Regional NSW

The Smartline Report – November Edition

The month in review: Regional NSW

By Herron Todd White
November 2016

Southern Highlands
With strong prices in the residential market being achieved across the townships of Moss Vale, Bowral and Mittagong, it is not surprising that there is an increase in activity in the stand alone renovate, extend and sell market. Traditionally 1910 to 1920s cottages close to the town centres have been the subject of the first wave of this style of development. This has more recently extended to second ring areas that historically have been characterised by affordable, stand alone dwellings of circa 1950s to 1960s.

Under the current Wingecarribee LEP 2010, there have been infill development opportunities for villa development, which have now become economically viable with the increase in completed unit sales prices. This is particularly the case in the townships of Bowral and Moss Vale.

We have also noticed the emerging popularity of dual occupancy developments across the hamlets of Hill Top and Bargo being located in reasonable proximity to the freeway. Entry prices range from $500,000 to $1 million and experienced developers have been obtaining normal profit on costs of 10%, timing and quality being the key.

Southern Tablelands
Similar to the Southern Highlands, redevelopment opportunities of stand alone cottages within walking distance of town seem to be the most popular type of development for the small developer. Again key to success is experience in the market and control of costs via utilisation of local reliable contractors. Entry prices are between $450,000 and $600,000.

NSW Mid North Coast
This month we are looking at small development projects within our area, focusing on the mum-and-dad developer.

On the Mid North Coast we have noticed a recent and significant increase in dual occupancy style developments. This style of development has become very popular with the small investor and is becoming predominant in the new and developing residential areas, particularly within Port Macquarie around the new University and Base Hospital.

Investors are generally purchasing off the plan within these new subdivisions and constructing a variety of styles of development. These range from two attached villa style properties, two attached townhouse style properties or a single dwelling with attached (or detached) granny flat. These developments are permitted by most Councils as part of the original development application.

The price range for this style of development is from about $550,000 to $750,000 depending on the style, size and quality of the construction. The initial outlay and good rental returns resulting in a good yield are the major benefits of this type of development. Other fringe benefits include lower stamp duty and higher tax depreciation offsets compared to, for example, buying two older investment properties.

Another positive feature of these types of properties are that most are able to be strata titled in the future if required. This provides the developer flexibility with their investment, allowing them to sell off one and reduce the mortgage and enjoy the return from the other or sell both off generally for a healthy profit.

Another small project that is becoming more popular with the mum-and-dad developer is the purchase of an existing dwelling on a larger than average lot within the major towns in the region, and then adding a granny flat (under 60 square metres) to the rear. This has the great appeal of a significant return on investment for the flat, with the starting price for flat construction from $100,000 and likely rental in excess of $250 per week. When this rental is combined with the rental on the original dwelling it can make for a great yielding and generally positively geared investment property.

We have also noticed an increase in small to medium villa and townhouse developments (four to ten plus units) and consider that these are best left to developers with experience in these types of developments and not novices, because if these products are not tailored to the specific market or the sales rates are not as expected, there can be expensive holding costs that can erode profits and cause financial pressure on those without extensive cash reserves to call on.

NSW Central Coast
In many ways, the Central Coast’s real estate market is the beneficiary of values rising within the Sydney market. The point was reached some time ago in Sydney where would-be investors with spare cash and ambitions to build wealth using property as a base were squeezed out due to the widening gap between affordability and property values.

Being an immediate neighbour north of Sydney means that it’s just a short drive up the M1 freeway to reach our region and this has been recognised by those displaced investors. The word is certainly out that the coast is the place to be.

A drive around the region’s main centres reveals there is activity aplenty in new developments, lots of renovations, big and flashy marketing signs on properties, cranes in the sky and tradies everywhere.

Our only questions are how long will this last and are there indicators of the brakes being applied?

Smaller investors on the Central Coast have traditionally targeted the renovation or dual occupancy markets. This is still the case as evidenced by the constant stream of older houses purchased, made over and onsold. Those a little more adventurous who have purchased a small development site and built two or three villas have been largely successful provided they have good planning and an understanding builder. Investors with the ability to do so often retain a villa in these developments.

We have found in more recent years this type of development is still being seen, but less so.

What we have found is that as investors have become more sophisticated, diversification has become evident. We are seeing more of these people buy new units and dwellings, often off the plan. The attractiveness is having a ready made product with an instant return without the heavy lifting and in the current market, a rise in capital value before the property is paid for.

