location. Where banks have stepped out, there are several options for funding from the non-bank sector for small to mid-size projects.
It’s not about just finding a block, chasing the cheapest build price from smaller players, and then building something – hoping all the while that a buyer will turn up. That is not the key to project success.
The right approach to development in this market is to undertake solid research with professional firms and advisers who know this space.
The facts:
• There are pockets of demand for good units/ townhouses and villas.
• The market demands certain types of homes. This needs serious consideration.
• The sale price is the sale price. It’s about what the market will withstand so don’t be overly optimistic.
• A margin needs to be maintained for risk. No risk margin, no finance.
• Your risk margin – or profit margin – is the price you sell for (less GST and agents’ fees) less finance costs, other fees and holding costs, land costs and build costs. Basically, you should be left with at least 20% profit once you’ve deducted all your costs from the price you sell your properties for.
• Work with a professional builder and broker to jointly ‘value engineer’ your project. Remove waste expenditure and meet required margins.
• Pay only what the land is worth. Just because it’s on the market as a three-unit site for $550,000 doesn’t mean there is any profit in developing it.
It’s always prudent to get professional advice when thinking about a development project. Look for a builder and a financial specialist that will both allow you time and give you the professional input you need – and that are financially secure to be around to finish the job for you.
Talk to Developments by Dale Alcock on 9242 9500