Property Density

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This week I had the opportunity to run the numbers on an eleven unit development project. 
Normally, Property Bloom clients ask us to source lower density developments such as dual occupancies or three to four unit developments.  Whilst crunching the numbers on this big boy, I started to wonder how many smaller projects we'd need to complete to achieve a similar financial outcome. The answer surprised me. 
What do you need to consider when looking at a medium density development project?  
By the way, density is a measurement used to work out how many dwelling can be built within a particular zoning. In NSW, a medium density zone is defined as 20-40 dwellings per hectare.
1. Finance. Investors can be afraid of jumping from a residential loan to a commercial/development funding and believe that banks will generally lend on three-four unit projects under residential lending. There are a few myths around this. If you have a good relationship manager at your bank, your finances are in good order and you present a larger project to them in a professional way, they will consider it. Also, people assume the commercial funding is going to be more expensive and it can be, but there are lenders out there with very competitive rates. It's imperative to use an experience commercial financier when seeking these loans.  
2. Risk. Generally larger development projects are assumed to carry more risk. Assessment of risk is different for everyone but it really comes down to the bottom line. How much profit is there in the project and is it sufficient to take on the risk? How accurate is the research and cost estimates being used?  What are the current market conditions and are they likely to change anytime soon? This will determine exactly how risky it may be or may not be. 
3. People. A good team is imperative. Because if you don't have a trusted team, you'll be testing the experience and efficiency of these people on a larger scale. If they let you down, you will feel it!  Having a proven track record with your team, particularly your builder when embarking on a large scale development, is critical. 
So just how did we find this development site? One of our clever project managers has a great skill. She communicates extremely well and is a very nice person. She was chatting to one of the property owners in this street and ended up negotiating with this man and his neighbour who both owned large lots in this suburb of Newcastle. It wasn't long before she'd secured their adjoining properties under an Option Agreement.  
One of the main benefits of this agreement is that  there are no holding costs until we are ready to build next year. During this period we manage the design and planning process of the project, so construction can commence upon settlement of the land.
The site is located six minutes drive from the main hospital, twenty minutes from the CBD and ten minutes from the university. There are local shops with a nice cafe, three schools in walking distance, an aquatic centre, gym and a number of parks and sporting fields, making it a very popular with the locals.
Our research tells us that there is strong rental and resale demand. 
I thought I'd share with you the numbers on this medium density, eleven unit project as they are looking quite good: 
Land cost:  $1,040,000 
Stamp Duty and acquisition costs: $45,000
Estimated consultant and council fees and charges:  $86,000
Estimated build costs including contingency: $2,640,000
Option fee:  $120,000
Miscellaneous/other costs:  $30,000
Estimated total costs:  $3,961,000
Estimated end values 11 x 3 bedroom townhouses:  $4,840,000
Estimated weekly rental per townhouse $450 per week
Looking at the numbers, there is opportunity to create equity of $879,000. This is before we apply a project management fee which we will discuss with the purchaser. So the developer's margin at this stage is 22%. The purchaser also needs to include holding costs during the six month construction period. There is scope to increase the equity with playing with the design and looking at other configurations such as including a four bedroom home. We've purposely kept our estimated end value conservative. 
In comparison, a typical dual occupancy project will create around $130,000 in equity at a total cost of $740,000. That's a 17.6% margin. That's not too bad and many of our clients come back to do another one. But you'd need to complete about seven dual occs to achieve a similar equity position as the eleven unit project.
It's interesting to compare the numbers and whilst a larger development is not for everyone, we are excited to be able to offer something different. So, if you are ready to sink your teeth into a large project and have sought professional financial advice, then we've done a lot of the hard work for you. 
Jo Chivers is Chief Executive Officer of property development project managers <a href="https://www.propertybloom.com.au/about" target="_blank">Property Bloom</a>.
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Medium density development numbers add up: Jo Chivers

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EXPERT OBSERVATION
Australia is moving through the peak of an unprecedented boom in apartment construction.
Over the twelve months ending March 2018 there were almost 97,000 medium to high density dwellings that completed construction across Australia; a year earlier there were 105,300 projects that finished construction (84% higher than the decade average).
As at March of this year there were still 155,275 medium to high density projects still under construction.
The majority of this construction work has been centered around the inner city areas of our largest capital cities, so it shouldn’t come as a surprise that population densities have surged higher across many inner city areas of our largest cities.