Another interesting phenomenon is the number of properties being purchased by investors with an older dwelling in place and immediately adding a second dwelling (previously referred to as a granny flat). This is achievable under current town planning rules which are quite easy to navigate and a degree level knowledge of town planning is usually not required. The percentage returns are quite attractive for this product and we think lenders and insurers also seem quite comfortable with this type of investment at the moment. However, we wonder if there are too many of this type of property emerging and how long before the service infrastructure system becomes problematic through the strain of extra loads leading to the introduction of additional levies by council on this type of development, thus perhaps eroding investor gains.

Adding a second dwelling is occurring in many parts of the region, but quite possibly more so in the Peninsula areas of Woy Woy, Umina Beach and Ettalong Beach. It’s now almost a case of dual occupancy properties outnumbering the single occupancies. This proliferation, along with the extraordinary growth in values of all property types seen on the Peninsula over the past several years is becoming alarming and in our regular high level reporting to major lenders, the possibility of values becoming unsustainable has been flagged. We say this on the back of prices we see being paid for development sites versus the cost of developing them and end sale prices where we are sure the margins must be thin.

We are regularly seeing small development sites selling on the Peninsula for around the $700,000 mark but up to as much as $900,000. At these levels of buy in, development of two or three villa or townhouse sites in these areas are nowadays more the domain of professional property developers with the necessary skills and backing to make a living from them.

Other areas where we are seeing more second dwellings include some parts of Bateau Bay, Killarney Vale and Berkeley Vale. These areas are towards the central part of the region and have seen steadily growing values. The presence of villas is less than many other areas and there are virtually no unit developments. Thanks largely to affordable entry price points, good topography and a few locals turned celebrity renovators, this part of the region is deservedly becoming more popular, and at this time, we see no quantifiable evidence of prices paid putting it out of reach of buyers and investors.

The Toukley, Gorokan and Budgewoi areas are also seeing a trickle of second dwellings coming into the area, but the few new investors tend to be sticking to traditional bricks and mortar type properties where acceptable 5% to 6% returns from rental properties are the norm. We have found that these areas are yet to experience the high levels of demand seen in others, but we don’t think this will last – take that as a heads up.

These areas are towards the northern end of the region and sit on the edges of Tuggerah and Budgewoi Lakes. Buy in prices for older style dwellings with renovation (and value adding) potential start at mid to high $300,000 which on today’s property value spectrum is considered comparatively low. Re-sold renovated dwellings regularly sell for well into the $500,000s and the investor market for villas and townhouses does not appear to have been approached with any great gusto.

Rounding out the renewed level of development occurring in the region, the Gosford City Centre is buzzing with new, large scale (by local standards) residential unit complexes. In fact, when we last looked, over 2,000 units had been approved. Fortunately, they won’t all be built concurrently thus leading to an oversupply situation of disastrous proportions. With few exceptions, most of these developments are shaping up to be good in quality and amenity. Those slightly more sophisticated mum-and-dad investors we spoke of earlier are acting on these developments with take up rates being reported as good. Expect to pay around the $400,000 mark and upwards for units in these developments. A good vibe is emerging here, but we caution would-be investors to closely monitor the number of new developments coming out of the ground and avoid them if an oversupply situation is likely.

The same can be said for new unit developments in the popular seaside suburb of Terrigal. There are a few new unit developments under construction right now and we think they are good value. One in particular by a family based developer who rarely gets it wrong in terms of style and timing has a boutique ethos and this is a real winner – but too late for investors on this as they have been sold. If it’s any help though, there are still a few available in the development next door.

The purchase and subdivision of a land parcel sounds easy. It’s only a block of land screaming out to be cut into two or three pieces right? Wrong. We suggest that any small subdivision is difficult and costly to complete, so be very careful. We sometimes see smaller investors buying smaller sites for subdivision and sale. Despite the size and availability of englobo parcels, the Central Coast has comparatively few opportunities in this regard, so while we see the odd small subdivision, they are uncommon. Most subdivisions involve larger land parcels which are well out of reach of the small investor in terms of both cost and complexity.

Before putting away the keyboard, we should take a look The Entrance. This is a complex corner of the region. In years past, developers, investors and many other wide eyed Sydneysiders loved the area. Unfortunately, the love was too great and the area suffered badly when the market last crashed. Developers and investors were left in a pretty bad way and lenders were burnt.

While still well short of the halcyon days, weekenders and holiday makers are back to calling The Entrance a great place to visit and stay. The market here has been steady and it isn’t setting any records. We are however, slightly surprised at the subdued level of new development occurring. Values haven’t been rising as quickly as some other areas and whilst we are yet to see any real signs, this might change.

