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My property development journey – Part 2 of 4

My property development journey – Part 2 of 4

By ANDREW STONE

The Melbourne market’s hot right now, but so much of property development is about future market prospects… ‘How will prices look 18-24 months from now?’

As real estate analysts, we know that median house prices tend to rise in response to low or falling interest rates, and to an average Aussie dollar. Markets react to cheap debt finance and strong foreign investor demand (among several other forces that we monitor).

So, we’re reasonably optimistic about the future market direction. The key question beyond that is – how will specific market segments perform?

Premium, million-dollar suburbs tend to experience higher percentage value growth in good times than average suburbs do (though they tend to suffer more in the bad times). To illustrate this, I’ve compared Boroondara’s median house price change history (currently $1.5 million) to neighbouring Banyule’s (currently $0.6 million). The highs and lows are clearly more dramatic in Boroondara.

Looking to capitalise most on a rising market, I chose to pursue a development in a premium suburb. When assessing suburbs, I analyse demographics, infrastructure and public/private activity.

One key demographic is age. Specifically, I look for suburbs with a high proportion of people aged 24 to 35 and 80+. Historical statistical analyses proves that these ‘newly wed and nearly dead’ suburbs tend to experience significant future median house price growth. Why? Oldies in original houses on large blocks tend to sell to developers for big bucks, or to homebuyers who invest in renovations/extensions. Widespread gentrification leads to higher house prices.

Infrastructure worth considering includes public transport, hospitals, commercial precincts and schools. Public/private activity relates to burgeoning shopping centres, medium-density unit development, improving community facilities and business diversity.

Ivanhoe looks fairly well placed for strong performance over the next 18 to 24 months.

In real terms, this is how future growth in house prices could affect our project:

If median house prices in Melbourne increase by 5.9 per cent a year (according to CoreLogic RP Data, this is the 10-year capital city average), then all things being equal, our block will be worth about $75,000 more come the end of an 18-month project.

If median house prices in Ivanhoe increase by 8.2 per cent, then we should see about $110,000 growth. That’s a difference of $35,000. Add on construction costs of $900,000 and total potential incremental growth associated with smart suburb selection nearly doubles.

My-Prop-Dev-Journey-pic

The specific neighbourhood we purchased in was recently rezoned from Heidelberg Heights (median house price of $580,000) to Ivanhoe (median house price of $1,175,000). It takes time for perceptions to change, but our property will be more aligned to Ivanhoe come project completion, and our ceiling price could increase dramatically.

In summary, the likely future direction of the market should play a major part in determining the type of property development you pursue, and where you seek to purchase.

This article is in four parts:

Part one

— Part two

Part three

Part four

About Andrew Stone

Andrew Stone is a director at Property Analytics, a real estate data analytics consultancy and licensed buyers’ agency. He regularly manages JV townhouse developments with family members, mates and clients.


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Original author: Andrew Stone
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