The Smartline Report – November Edition

The month in review: Melbourne

By Herron Todd White
November 2016

Renovations within inner south eastern suburbs such as Malvern and Malvern East are increasingly popular amongst owners and investors with the region spending the second most on renovations throughout 2015 according to the ABS.

With a large portion of the dwellings in these suburbs being of period style with construction dates ranging from 1890 to 1930, very few of the original style dwellings or even dwellings with dated renovations exist. It has been noted that buyers are willing to pay a premium for properties with dated renovations, with the trend being to renovate according to their personal style rather than redevelop the property.

Due to properties in the area being of higher value, renovations are rarely on a small scale. Most renovations are quite substantial in size and cost, with many opting to fully renovate the interior whilst also extending the existing dwelling. With much of the area affected by various Heritage Overlays, it is of importance that the period façade is retained to preserve the historical significance of the era.

The recent sale of 34 Johnstone Street, Malvern for $3.4 million is a demonstration of what value a quality renovation can add for any mum-and-dad developer. Since its previous sale in November 2013, a significant renovation was undertaken to this 1920s residence, including rear extension, addition of second storey and full internal renovation. Whilst it is unknown how much was spent on the renovation, the works performed added almost 2.7 times the value of the initial purchase in just under three years, demonstrating the significant value a quality renovation can add to a property in this region.

Inner City
Renovations are all the rage in the inner city, with the current trend being renovating, extending and restoring classic Victorian and Edwardian terraces. This is occurring in suburbs such as Fitzroy, Carlton, South Yarra, Albert Park and St Kilda amongst others. The key challenge facing owners of these properties is maintaining the heritage façade whilst still being able to modernise the property. To obtain approval in the majority of cases, the house will need to maintain the front two rooms on both levels if applicable and demolish the rest to build a modern extension, sometimes with a second level attached. One loophole that was exploited several years ago was at 8 Tyson Street in Richmond. Instead of maintaining the façade and building a modern extension, the owners demolished the house completely, built a modern house and laser etched a photo of the original façade onto the front of the house, giving the illusion that the original dwelling was still there.

In Richmond, a nicely renovated single level, single fronted Victorian on 210 square metres recently sold for $1.695 million. It is located within a leafy street in a good part of Richmond. It was purchased in 2010 for $925,000.

Due to the requirement to retain the façade and the usually tight streets in the suburb, the build contracts are usually higher than they would be for similar works further away from the city. As a result there is a good risk of over capitalisation as the cost to buy and build may outweigh the subsequent sale price. However there is still a good possibility for profit as long as the contract is well managed and the end finish is desirable. We have encountered a large number of owner builder projects where over capitalisation has occurred.

Inner West/North West
In the inner western and north western suburbs of Melbourne, projects such as dual occupancies and townhouse developments have increased significantly. This has been seen particularly within suburbs such as Strathmore, Essendon, Ascot Vale, Footscray, Newport, St Albans, Sunshine, Altona and the surrounding suburbs.

There are many town planning considerations to take into account when planning a development. Each council has its own guidelines for multi-unit developments. For example, the Hobsons Bay City Council assesses many factors when considering granting or rejecting a planning permit application. Some of these considerations include whether the development fits in with the neighbourhood character, how the development will affect daylight to existing windows, whether the development will place walls on the external boundaries, how the development will overshadow open spaces and if the development will provide safe access between roads and the individual lots. Within the suburb of Altona recent land sales are indicating rates of between $1,355 and $1,930 per square metre for allotments with permits and between $1,225 and $1,375 per square metre for allotments suitable for development (STCA). 21 Blyth Street, Altona sold on 8 October 2016 for $992,000. It was sold as a vacant allotment with plans and permits for two dwellings.

As shown above, the permit is for the construction of two double storey duplex style dwellings. The allotment size is approximately 514 square metres. The sale price of $992,000 reflects a price per square metre of land of $1,930.

Northern Suburbs
Predictably, land size informs the type of development taking place in the inner north of Melbourne. In Brunswick and Brunswick East, four kilometres and six kilometres north of Melbourne’s CBD respectively, where sites tend to be narrow and small, there are less small scale projects with the majority of development centred on larger blocks of apartments along the main thoroughfares of Sydney Road, Lygon Street and Nicholson Street.