NSW North Coast
The Clarence Valley
The main small development projects in the Clarence Valley are renovations, particularly in Grafton where you will see investors purchase a 1950s original dwelling for approximately $200,000, undertake refurbishment and modernisation works and resell it for closer to the $300,000 mark.

There are a handful of subdivisions situated around Yamba. It has been noticed that some builders are taking advantage of the current strong market conditions and are able to undertake speculative developments (i.e. build for themselves below cost due to builder’s margin and sell for a profit).

The only town planning considerations or rules in relation to these properties are to ensure that you are within the correct zoning for such ventures and watch for Heritage listed properties.

The area has a shortage of selling stock due to the infrastructure upgrades within the Clarence Valley and there are profits there to be made. However, the potential capital gains are not substantial and there is the risk that over capitalisation may occur in the current market place. With small projects in the region it is best to do your research and keep it simple.

Byron and Ballina Shire
Dual occupancy is the most popular form of small development currently being undertaken in the Byron and Ballina Shires. This is because the rental return is currently so strong for these property types. Studio and granny flats are the most popular form of dual occupancy and you will find these on both rural residential properties and standard residential properties.

Like most local authorities, in the last few years the Byron Shire has relaxed its rules and approval process in regard to dual occupancy developments, hence the surge in this type of development. The increase in this form of development has also occurred due to lack of housing in the area and Council trying to prevent home owners from illegally converting garages and non approved studios for leasing out.

Ballina Shire has also waived their developer fees for secondary dwelling developments and has extended the current scheme until 31 March 2018. It is interesting to note that the population and number of dwellings have been increasing, but the number of persons per occupied dwelling has been decreasing, so it has been the Ballina Shire’s intention to increase the number of small dwellings in the shire through construction of dual occupancies and studios.

The market is not considered to be oversaturated as there is a need for this type of development in both Byron and Ballina Shires and there is little available stock. Even though premiums are currently being paid for land, costs to build are still relatively low and the overall value exceeds the cost to build, more so in the Byron Shire. As a result, there are definitely strong capital gains to be made on this type of development. It is the vendor’s decision whether to sell up now while the market is strong or retain the property and benefit from the strong rental income.

The majority of small projects undertaken within the regional centre of Lismore and to a lesser extent in Casino and Kyogle, generally involves the addition of a second dwelling on an already established block of land with an existing house. Traditionally, such developments are only viable if there is sufficient side access i.e. six metres or more distance from the house wall to the side boundary or if the property occupies a corner site. In such cases the land area needs to be of a sufficient size (generally 600 square metres or more) and the existing house positioned towards the front corner.

Other projects can include a full refurbishment of the house with new kitchen and bathroom being particularly favoured or addition of a bedroom by utilising excess space within a large living room.

Such development tends to occur in older dwellings, particularly those with a bit of character and located in areas within close proximity of the town centre, such as Girards Hill. However, any suburb within Lismore City can benefit, providing the cost to carry out such renovation is within budget and not overcapitalised.

Within the last few years, Lismore City Council has been actively encouraging infill and medium density development near the town centre or services such as shopping centres, hospital and medical establishments. This has come in the form of increased floor to site ratio, expressed as a number of units per square metres of land.

With profit margins being relatively slim at 10% to 15%, the price level of such developments can be somewhat hedged by a ceiling level, i.e. purchase of any property over $400,000 would increase risk and ultimately the likely profit on the total outlay is generally reduced. Looking for bargains at purchase is usually the first step to ensuring a suitable profit margin is maintained.

The market is relatively thin for small projects within Lismore City as the demand is not significantly strong. Most of the current development projects are for large subdividable residential zoned land of 20 plus lots, large scale rural residential subdivision or spec builders within new estates. The supply of land suitable for splitter subdivision is limited with much of the new residential estates already comprising smaller sites. The once vaunted quarter acre block (1,012 square metres) of yesteryear is now relatively rare within flood free or level sites. There are always some opportunities, however they are quick to be pounced upon and small in number.

Small projects to stay away from include older style brick and tile units in generally fair to moderate condition, particularly if the solvency of the body corporate has question marks or the main structure is in poor repair. These can be expensive to repair and not a fun way to inherit past problems from previous owners.

Also to avoid are flood prone properties with large site areas. Sometimes, the truth is stretched in regard to development potential and ability to subdivide. However, a thorough review of the local environmental plan and development control plan make it very clear what can and can’t be done.

Coffs Harbour
Being a regional area, we see the mum-and-dad developments relegated generally to splitter blocks, dual occupancy and duplex style developments. There are no specific areas where these types of developments are being undertaken. These occur where the small developer looking to increase returns and long term wealth sees an opportunity.

