The latest happenings in the Melbourne property market. For our Essays and The Secret Agent Report, see our Research page.

Category Archives For: Property Development

The Secret Agent Report – Recreating Period Homes

We have just released our latest Secret Agent report!

The original period homes that remain in Melbourne are frequently purchased for record-setting prices. It is difficult to quantify the value of character, however it is possible to estimate how much these houses are truly worth if we were to build them from scratch today.

This month, Secret Agent investigates the cost of rebuilding two period homes in inner Melbourne. We demonstrate that the prices paid for period property fairly represent the quality, history and scarcity of these types of homes in today’s market

Start reading this report by clicking on the link below:

Register to receive our report monthly and access the Recreating Period Homes report now!

Settlement Risk Looms

The development space in inner Melbourne and Sydney is set to be severely challenged. Conversations between Secret Agent and various developers over the past month have revealed their increasing anxiety about potential settlement issues. These developers, who have settlements due in the next 18 months, are worried that many of their apartments may not be able to settle due to the restrictions placed on foreign buyers by local banks. This is likely to have substantial implications.

For some time now, developers have used successful business models to sell their projects directly to Asia. Sales companies who specialise in selling unseen apartments to the Chinese market have made large financial gains. These apartments, many of which are tiny by local standards, have been purposely designed for the overseas market. Committed contracts, once thought to be rock solid, are now on shaky ground.

To understand the problem at hand, let us consider a hypothetical situation. An investor group, on behalf of a developer, sells a small two bedroom CBD apartment to a buyer based in Shanghai. The buyer pays $714,000 for the 68sqm apartment, which is $10,500 per square metre, and pays a 10% deposit. Since the transaction was entered into 12 months ago, the investor has no stamp duty to pay at settlement. It so happens that this purchaser defaults. The developer gets to keep the 10% deposit minus fees. The problem is that there is a need to sell the apartment to someone else.

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Bulletin – Planning Changes

From Julian Faelli, Head of Design – Create By Secret Agent

New planning reforms were announced by the state planning minister Matthew Guy on the 1st of July this year. They are significant changes that will affect where and how development is managed in the city. It’s going to take awhile for a clear picture to emerge on how the changes will affect investment, but in the meantime here is a quick wrap-up.

Three new residential zones have been created, Neighbourhood Residential, General Residential and Growth Residential. They aim to make it clear in the planning framework where higher density development such as townhouses and units can be located. The new Neighbourhood residential zone will bring the biggest changes, with only dual occupancy development being permitted (not encouraged). This change will likely bring to a end the 4-5 unit/townhouse developments we have seen in growth suburbs such as Preston and Reservoir.

The scheme will effectively curtail the growth in established areas, restricting any development to mixed use and growth residential zones – located on busier roads near public transport. It’s a bid to protect ‘neighbourhood character’ in predominately single dwelling subdivisions.

The medium density townhouse/unit has proven to be popular in the market as a affordable entry point for accommodation close to the city – without being a apartment. If the neighbourhood residential zones are applied broadly and townhouse development slows we expect to see further competition in this segment of the market for finished product.

There have also been one new commercial zone introduced and a revamp of the mixed use zone announced as part of the reforms. The commercial zoning frees up the use of commercially zoned land allowing for smaller supermarkets and the like where only big box retail may have been permitted previously. The mixed use zoning is encouraging higher density residential growth. Expect to see it in parts of Brunswick, Footscray and similar ex-industrial locations.

The new residential and commercial zones have already been incorporated into the planning scheme, councils have until July next year to decide how to distribute the zoning across their municipalities.

We will be covering the planning changes in further depth in the October edition of the Secret Agent report.

Density Diagram - DPCD

Density diagram from the Department of Planning and Community Development (DPCD)

See diagram in full here:

Be Careful of Grand Illusions

With shows such as ‘Grand Designs’ capturing the hearts and imaginations of Australians all over the country, it is little wonder that the building bug has bitten many home owners and investors.

But what is not often mentioned is that these ‘grand designs’ can threaten to break the bank!

BTM Tax Depreciation have a simple construction cost guide that may be useful while planning your dream housing project.

Now, we must make clear that these are still rough estimates. Any builder who is concerned with quality product will tell you that a construction cost guide based on a per sqm rate is never going to be exact – however it’s a good place to start.

Assume you purchased a 100 sqm lot of vacant, inner city land at $712,500, with the idea of constructing a 3 bedroom home, the most commonly occurring type of house on the market.

A number of questions facing you include:

  • Do you go for either a low or high quality finish – or something middle of the road?
  • How much site coverage will your new home take up?
  • What type of materials will protect your asset from the elements?
  • Will you go up and create additional levels and balconies?
  • What are the challenges for building your dream property?

If we made a presumption that the property comprised two levels and the structure had a site coverage of 75% – we could make the following observations depending on the quality of construction.

A two story dwelling with 75% site coverage over two levels would have a total build area of 150 sqm (on a 100 sqm block of land) with a construction cost guide of $2,160 per sqm using the architecturally designed rate for a low level finish.

