By Herron Todd White
Firstly, a short COVID update.
Since last month’s edition, we have seen the number of daily new cases of COVID-19 in New South Wales remain low. We have also seen the first stage of the easing of restrictions and also the lifting of restrictions on live auctions and open homes. This has at least made the process of selling more straightforward and has seen an instant bounce to auction clearance rates, back up above 70% for Sydney, mainly as a result of the number of auction withdrawals returning to more normal levels.
The last month has still seen prices remain fairly stable overall, however as discussed previously, there are some localities and price points seeing some discounting. This is mainly due to the number of new listings remaining subdued, meaning that supply and demand are staying relatively in balance. The concern is what will happen later in the year when government stimulus and mortgage pauses end. There potentially could be a significant increase in new listings, some under distressed circumstances, which could have a large impact on prices heading into 2021.
In the rental market we have continued to see an increase in vacancy rates and a fall in asking rents. Houses, somewhat surprisingly, have experienced a quicker fall than units over the past two months. With restrictions around travel within the state and within Australia likely to be eased in the coming weeks and months, short-term holiday rentals that have been transferred to the long-term rental market may start to transfer back to the holiday market, easing vacancy rates.
Now, onto our renovation conversation
Renovation is a popular option in many parts of Sydney, particularly in inner Sydney and harbour side locations where extension and renovation of an existing home is a more viable option than a knockdown and rebuild.
These areas often have heritage and other planning restrictions that make it difficult to get approval to do a complete rebuild. In addition, it is also desirable to maintain the period features of older dwellings whilst upgrading the fit out and increasing the floor space.
In the middle and outer rings, there is more of an appetite for knock-down and rebuild, increasingly for duplex and small townhouse style developments to take advantage of larger land parcels. Granny flat builds continue to be a popular option in these areas too, either for extended families or for those looking to obtain some additional rental income.
This doesn’t mean that renovations aren’t an option here, as owners look to enhance their homes by something as minor as a fresh paint or some additional landscaping, through to a full blown second floor addition and full renovation.
Inner Sydney Property Update
It is not uncommon to see residential properties undergoing renovations throughout the inner suburbs of Sydney. Narrow laneways with skip bins and trucks parked on the kerb is an all too familiar sight for many older heritage style localities in suburbs such as Glebe, Surry Hills and Darlinghurst. This trend has been evident for many years now and we expect it to continue into the future, even within this current COVID-19 pandemic.
One of the reasons we anticipate minor renovations to be evident in the short term is due to people being locked-up at home and looking for constructive projects to complete around the house which will serve many purposes such as increasing the presentation of their homes and also providing much needed stimulation throughout this lockdown period. This could partially explain the continued demand and long queues at Bunnings Warehouse over recent weekends. Even larger renovation projects have continued to be evident as owner-occupiers look to improve the value of their properties and engage builders and tradesmen at potentially reduced costs, at least in comparison to recent years. A slowing construction sector, low interest rates and lack of supply in many locations and sectors are likely to encourage renovation projects in the near future.
Investment properties such as older style home units are also likely to see continued renovations as potential tenants are provided with greater choice at reduced asking rents. It will be imperative that investment properties are presented in the best possible condition, otherwise tenants will quickly choose a competing property in superior condition or alternatively demand a discounted rental price for any sub-par properties.
When renovating it is essential to understand the main goals for doing so, whether that be to sell, rent, or purely to renovate to personal taste to live in long term regardless of how this appeals to the local market. A few significant aspects to consider when deciding to renovate are in relation to possible heritage restrictions, planning limitations, site access and the scope of works being carried out.
We hear of many renovation success stories, however a significant part of this requires understanding the intended personal objectives of renovating a property and if renovating with the aim of selling for a profit, then timing of the market cycle (which can involve some level of luck) is important. Some other techniques to ensure renovations are not overcapitalising is by focusing on what the local market desires most, researching recent sales of similar properties (on completion of the renovations) and then ensuring the cost to do the chosen works does not blow out your budget or exceed the market value of the finished product.
A recent example of a blank canvas property in Glebe, which sold for $1.86 million at an online auction on 4 April, almost $200,000 above reserve, indicates that there is still demand for this type of original property that requires a full renovation.
Eastern Suburbs Property Update
The majority of development applications in the eastern suburbs relate to renovations and extensions. Renovations are generally made by owner-occupiers looking to enhance their current home to meet their changing needs and include examples such as renovations of terraces in Paddington and Woollahra, to second storey additions to semi-detached homes in Maroubra and Randwick, to huge extensions and renovations to large prestige homes in Vaucluse and Bellevue Hill.
While we do see full renovations of units and townhouses in the eastern suburbs, it is more often the case that a part renovation is undertaken to get an uplift in rent for investors, or an uplift in price for owners looking to sell after the renovation. These renovations often focus on the works that will give you more bang for their buck such as a new kitchen, bathroom renovation or new floor coverings.
Given the local government areas of Woollahra, Waverley and Randwick have a significant proportion of development applications relating to renovations and extensions, we took a look at the number of new development applications lodged so far this year and how that compared to last year.
In the period to the middle of May this year, Woollahra LGA saw 150 new development applications lodged. This was slightly down on the 170 lodged over the same period last year. Waverley had 150 in both years, while Randwick dropped from 270 last year to 215 this year. These numbers may reflect the stronger property market conditions in the first quarter of 2020 compared to 2019, with owners looking to sell rather than stay and renovate, but may also indicate that some owners may be placing larger renovation projects on hold under the current COVID-19 environment.