Small scale development is evident in Reservoir and Preston. At 13 Steane Street, Reservoir, a 746 square metre site with a single dwelling sold for $787,000 in May 2016 ($1,055 per square metre). Number 15 Steane Street, Reservoir (on 738 square metres of land with plans and permits for three dwellings) subsequently sold to a different developer for $815,000 in August 2016 ($1,104 per square metre). (Source: Core Logic, 2016.)

Six hundred metres away, 1 Crevelli Street, Preston, on the corner of Crevelli and Tyler streets and opposite a park and Preston North East Primary school, sold to a developer for $1.006 million in August 2015. The 726 square metre site has a street frontage to Crevelli Street of 20 metres and a depth (fronting Tyler Street, Preston) of 37 metres. The land is zoned general residential by the City of Darebin which allows for moderate housing growth, medium density and diversity. Dual occupancy, villa units, townhouses and in certain cases low rise apartment developments are permitted.

The original 1950s dwelling is being replaced with a medium density four-unit development (pictured below). These 3-bedroom, 2-bathroom, 1-garage townhouses are currently being sold off the plan with a quoted price range of $790,000 to $895,000. Assuming total sales of $3.265 million (i.e. $895,000 for the larger unit fronting Crevelli Street and $790,000 for the three other units fronting Tyler Street), this would appear to be a profitable development.

The developer of 1 Crevelli Street paid $1,386 per square metre, a 20% premium on the latest sale on Steane Street, Reservoir. While Crevelli Street, Preston is not the most sought after pocket of Preston, this higher rate per square metre may be attributed to its corner location which allows for four units, each with street frontage, rather than three and a location across the road from the park.

Steane Street, Reservoir and Crevelli Street, Preston are not the most the desirable pockets of these suburbs and it appears that these are high sales.

Outer East
Bayswater, Boronia and Kilsyth tend to be experiencing the highest number of two and three lot subdivisions, with existing owners deciding to subdivide their large sites, capitalising on the higher land values. A recently valued large site in Kilsyth was valued at $640,000 prior to the land being subdivided. Following a two lot subdivision, the rear vacant site was sold for $300,000 while the front renovated property sold two months later for $540,000. Taking into consideration the associated costs of the subdivision, the owners would still have realised a healthy net profit.

In general however, novice developers can expect a 5% to 15% return, the higher percentage being associated with more popular suburbs such as Ringwood and Ringwood East, where the underlying land value is a key component of the overall value.

Subdivisions which include more than three lots tend to be carried out by the larger and more experienced local developers as opposed to novice developers. Zoning, in particular design and development overlays, in Boronia has been a key factor which has unstuck many novice developers unaware of the strict requirements imposed by council. Additionally suburbs such as Croydon have a minimum land size requirement of 300 square metres and at least a three metre driveway for access to rear dwellings thereby again catching out would-be developers aiming to make a quick profit.

Renovating and then selling has become considerably more popular in Ringwood and Ringwood North with buyers tending to pay a small premium for updated and renovated properties. However, the existence of such opportunities tends to be scarce, with most would be developers buying with the aim of holding the property for the long term and realising a profit in the future.

The general advice for novice developers within the outer eastern suburbs is to thoroughly research all of the potential costs associated with a development and in general, to stick to the smaller renovation or subdivision projects which have a lower risk and reasonably swift turnaround time.

South East Corridor
Small development projects in the south eastern corridor are most common within the municipality of Glen Eira, especially on the larger blocks found in Bentleigh and Bentleigh East. The most common project we see in these suburbs is the construction of two townhouses (either semi-detached or fully detached) on one site, with the intention to either subdivide or to keep as dual occupancy. Typically these townhouses have their own street frontage, however we regularly see one townhouse built behind the existing. From our experience in this area, complications regarding permits and town planning rules are infrequent, however there have been scenarios of overshadowing restrictions and neighbour complaints holding up the process. Supply of these townhouses in the inner south east is low, with demand high.

Find out more information and to chat with local Mortgage Brokers in Melbourne and Mortgage Brokers in Richmond.

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © Smartline Home Loans P/L 1999 – 2016. Australian Credit Licence Number 385325

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