Follow these fundamentals when selecting a potential property development site.
Over the last decade, technology advancement has brought properties quicker to the market than ever before, therefore increasing competition amongst developers seeking good development sites. Despite these advancements, many fundamentals remain in selecting a potential development site. To be successful in today’s marketplace, developers have to be sophisticated with sound negotiating skills. What has changed though is how they gather information and execute development opportunities. While technology has created competition, developers can now collect site information a lot faster and more accurately than ever before. With readily available property data and lightning speed sharing of information that technology provides assist developers in making informed and quicker decisions.
The criteria for a residential development site are based on several standard factors, whereas for a commercial site another set of rules apply. With commercial sites, there is more emphasis placed on a regional study as the demographic catchment area is broader compared residential where selection is more localised.
Analyse the property market trends
This is one of the most important aspects to investigate before purchasing a potential development site. Analysis of the present and predicted market conditions would determine the viability of your project, and this includes the rental and occupancy rates, yields, absorption rates and the volume of sales of similar type of properties.
Rental rates: An analysis of local rental rates for the similar type of property that you will be developing will help to calculate the market rental (the advertised rent) and the net rental (the real rent collected after all landlord cost are figured in). You should then know how your property should fit into the rental rate structure. Information on such rental can easily be found on the internet through various real estate websites.
Vacancy levels: As a property developer, you should find out the vacancy history of properties in the market and more importantly evaluate the trend for the future. By talking to the local real estate agents, local real estate research firms and property valuers you will get a good understanding of the occupancy rate in the area. In addition, you will be able to tell a lot about the health of the real estate market by the rent or sale concessions currently being offered. Carefully review the history of these concessions and analyse where the market is heading. Ensure that you research areas that have a similar location, as many properties can be in areas of low occupancy rates when the market appears to be healthy.
Recent sales: Obtain a listing of the most recent sales of similar type of properties. This list will provide information on what comparable properties have been selling for recently. Evaluate the amount of time these properties have required to find a purchaser and the percentage of the original asking price that they sold for. Also, review the history of appreciation for similar properties over the last few years and estimate the appreciation you may see in the future. A well-established local real estate agent can provide both the present and history of sales. At a small fee, there are several websites such as RP Data that can provide you with such information.
Absorption rate: Analyse how long does a property of a similar type remains vacant until it is either rented or sold. More importantly, if it has been vacant for some time find out the exact reasons why. Some properties do not move simply because of location or architectural design.
Analyse the economic characteristics
When assessing the viability of a development site or an existing building, you should review the property on not only a micro-market level but also the broader macro market as a regional area. The research should include information on the general economy, comparable properties and future development activities. This analysis should take into consideration the following:
General economic information:
In conducting this research, you should obtain the necessary information to make a judgment on the development site. The sources described below can be used to collect this information.
- What is the general trend of the economy for the region?
- What is the growth rate for the region?
- Which direction is the employment base heading upward or downward?
- What is the structure of the state and local governments?
- Does the region or city have a pro-development policy?
- Are adequate services provided to the area?
- What is the history of building applications for various types of properties?
The local unemployment figures should be evaluated to see if the area’s rate is rising or declining. A trend toward high unemployment can mean a low demand for sales or rental properties. Information can be obtained from the Department of Labour or the local Chamber of Commerce.
New construction activity and available land:
Carefully examine the current and projected commercial and residential construction activity. Is building activity increasing or decreasing? Any new building activity of a similar type to your development will add more competition to the market. Also, the rezoning of any vacant land in the area should be examined, as new land could be competitive in the future. Information can be gathered from the Australian Bureau of Statistics, the local building department, local real estate research firms and local real estate valuers.
Local bankruptcy rates of businesses in the area indicate the health of the market. The higher the rates, the closer the local economy is to a recession or depression. Check and research this information from the local banks, legal newspapers, research firms and local accountants.
Local inflation indexes:
In preparing your financial forecasts and feasibility study, you will need to know what the past cost of living indexes was and what the future trends are predicted. Information can be obtained from the Australian Bureau of Statistics and or local accounting firms.
Factors that make a good development site
Depending on the complexity of the development and your level of expertise, you may need the advice of consultants of varied disciplines when selecting a potential development site. Site requirements can vary according to the function and operation of the specific development. However, several fundamentals are applicable, which can include the following:
Location: Securing the right location is critical upon the success of a development.
Zoning: A development site should have the appropriate zoning or have the potential site to be rezoned to the developer’s requirements. The following regulations should also be checked:
- Coverage – the percentage of ground floor area relative to the total site area.
- Plot Ratio – also known as bulk or floor space index.
- Parking – each building type and each council will have its own set of rules.
- Building setbacks – also known as building lines.
- Easements – these are special restrictions conditions such as sewerage and stormwater easements etc.
Size and shape of the site: This can have an impact on your development in terms of design. The zoning density may allow you to develop 10 residential units, but the awkward shape may only allow to you develop only 8. A preliminary sketch plan will assist in establishing whether the maximum plot ratio can be utilised.
Physical characteristics: Before purchasing a development site, the physical characteristics should be reviewed as this could affect the development and building cost. These include:
- Soil conditions
Traffic flow: The success of a project will be determined by the smooth flow of traffic to and from the site. Any hindrance will affect the marketing of the development. Evaluate the following:
- Access and egress
- Volume of traffic
- Traffic flow
Utilities: The availability of telephone, water and sewer, electricity, gas and internet lines are essential for all types of sites. If not, then you should analyse the cost implication by bringing these utilities to the site.
Public transport: Potential development sites that are close to a public transport system are beneficial to both residential and commercial developments.