Based on an analysis of population data at the SA2 level (an SA2 region is a standard geographical classification roughly the size of a suburb in the cities or a town in regional areas), the highest density area in Australia is now Melbourne.
45,231 people reside within the 2.4 square kilometre area, equating to a population density of just over 19,100 people per square kilometre.
The population of the area has increased from 7,644 in 2001 – an increase of almost 500% over 16 years.
Apartment values in the area are relatively low with a median of $444,000, providing a relatively low cost entry point to a housing market located right in the middle of one of Australia’s largest working populations.
Back in 2001, the Melbourne SA2 region ranked 114th in the country with a population of only 3,229 and a population density of 7,644 persons per square kilometre.
Potts Point – Woolloomooloo showed the highest population density, followed by Surry Hills.
In fact, back in 2001, the top 12 areas of highest population density were all located in Sydney, with St Kilda East recording the highest population density outside of Sydney (6,259 people per square kilometre).
The 20 most densely populated areas of Australia are all confined to Sydney and Melbourne. Fifteen of the top 20 areas are in Sydney and five are in Melbourne.
While high density living may not be everyone’s cup of tea, it makes sense for many, especially for students and young professionals who work and play in and around the city centre.
Focusing on the Melbourne SA2 area again, two thirds of the resident population are aged between 20 and 34, with the most significant age group being 20-24 year olds (31% of the population).
High density living generally involves less time commuting, lower housing prices and plenty of choice for amenities.
Of course there are going to some downsides to high density living, like the potential for noise pollution, tight living spaces, elevator congestion at peak times, overcrowded or poorly maintained communal areas and limited access to green space.
The latest small area population numbers from the ABS are already a year old, and, considering the record number of apartments under construction across Australia, our inner city areas are going to increase in density further from here.
Densification makes sense from a town planning perspective – it reduces urban sprawl and the necessity to continually invest in transport infrastructure linking the outer fringes of the cities.
From a livability perspective, some people will thrive in a high density environment, while others will crave the peace and quiet of the burbs. Lucky Australia has such as broad range of housing options.
<a href="https://www.propertyobserver.com.au/images/2018/10/4/density%201.jpg" target="_blank">Click to open in new window</a> 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/4/density%201.jpg" alt="">
<a href="https://www.propertyobserver.com.au/images/2018/10/4/density%202.jpg" target="_blank">Click to open in new window</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/4/density%202.jpg" alt="">
TIM LAWLESS heads up the CoreLogic RP Data research and analytics team and can be contacted<a href="https://blog.corelogic.com.au/author/timlawless/" target="_blank"> here.</a>
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The highest density living options in Australia: Tim Lawless

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EXPERT OBSERVER
With new forecasts of record population growth across Australia’s major capital cities over the next few decades and affordability remaining a challenge, is it time to reconsider the core principles and policies that guide the management of this growth?
The accepted wisdom that we should be simply directing development and people towards higher density living in our major cities, especially Melbourne and Sydney, is increasingly being challenged by many buyers and households who continue to vote with their feet and move to more affordable locations, including greenfield suburbs, peri-urban locations and regional centres.
Two recent reports have highlighted current and emerging trends about how our cities might evolve in the future and what the opportunities and challenges might be.
<a href="https://www.planning.vic.gov.au/land-use-and-population-research/victoria-in-future">Recent population projections by the Victorian Government</a> suggest Greater Melbourne could have a population of nine million by 2056 with a full state population of 11.2 million, up from 6.5 million in 2018. Greater Melbourne is expected to grow by 1.6% every year while the rest of Victoria could grow by 1.0% every year.
How do we deal with this growth? 
The CSIRO’s latest<a href="https://www.csiro.au/en/Showcase/ANO"> Australian National Outlook 2019 (ANO)</a> suggests the country could face a ’Slow Decline’ if we do not take action on our most significant economic, social and environmental challenges.
The report highlights several key shifts that are required to meet these challenges and maintain our high standard of living, including a focus on greater densification of our cities.
“An urban shift will enable well-connected, affordable cities that offer more equal access to quality jobs, lifestyle amenities, education and other services,” the report said.
The report notes that the ‘shift’ could potentially be achieved by planning for higher-density, multi-centre and well-connected capital cities to reduce urban sprawl and congestion, creating mixed land use zones with diverse high-quality housing options and investing in innovative transportation infrastructure.
However, policies that direct most people into higher density housing options in our major cities do not always reflect the needs or aspirations of buyers and households.
Affordability constraints and the fact that many households, especially young and established families, prefer a detached house should be carefully considered when advocating for increased density as a ‘one size fits all’ policy.
