Finding value in a tough market – the development site acquisition challenge

ACQUISITIONS 4465X3502

2015 was an intensely competitive year when it came to buying development sites. Despite this our little team managed to acquire 10 development sites for our clients worth just over $13m – from a 192 sqm site in North Fitzroy to a 1413 sqm site in Thornbury. So what did we learn from our experiences in 2015?

Value is in the eye of the beholder

Most of our development site acquisitions came in the $1m-$2.5m range. It was a very competitive space. On a number of occasions we were under bidders by $100-$300k. When you are targeting a 20% return on costs this is needless to say a big gap.

For example in November we identified a four unit site in Miller St Thornbury for a client. It had good access with a row next to a picturesque park on 688 sqm. We saw value to around $1.3m. On the day the site sold for $1.46m. A cost psm of $2.1k. We were 12% off the mark. In April I had purchased a 1400 sqm site 800m away for $1.75m. A 6 unit site. A cost psm of $1.2k. Quite a difference.

Similarly in September we missed out by $300k on a 313 sqm 7 townhouse site in West Melbourne. 14% off the mark. We saw value at $2.1m, the site sold for $2.4m.

So perhaps in both these cases, the purchaser was an overzealous home owner, a builder developer or perhaps a developer with some very optimistic planning advice or views on end values. Perhaps they were investing for the very very long term or had lower funding costs than typical.

When it comes to buying a development site, patience and persistence is the key. Well located sites with good access, with low-medium planning risk and medium to high returns are not common. But if you are patient, are persistent and have a good team to support you, success is just round the corner.

Off market – off the mark

We also dealt with a number of off market transactions. With mixed results.

We secured a 1085 sqm double allotment 8 townhouse site in Alphington for a client for just under $2m. However we failed to secure a 1230 sqm double allotment 7 townhouse site in Heidelberg when one of the family members thought they could get more on the open market. The deal fell through. I hope their gamble pays off.

We also thought we had secured a 3,500 sqm site in East Brunswick after the vendor excepted a cash and finished product offer, but then changed his mind. We assumed his agent shopped the deal around. After shaking hands on the deal it was a major disappointment.

Many people get excited about “off market” deals, however they are more opaque transactions than listed sales. So tread carefully with off market transactions. You can waste a lot of time and resources.

Auctions – where the action is

Despite the competition we also secured a number of sites at a significant discount to the price we were willing to pay. In Thornbury we secured a 6 townhouse site for $1.75m in April. This was $250k less than what we were willing to pay. Similarly in September we secured a 4 townhouse site in Nth Fitzroy for around $250k less than what we were willing to pay.

Interestingly, both were bought at auction which is contrary to popular belief that auctions are an expensive way to secure real estate. In both cases we saw opportunity where others didn’t. We were also lucky.

How to find the “nuggets”

The challenge all developers in this market face is:

  • identifying profitable potential sites within their budget
  • quickly obtaining accurate planning, design and development information so they can make confident investment decisions.

It can be a challenge to be confident that your due diligence is accurate given the sometimes conflicting information provided by agents, council planners, private planners and architects or building designers.

You need:

  • the right planning advice,
  • the capacity to analyse a lot of deal and
  • the experience to look at opportunities differently

A different perspective on how a property can be used, or how additional value can be created, can provide the edge needed. You only need to be willing to pay $1 more than your competitors to secure a site. The trick is to have the confidence to want to.

We love finding what we call “nuggets” for our clients. It’s truly exciting when we see a cracking site hit the market. They don’t come along often but when they do it’s worth the wait.

For example, last year year we purchased a small 192 sqm site in Nth Fitzroy. At the back of some shops with north and south access from two laneways, it was commercially zoned and therefore had no height limit. The existing buildings were dilapidated warehouses with heritage zoning. Our due diligence indicated 4 townhouses were possible on the site. Our recommendation was that we could bid up to $1.4m to ensure his minimum target return. On the day we bought the site for $1.16m at auction. $6k psm for a site in Nth Fitzroy. A great result. We later negotiated with the neighbour to purchase the adjoining block, this gave us access to a laneway to the east of the site. We have just submitted plans for 5 townhouses.

Similarly in 2013 we purchased a small industrial site of 309 sqm in Abbotsford for $400k. In 2014 we secured a permit for five townhouses on the site. In 2015 our client decided to sell the site with plans and permits. It sold for $1.6m. A spectacular result.

Taking a different approach

A large part of our success is our integrated approach to development. But what does that mean and why does it help?

An integrated approach means we can get all the people you need together quickly to provide the intelligence required for you to confidently make investment decisions. Our site acquisition service gives clients access to the combined knowledge of our team of architects, planners, builders and developers to ensure you secure a profitable site.

We are small, but we are nimble and we get results. Our team use our experience and local market knowledge to:

  • help refine your strategy according to your budget
  • leverage our networks to identify suitable sites you may not have access to
  • conduct detailed spatial and financial feasibility studies to determine profitability and residual values
  • successfully negotiate purchases

Our service:

  1. saves you time – we quickly find sites that suit your budget. You get more resources working for you to find and assess more properties
  2. is easy to control  – you don’t need to manage a group of consultants to get the answers you need. You get a single point of contact for all your design, planning and development needs
  3. secures profitable development sites – we target sites with minimum forecast net return of 20% on all of our acquisitions

Want to know more?

Please download a copy of our Site acquisition service information pack.

Alternatively give Tim a call on 0407 846 965 or email me at tim@pillarandpost.com.au