Real estate tax rates: Take these into account as when assessing a potential site. This includes stamp duty and any other state or local government taxes, such as rates and taxes or land tax.
Developer’s contribution: With greater urbanisation creating increased densities in the suburbs closer to the CBD, some of the local councils impose a developer’s contribution levy. The amount to be paid by the developer varies between the different councils and it best that you verify the amount to be contributed as part of your due diligence of the site.
Environmental issues: Environmentally impacted areas should be evaluated to find out if any problem could affect the value of your development as this could cause delays in approvals.
Other site considerations: Depending on the type of development, other site considerations should be considered. For example, for a residential development, a site that is close to social infrastructures such as schools, community centres, medical facilities and libraries have increased value. Whereas, for commercial developments, especially those involved around manufacturing require access to large labour pools.
Having considered the above factors, you should determine whether the price of the land is justified for your intended development. The cost of land can be broken down into a rate per square metre, but to a developer, its real value is how much building can be efficiently constructed on the site. For example, if the price of an apartment development site is $2,000,000 for a 5,000 square metre, then the asking rate is $400 per square metre. However, when analysed against the plot ratio or the number of apartments, the value may be different. If the allowable plot ratio is 2.0 or 200%, then the rate is $200 per square metre, and if an average apartment is 60m2, it allows approximately 83 apartments to be built which equates to $33,333 per apartment.
Avoid legal pitfalls
Another area of due diligence pertains to the legal limitations imposed on the property. This area includes several vital tasks.
Reviewing the title to the property: In evaluating the title, the attorney should determine if the seller or title-holder could transfer the property with a clean and marketable title. A clean and marketable title is one that is free of any liens or other encumbrances. The following items need to be reviewed in examining the title:
- The current owner of the property
- Mortgage holder
- Caveats or liens by third parties
- Easements and encroachments
- Arrear rates and taxes
- Poor legal descriptions
- Restrictive covenants
- Improperly executed deeds or other instruments
- Boundary line agreements/party wall agreements
The Dos and Don’ts
As a conclusion, it is essential to note some straightforward but helpful hints in selecting a site. Also, a site checklist is provided to be used before entering into any formal contractual relationship with a landowner. Remember that location is one of the primary success fundamentals in real estate. Any poor decision made in site selection is something you will regret.
- Secure a development site in established growth areas;
- Secure a development site in high visibility areas;
- Secure a development site with high occupancy rates;
- Secure a development site that has increased rental rates;
- Secure a development site that has established services/utilities;
- Secure a development site based on market research and not on emotion;
- Always perform due diligence on the development site; and
- Always perform pre-purchase viability.
- Secure a development site on the down cycle;
- Secure a development site unless you have enough funding to carry any interest during the holding period;
- Secure a development site that does not have the appropriate zoning unless there is a good chance of getting it rezoned; and
- Secure excessive land unless it can be sub-divided and sold to other parties or unless the land is cheap or required in a phased development.
The influence of site selection on cost
Finding a development site in the perfect location is a priority for a developer, but this is only one aspect as there could be matters that would make the site unfeasible due to physical cost factors beyond the developer’s control. This may include any the following:
The shape of the site:
A rectangular or square site is far more cost-effective than an irregular one as shown in the two diagrams below:
The slope of the site:
The steeper the slope of a site, the more it costs to build on it because foundations and supporting structures are more complex. Excavations and the need for retaining walls increases and drainage issues appear as buildings step down a slope, the area of external walls increases.
When looking at the price of a site for sale, a developer should not just compare the rate per square meter for the raw land but carefully analyse the cost against the plot ratio for the entire building(s) and the cost per unit for residential developments. As an example, if a 1000m2 site is asking $1,000,000 zoned with a plot ratio of 2.0 then the rates can be analysed as follows:
- Price for raw land: $1,000,000 / 1000= $1000 per m2
- Price for plot ratio: $1,000,000 / 2000= $500 per m2
Using the same example above, if the site allows apartments to be built and say that the average apartment is 66m2, then 30 (2000/66) apartments can be constructed therefore the land price per apartment is $33,333.33.
Poor soil conditions may require additional engineering to support a new structure. Sandy or clay soils can require deep concrete piles to achieve adequate support. Typical soil types and conditions can be compared as per the list below:
||Most sand and rock sites, with little or no ground movement from water to changes.
||Slightly reactive clay sites, with only slight ground movement from moisture changes.
||Moderately reactive clay or silt sites which can experience moderate ground movement from moisture changes.
||Highly reactive clay sites, which can experience high ground movement from moisture changes.
||Extremely reactive sites, which can experience extreme ground movement from moisture changes.
||The site, which includes soft soils, such as soft clay or silt or loose sands, landslips, mine subsistence, collapsing soils, soils subject to erosion, reactive sites subject to abnormal moisture conditions or sites which cannot be classified otherwise
Other site factors to consider:
Below are additional items that may affect the cost during site selection:
- Access: Difficult site access makes materials handling more difficult and time-consuming. Some isolated sites such as those only accessible by water increase the cost of materials and labour dramatically.
- Demolition and clearing the site: Depending on the age and scale of an old building, demolition and clearing the site can be as much as 10% of a new building. Site contamination issues such as asbestos removal can add to the building cost significantly.
- Excavation: Excavation is costly and time-consuming and often requires shoring up or underpinning of adjacent foundations. Rock excavation can be, and associated drainage issues also add to the cost.
- Availability of services: Some remote sites do not have easy access to services such as water, electricity, sewerage, stormwater systems and gas etc. Provision of these services remotely can be costly. In less isolated areas the distance from mains can also be an issue.
Residual to Land Value
When calculating a development site’s value to ensure that a project is viable in line with your targeted return, use the Residual Land calculations below: