Regional QLD

The Smartline Report – November Edition

The month in review: Regional QLD

By Herron Todd White
November 2016

The Toowoomba residential property development market experienced a period of robust growth during 2013 to 2015, however it has slowed rapidly throughout 2016 to date. A large number of small projects have been undertaken during this time, including one into two lot subdivisions (with and without a new build on the newly created lot), new duplexes and small unit developments and speculative detached housing. Below is an example of a one into two lot subdivision in South Toowoomba on busy James Street. The existing dwelling was renovated and resold on the smaller 473 square metre lot and the 671 square metre hatchet lot was sold as a vacant lot.
Most of the activity has been concentrated in established suburbs close to the CBD and major shopping centre nodes including South Toowoomba, Centenary Heights, East Toowoomba, Rangeville, North Toowoomba, Newtown and Wilsonton. The 2012 Toowoomba Regional Planning Scheme has encouraged infill development within the plentiful low-medium density residential zone.

In response to community concerns regarding the location and type of unit development, Toowoomba Regional Council is currently undertaking a comprehensive review to determine the future location of units in the city. The term units encompasses two or more dwellings on one lot, a group of dwellings within the same building or a single dwelling on a lot with an area less than 450 square metres. There would be a series of medium density nodes created under the proposed changes, with the nodes revolving around facilities and services, parks and gardens, high employment facilities and the University of Southern Queensland. The proposed change would mean that unit development would be encouraged within the node areas and discouraged or prohibited in other areas. Some commentators suggest that there may be a rush of applications for properties that will move from unit areas to non unit areas, however this has not been evidenced to date. Under this review, we note that unit developments will be discouraged on hatchet shaped lots in future due to poor demonstrated outcomes to date. Overall, the proposed changes should provide a more orderly approach to infill development and provide superior urban development outcomes.

Market activity has softened during 2016 as an oversupply of residential product has emerged (particularly units), leading to an increase in vacancy rates, a reduction in rental rates and subsequent exit of absentee investors. Opportunities to buy properties with redevelopment potential still exist, however with the current decline in demand for residential product, the market risk has substantially increased. Larger scale projects therefore should not be tackled by novices.

Sunshine Coast
On the Sunshine Coast small development projects are becoming more and more popular with investors starting to have a go. They can be quite difficult to find but they do offer some opportunities that can be pretty lucrative if you do your homework.

Typically, the small projects and opportunities appealing to mum-and-dad developers are being provided in the new estates. There are a number of designated duplex sites on offer which are being snapped up, largely by investors. As well as these non-strata titled duplexes, we also note the rise of the three bedroom dwelling with a small one or two bedroom studio bolted onto the side. Both these project types allow for rental incomes to be maximised given the two tenancies. There have been limited re-sales within the market to date for these property types so the sustainability of value levels has yet to be proven. Price points are typically somewhere between $600,000 and $700,000 with a yield of circa 5%.

Splitter blocks or infill subdivisions are harder to identify. Given the Sunshine Coast remains a relatively young region, the council town plan has pretty much catered for the region as it has grown. The Sunshine Coast Planning Scheme 2014 has instances of properties being re-zoned in hinterland locations providing the opportunity for a block to be cut off or a small three to six lot subdivision to be undertaken. We do note that with the launch of the new south-east Queensland regional plan, some opportunities may arise from previously fringe properties now being cast into an urban footprint, consequently making these sites available for subdivision opportunity.

The main hurdles with these development sites are typically the minimum lot sizes which vary based on zoning and the local plan for the area. Good town planning advice is critical to ensure that what you want to do is possible. Typical project costs to be considered include council head works charges, professional fees and GST implications.

A big benefit that duplex or splitter block developments offer is that some financial institutions will lend on a residential basis rather than going for a commercial or development loan. Subsequently this may lead to a higher loan to value ratio and less hurdles thus making these small developments attractive.

Hervey Bay
The most common type of small project in the Hervey Bay area at present appears to be a mixture of compact infill developments which offer five to ten lots of varying sizes and location. There have also been some owner occupiers with larger two hectare sites taking on the challenge of subdividing to provide additional lots. Properties such as this have been rezoned within the last few years to low density residential LDR 1, with a minimum lot size of 2,000 square metres. Most of these larger sites have reticulated town water available, however sewage services are not council provided so sewage treatment systems are required. Suburbs with these larger lots tend to be located in Wondunna and Urangan, with sites typically selling between $165,000 to $220,000 depending on the lot size, topography and ancillary improvements such as existing sheds. As with any potential development, it is imperative to investigate proposed infrastructure and surveying fees and driveways (for battle axe access) in order to assess whether the project will be viable in the long run.

The market for vacant land over 2,000 square metres appears to be steady at present, with demand and supply fairly harmonious overall. Construction of new dwellings has improved for local builders in recent times with feedback being very optimistic and positive. Many builders currently have new homes at various stages of construction across the wider Hervey Bay area including Burrum Heads, River Heads, Toogoom and Dundowran Beach.

This month we are looking at small development projects in the Bundaberg area that might be undertaken by people not considered to be hard core developers.

There are a few such developments in the area where investors have bought a house on a large rural residential parcel of around two hectares on the edge of town. The minimum lot size in the area is 4,000 square metres and there is the potential, subject to local council rules, to subdivide, providing the house with a generous curtilage and an additional four or five lots of over 4,000 square metres.

