The month in review: Perth
By Herron Todd White
Investors have largely retreated from the Perth small scale development market over the past 18 months however speculation about timing of the bottom of the cycle is rife. Small scale development sites in particular have been on the nose, but with prices in many areas approaching single residential value and reducing the risk profile of these sites significantly, there appears to be a renewed interest in some areas, although not all.
Due to the declining values of resultant units and villas in recent times, the profit available in many developments has dissipated or disappeared altogether. Further, the cost of construction does not appear to have declined in line with what the market may have expected from a subdued labour market. Add to these factors that the likelihood of any short term notable uplift in values of these products is difficult to predict at the moment, the net result is a risk averse market looking for cost savings in all aspects of the development for any proposal to be economically viable.
In lower socio-economic areas such as Armadale in the south-east corridor of Perth, small lot development sites (R30/R40) appear to be attracting no premium whatsoever over and above standard single residential lots.
In the similarly located suburb of Gosnells, investors can take advantage of a development bonus for corner lots where the local council offers a higher density over and above the listed R-code. When combined with a build and retain scenario, these can allow developers to purchase a decent allotment and retain some income flow whilst they pursue development of the remainder of the site.
However in slightly better locations, there is some sign of an increase in speculative activity. An example of this can be found in Gabriel Street, Cloverdale, where many sites have a zoning of R20/50/100 and offer a variety of development opportunities. The property at 127 Gabriel Street transacted in May 2016 for $535,000, whilst an almost identical property situated at 131 Gabriel Street transacted in July 2015 for $610,000. More recent activity indicates a higher level of interest in similar properties above $550,000.
Further south in the coastal town of Mandurah, there appears to be a long term focus from speculative investors as opposed to any short term development plan. Supply of end products appears to have peaked just as the wider market cycle has reached or is approaching the bottom, resulting in infrequent development starts in the past six months. Various zonings within the area are also having a significant influence on subdued development conditions, with compulsory two storey street front development requirements clashing with a negligible sale premium for these products over single level construction.
In the Pilbara region, we start to see more extreme examples, such as a property on Richardson Street which has recently transacted. The property features a basic dwelling in average condition situated on a 956 square metre allotment fronting the Port Hedland foreshore. During the peak of the mining boom, the property was subject to a Development Approval for 23 units and was purchased for $2.2 million. However as market conditions declined rapidly, development of the allotment was no longer viable. The property has recently transacted for a figure below $550,000, which indicates minimal premium over and above a standard single residential allotment.
While it may have become more attractive to purchase development sites in the current market, we urge caution to all novice developers. The economic viability of many developments is extremely fragile with any unplanned expenses likely to push the development into the red very quickly. Relatively simple duplex developments are likely to offer a more comfortable risk profile, particularly on a build and retain basis. Profit margins may be smaller, however they reflect a lower risk than multilot development in the current market.
Find out more information and to chat with a local Mortgage Broker in Perth.