A good example of uplift in value from renovating in the eastern suburbs is a property at the southern end of the region in Chifley. The original two storey, semi-detached, fourbedroom, two-bathroom dwelling situated on a thoroughfare opposite Long Bay Correctional Facility, sold in September 2018 for $1.15 million. After a full renovation, the property resold in November 2019 for $1.9 million, more than covering the cost of the renovation.
Another example at 9 Jane Street in Randwick saw a detached, single level cottage sell originally for $2.1 million in June 2019, then undergo a full renovation, before selling again in April for an undisclosed price above $3 million.
Both of these examples also benefited from an improving market between purchasing and selling. This is an important consideration for anyone looking to flip, as in a falling market it may be difficult to cover your total costs after completing the renovation.
Northern Beaches Property Update
The Northern Beaches area is heavily owneroccupier driven and most renovations occur for this purpose, whether that be for first-home buyers looking to add value or families looking to upsize but remain in their existing homes.
Freshwater is one of the most active suburbs for home renovations at the moment. The suburb has one of the highest number of outstanding development applications in the Northern Beaches Council with around 30, particularly high considering the size of the suburb.
Entry level into the Freshwater market for housing is typically $1.5 million to $2 million, depending on the position in the suburb, land characteristics and accommodation size. Generally speaking, construction works typically return their cost and often a profit.It is prudent to analyse sales in the local area of finished, renovated homes if creating equity is a major factor in your decision to renovate. The sales will assist in determining what the market is willing to pay for certain products, help set a construction budget and provide design ideas and concepts that the local market is receptive to.
A recent example of this is 70 Soldiers Avenue, Freshwater which sold for $2.725 million on 9 April 2020. This circa 1960s, four-bedroom, threebathroom property recently underwent a full renovation and is a good benchmark for owners looking to renovate their existing homes in the suburb.
Prestige/Upper North Shore Property Update
The prestige market on the Upper North Shore is seeing plenty of renovation activity, although this is not uncommon for this area of course. It can traditionally be very hard to find a property that ticks all of your boxes at this higher end of the market, so usually buyers or owners are willing to renovate as needed and are more likely to have the funds to do so. This has become even more pronounced with the dramatic drop in the amount of stock coming onto the market during this COVID-19 period. Home-owners who were looking to potentially upgrade prior to March this year may now be nervous due to the current uncertainty in the market and decide to renovate instead. These same owners may now have slightly more time on their hands too, allowing them to investigate the renovation and associated DA process.
Renovations on the Upper North Shore, assuming undertaken to a quality standard, traditionally provide the added value of the completed work at a minimum. Of course there is always the odd property where over-capitilisation has occurred, but it is hard to go wrong in this sector of the market if owners follow the basic renovation rules.
An example of a recent purchase and renovation job re-sold in March this year for a substantially higher price. The period property in Killara sold in May 2015 for $2.75 million and was in dated condition throughout. After some small extension work, floor plan re-configuration and a full internal renovation, the property re-sold in March this year for $6.1 million. Of course there has been some market growth over this period too, but it is still a good example of the added value of quality renovation works. Situated on a good sized block with a highly desirable north-to-rear aspect and located in a well-regarded street, this was always going to see a substantial increase in value.
Western Sydney Property Update
If the queues at Bunnings are anything to go by, home renovation seems to be on the rise in western Sydney. Niggling jobs that have been put on the backburner are now being addressed, be it patching a hole in the wall, reconfiguring the rear garden or even a second storey extension.
Western Sydney is a diverse area for real estate and this allows residents a larger choice in property. Families who have outgrown their existing property have a number of options such as upgrading to a new property in the growth areas or buy an existing dwelling and renovate.
The north-west and south-west growth precincts have seen substantial development of new dwellings on smaller allotments over the past five years, with many buyers upgrading to these readymade new products rather than undergoing an extensive renovation on their current dwelling.
Given the lower price points in western Sydney compared to eastern Sydney, it is vital to analyse the current renovated sales to ensure you are not overcapitalising. This is particularly important for investors as it is dead money that could have been used elsewhere. Owner-occupiers may not be as concerned as over time these costs will be absorbed as the market improves.
For years, investors have been actively buying older run down properties in western Sydney and updating the dwellings to not only add value but increase rental return.The addition of a well-placed granny flat in the rear yard further increases the yield for the investor.
An example where this has worked is in Whalan in the Blacktown LGA. This three-bedroom, onebathroom dwelling sold for $366,000 in February 2019 and after undergoing a full renovation, sold for $520,000 in February 2020 through Raine & Horne Penrith.
Regarding the cost to renovate, it seems that engaging a skilled tradesperson to complete some work is not a cheap exercise. One has only to look at the number of shiny, dual cab utes on development sites to see that skilled tradespeople are in hot demand, mostly thanks to the amount of infrastructure and construction within the Sydney metropolitan area.
In Prestons, the difference between a renovated and unrenovated entry level home is demonstrated by the results of two sales this year.18 Cedar Road, an unrenovated property, sold for $676,000 in January, while 32 Grevillea Crescent, with a basic internal renovation, mainly to the kitchen and bathroom, sold for $740,000 at the end of March. Whilst not a large uplift, it would easily cover the cost of completing the renovation works.
Speak with a Sydney Mortgage Broker today.