Typically lot sizes in excess of 800 square metres are required to split or subdivide existing house blocks subject to council approval and dependent upon the shape, street frontage and position of the existing improvements on the site. We see this type of development being more financially advantageous within popular locations such as the beach side suburbs of Sawtell, The Jetty precinct, Woolgoolga and the rural township of Bellingen where vacant land is scarce and demand is high. The entry point in these areas for a suitable property to split would range from around $450,000 to $550,000. The more suburban areas of Coffs Harbour could see the entry point at between $375,000 and $425,000.

Rural localities such as Korora to the north and Bonville to the south of Coffs Harbour have undergone zoning changes which allow for subdivision of larger acreage sites into one hectare allotments. These areas are seeing more activity with regard to splitter blocks however we do note they come with greater environmental controls and constraints which may make development less viable in some cases.

We are seeing increased activity for dual accommodation development in the form of granny flats due to council relaxing the red tape and cost associated with approval for these developments. Typically the size of these flats must be 60 square metres or less. They have the potential to rent for $200 to $300 per week depending on location and design.

To a lesser extent duplex development is also taking place within the more modern estates where land has been available at a reasonable cost (sub $200,000) such as Sandy Beach to the north and Valla Beach to the south. This style of development gives good returns with the option to strata title in the future and sell separately for capital gain.

As property values continue to rise due to demand and the limited supply of land with increasing generations of families living on the same property, we are seeing more and more mum-and-dad developers undertaking options to split blocks and develop dual accommodation. Councils are becoming more relaxed with these styles of development making it easier and less costly to undertake.

We would always caution any would-be developers to take the time to understand and seek out professional advice with regard to local town planning regulations and any constraints associated with each individual property before purchase with the intention of development.

The most common small projects undertaken in Tamworth are dual occupancies and subdivision of larger blocks. There has been a notable increase in the construction of dual occupancy dwellings either as two identical units or as one large dwelling with an attached, smaller granny flat at the rear.

Oxley Vale and North Tamworth are where we are seeing the majority of these dual occupancy projects, both constructed and bought, however an increase has also been noted within South Tamworth and Kootingal. In terms of splitting blocks, North and East Tamworth have seen larger blocks split as these suburbs are traditionally older and more tightly held.

As long as the size of the block allows for the construction of two dwellings or subdivision, we have not seen any real issues for developers in achieving their goals.

The buy in price for dual occupancy properties ranges from $250,000 to $800,000 depending on the location and quality of the product. A gross return of 6% plus is the market norm. The construction of new dual occupancy properties does not see a big profit margin in capital gains however provides good investment returns and tax benefits which attract investors.

The market is performing well with a good mix of investors and owner-occupiers. While competition for development sites located within the more tightly held suburbs is high and strong prices are being achieved, there are plenty of development opportunities in other suburbs that allow first time developers the opportunity to enter the market at a reasonable price.

We have seen that particularly within the more tightly held suburbs where houses on larger than standard blocks are available, good profit can be made by splitting the block or building a second dwelling. These blocks can also make good gains by being held long term.

Novices are recommended to think carefully about which suburb they choose for their project as although the draw of high rents and cheap land may attract them to some of the more inferior suburbs the lack of capital growth and increased risk of property damage makes it more favourable to pay more for a superior area.

Residential property development is continuing at a fast clip, particularly in a number of subdivisions with vacant lots on the fringes of Bathurst and Orange. In Bathurst a major developer is the Council providing service connected lots. The increased cost of housing in Sydney, the availability of health facilities for retirees and improved transportation are some reasons for the growth.

For a new development it might be worth considering a product which in some way is distinctive from the majority. This may be the location or the nature of the development. This can be beneficial for realising future capital gains and maintaining strong returns. An example is a community title development under construction with plans for a pool and a gym. It is unique for the area and it will +be interesting to see how the property tracks over time. Consulting your friendly local agent or valuer for what would or wouldn’t excite the market is a good idea. The downside is that it may not fit with the clunk-thump machinery that is geared up for churning out widgetlike residential developments. Property development made easy and affordable for many may mean a product indistinguishable from the majority. While the market is firming right now there is potential for oversupply in some pockets and such a property would feel the pinch the quickest. Many developers recognise this and this is pushing up the value of centrally located blocks with development potential, exacerbated by increased density allowances. Accessing greater profits, it seems, may require a greater initial outlay. For smaller investors this is what can make Real Estate Investment Trusts and other property investment vehicles attractive.

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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