While increased densities in our major cities are one way of coping with rapid (and often unexpected) population growth, it is worthwhile considering what buyers, families and households want and what the alternatives might be.
Young people are increasingly abandoning expensive coastal cities (where apartments are the main housing option for new property market entrants) in favour of more affordable locations where they can purchase single-family homes.
The reason is simple. Although many younger people who want to live and work in wealthy coastal capital cities, they often have little choice but to become permanent renters, usually in smaller apartments. They are keenly aware that home ownership is critical to long-term financial security and family formation.
In response, four-fifths of home buyers under 35 in America choose to purchase single-family detached houses in the suburbs. Since 2010, around 1.8 million Americans have moved away from the urban core of major metropolitan areas. They have opted, instead, to move to lower-density areas where single-family houses are the norm.
Some commentators have argued that the push for densification of our cities is not the result of market conditions but the concerted efforts by some who want to fundamentally alter the way cities are built. 
Arguably, responding to actual market needs and addressing key issues like affordability and declining home ownership figure less prominently.
While not often highlighted, we see a similar phenomenon in Australia where our greenfield and other outer suburbs and peri-urban areas are popular with many buyers and households. However, in these markets, supply falls short of demand.
We are also seeing many regional centres across the country experience rapid population growth.
While increasing density across our urban areas represents one important tool for accommodating a burgeoning population, it cannot be the only strategy when we are dealing with a complex range of issues especially those that relate to how and where people want to live and raise a family.
Rather than looking to simply transform Australian cities and urban areas into densely populated metropolises, we should be more nuanced about how we will build the cities of the future with individual and family choice and market aspirations taking a key role in our thinking.
George Bougias is the national head of research at Oliver Hume.
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Is it time to rethink density? George Bougias

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EXPERT OBSERVER
The recent announcement by the Minister for Planning to defer the introduction of the medium density (complying development) code in some councils is negatively impacting the wrong families or target market.
The government should not link community pushback and pressure  for high rise apartment growth - with the growing need for more modest medium density housing – especially terraces and dual occupancies.
There is justified concern across Sydney that local living conditions and growth/enhancements in social facilities have not improved at the same pace as recent growth and intensification of housing. This is not ‘nimbyism’. It is a response to the difficulties faced by governments to raise and spend sufficient infrastructure dollars in the right place at the right time – in the face of rapid growth. 
The Greater Sydney Commission is right to highlight those areas (eg Ryde and Canterbury-Bankstown) where the mismatch between recent growth and amenity is great. There are opportunities for State and Local Government to improve infrastructure investment and build capacity, divert growth - or just pause to catch up. But, the approaches taken must be evidence-based and strategic – and not be seen as a reaction to key electorates. 
The planning framework needs to offer a predictable basis for investment in the types of housing we need – in ways that reflect the communities’ values and needs for a place.
Sydney has sound regional plan and district plans that set out the challenge to accommodate another 740,000 dwellings by 2036. They cannot all be apartments  in inner city areas or homes on the edge of Sydney. Our population is getting older, more people are choosing to live in smaller housing, while many households are also looking for well-designed and more affordable accommodation closer to jobs and centres. 
Offering greater choice for medium density housing in Sydney’s ‘missing middle’ is vital for a fair and socially sustainable city.
A planning system that only offers a complying development pathway for single detached houses is not balanced. PIA has supported having the same incentive for a diversity of medium density housing types including terraces, dual occupancies and even ‘manor homes’ if well-designed and in the right setting.
Local Housing Strategies offer a way of checking that Council zoning approaches and contributions plans respond to the diverse housing needs and characteristics of the community – including amenity and infrastructure provision. These strategies could provide solid evidence for any deferral of major planning proposals at the ‘gateway’ stage. 
Local Housing Strategies can also help councils to get a handle on how a model code for medium density housing will take effect in their area. Depending on whether a council permits multi-unit or medium density development in low density residential zones is significant. If a council already has specific floor space ratios and setbacks then the outcomes of the code on housing supply would potentially be much lower.
PIA acknowledges that infrastructure delivery at a local scale has often not kept pace with apartment growth. A solution is to focus on funding infrastructure and strengthening amenity alongside acceptable rates and patterns of growth. 
Ad hoc deferral of new policy supporting medium density housing is not necessarily going to assist many communities across the state who wish to stay in their local suburb and age in place.
Jenny Rudolph is the PIA NSW President
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