There is potential to do this type of small development, however the prospective purchaser needs to do a feasibility assessment on the costs to achieve this and whether the final result of selling off the parcels is positive.

We have seen the recent emergence of a product called a dwelling house that contains a secondary dwelling. Whilst these look similar to a duplex, they are not the same. They must comply with local authority conditions for this type of residence and anyone interested in this type of development should study up on these conditions which include that the secondary dwelling must not exceed 80 square metres of gross floor area and that the secondary dwelling must be occupied by persons who form part of the household that occupies the primary dwelling. At the moment development is fairly slow, with builder-developers having the potential to make the most profits.

There are currently no small development projects taking place across the Central Highlands as it’s not a viable option. The cost to renovate is not recoverable in the current market unless you pick up a bargain well below market value or purchased over ten years ago and have not continued to borrow against the equity when values rose. There have been a few land banking sales but no development taking place. The only active sector from investors is the multi-unit product of duplexes, triplexes and flats which mostly show a gross yield of 10% or higher. Sales of multi-unit product have increased in the past four months.

There is currently no development work of any size being undertaken in Gladstone. Until the current oversupply lessens, developing new units, housing or land is simply not feasible. There are however opportunities to buy properties with redevelopment potential (higher density zonings) in central suburbs providing the investment is for the long term.

Rockhampton has normally demonstrated small development projects such as subdivision of one lot into two or strata titling of flats as the best option for first time developers to tackle. Occasionally, subdivision of rural residential blocks (again one into two) on the outskirts of town in areas such as Alton Downs or Rockyview also present opportunities.

Typically older, established areas with larger allotment sizes and a demand for new yet affordable dwellings is where most of this small scale development is seen, as the more modern suburbs generally have smaller lot sizes, negating any further development prospects.

Costs associated with this type of small scale development have become quite high, making projects more risky and less profitable. The necessary costs to be incurred and the risk of profit margins being quite slim are seeing no premiums achieved for property with such potential.

A prudent purchaser-developer would most likely be looking to hold property for the long term if purchasing now, rather than develop and on sell straight away given current market conditions. Locally, we have seen a recent example of minimal profit made from reconfiguring a double lot (with an existing aged dwelling) and constructing a new second dwelling. The site was originally purchased in 2014 for $264,000, reconfigured and a new, second dwelling constructed that is now under contract for around $320,000. The original aged dwelling is now worth around $200,000 (on a smaller lot). After deducting purchasing and construction costs as well as infrastructure and holding costs etc, profit will be minimal (expected to be less than $30,000). During more buoyant times in the past, this would have been a much more profitable and worthwhile exercise.

Detailed research is the best recommendation prior to undertaking any such activity, whether it be a project tackled by a novice, small scale developer or an experienced developer with many projects under their belt. The market is ever changing and without accurate information such as town planning implications, detailed building costs, knowledge of council fees etc on each individual project prior to commitment, a seemingly simple project can quickly turn complicated.

With affordability being the main attraction to our region at the moment, there could be some long term opportunities presenting themselves.

It is quite a difficult task to undertake a small scale development and come out in the black in the current Mackay residential market. There have been virtually no small developments (or large scale for that matter) in recent times, except for large developments that have been in the pipeline for some years and are just finalizing.

With land prices at over ten year lows and council charges still at peak market levels, it is not considered viable to subdivide land on a small scale. There have also been limited developments or renovations of dwellings with the express purpose of selling for profit. The key to these types of developments is to obtain the base unrenovated product for a below market or rock bottom price. The difficulty is that the depressed market has seen fully renovated properties sell for less than the cost to renovate. To make these projects viable, renovations usually have to be undertaken by the owner and not outsourced to third party contractors.

What we are seeing in Mackay though, is many investors and developers land banking both sites and older style dwellings in good locations, with what appears to be a strategy to hold until the market improves.

There are really no new developments in the Whitsundays to speak of. Some planned developments are just coming onto the market now, mainly land releases of ocean frontages and sought after spots located in Airlie Beach.

Some successful smaller subdivisions have popped up that have been filled with mum-and-dad investors and first home buyers. These are located in Jubilee Pocket and Cannonvale. Land prices range from low to mid $100,000s.

There really doesn’t appear to be much on the horizon at this point in time.

The market in the Whitsundays is firming and with all continuing on we hope to see some increase in the not too distant future, including local development moving as well.

The main small scale development project we are seeing in the Townsville market is typically the splitter and subdivision scenario. These developments usually occur within older established suburbs including Aitkenvale, Pimlico, West End and Currajong where larger lot sizes and house placement readily allow for this type of project.

There remains opportunities for buyers of this type of potential redevelopment to acquire properties in the current soft market environment and hold for potential long term capital growth. Consideration however must be given to the holding cost involved in such an investment, with the ideal scenario being for current owner occupation with future potential for redevelopment when market conditions improve.

Over the past five years we have seen an increase in the construction of dual occupancy properties, mostly within the newer residential land estates. These properties however are typically being constructed by builders and on-sold to investors. Whilst there are some dual occupancy lots being offered to the market within the newer land estates, the cost to provide the end product in the current market is unlikely to yield a positive profit margin.

The Townsville property market remains affordability driven and therefore small scale development projects must reflect this environment and offer a product to meet the current needs. Development projects that fail to reflect the current market are likely to find it difficult to move the end product.

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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