This would mean an investment of $324,000 into the construction of the home on top of the land cost of $712,500. You would expect the property to be worth at least $1,036,500 plus costs to retain your financial investment.

Now, if the land cost was that high, we feel you might be going a little “light” in regards to the quality of the construction and not maximising the strong  position of the property. A medium level finish would expect an investment of $487,500 on top of land costs. This starts to feel “right” as to the expectation of investment. You now have a total investment in the property of $1.2m + costs.

Presume you decide to push the boundaries and swing for the fences. You are going to build the best home around and utilise the small block to its full potential. Be prepared for $5,050 per sqm in construction costs.

This means you now have a house, that required more investment than the land itself, a total of $757,500 to build the house which equates to $1.47 Million plus cost as your total investment. If you wanted to ensure that your labour of creation didn’t mean that you were highly over capitalised, you really need to seek the finest land conditions (views, position, proximity, scarcity) to make these dearer finishes work for you.

When considering a vacant lot of land, one should contemplate whether the value of ‘creating’ would be able to trump or even compare to what has already been created.

Collaborative Consumption

The last decade has brought about unprecedented change in the property sector. The severe rising of asset values, the limitations in building quality, the ageing demographics of “cashed up” baby boomers and the “always connected” ways of the internet.

In response to these changes, Secret Agent has refreshed its brand to meet these rising demands from the baby boomer population as well as todays web savvy/time poor consumer.

We want to give you an “inside perspective” to the way Secret Agent is reaching out to tomorrow’s consumer including the very exciting world of collaborative development.

What is collaborative development?

Collaborative development allows a group of property buyers to help acquire and fund a new development. The benefits are that each owner will be able to have a huge say in how the development will be built, the type of quality invested into the building right down to an individuals preference for how their allocated unit is fitted out.

These benefits would apply to owner occupiers and well as investors.

Sites such as The Point and Collaborative Consumption have shown collective action in other domains. The property frontier is next.

Collaborative development could be a huge drawcard especially to inner city downsizers that have been let down by new developments creating “mass” without the considerations to open space, greenery and low rise accommodation. In other words, its quality and a great place to live that are considered along with profit – rather than profit being the sole focal point.

Example: A concept Secret Agent prepared was a project titled “The Feynman” located near Melbourne Uni. These designs by Secret Agent would create an ideal living arrangement for the down sizer which would be hard to find if being built by a traditional development.

Collective action requires all participants to pre commit to the purchase of land and the development, then the project will to go ahead. Both owner occupiers and investors are welcome to join in.

Secret Agent works as a company because it finds products (houses) for its customers first, rather than customers for its products (traditional Real Estate path).

Feynman Plans

Images from the plans for The Feynman which include analysis of light to ensure that all apartments will receive adequate daylight.

Moving house, literally

Not many people enjoy the task of renovating, building a new home or moving house. Imagine being able to live in your old house while the new one gets built and then having your house delivered to you, literally.

Prefabricated buildings are very uncommon here in Australia, but appear a very viable option to many people looking to rebuild on their current site. Basically a prefabricated home is a property built in a factory and then delivered to your block in a few pieces and put together.

The benefits of such a practice could be huge, provided as with any home, it is of good quality.

  • Savings on renting a property, often for 12 months or more while your home is being built.
  • Prefabricated buildings are often cheaper and there are no cost blowouts from unexpected hiccups, as you know what you’re getting right from the word go.
  • You can pop in and view the progress of your property as it’s being built in the factory.

We may be some way off this being the norm, however a very interesting concept indeed.

Melbourne’s population boom

The outer suburbs of Melbourne are growing rapidly – faster than any other area in Australia. Our population is now coming close to that of Sydney’s. In the past nine years Melbourne has gained 605,000 new residents.

How will our property market cope with this kind of growth?

Much of this growth is occurring in the outer suburbs, however the inner city has also seen a big hike in numbers, with the inner city population growing 30% in the last 9 years. With new development limited in inner city areas and demand for housing so high, new comers and low income earners are forced to live far out. Without sufficient housing supply, property prices will see a rise.

New development is on the rise, with the number of new building approvals up, this should help to ease some of the demand. It’s true no one wants to live next door to the nine story apartment building, yet new development is needed everywhere, inner and outer suburbs to cope with Melbourne’s population growth and housing needs.

The Ark Hotel in Shanghai – Took only 6 days to build …

We highly recommend watching this short video if you’re interested in the future of development.

The Ark Hotel took only 6 days to build,  yes that’s right,  6 days. This is the very future of many developments.  At this construction pace, new cities will emerge quickly.

If an entire hotel took 6 days to build,  imagine the possibilities with housing. You purchase a free block of land and have your entire house constructed in under a week. It seems to far fetched but it
might not be as far away as we might think…

Investment property and picking cereal – the similarities

‘Off the shelf’ investment options are in abundance. The reason is that they are so easy to offload to investors.

It just takes a year like 2008 to shake the tree and find out the good investment options to the bad ones. In bull markets pretty much everything goes up and only as a wise man once said ‘when the tide goes out – you know who’s been swimming naked’

So you have the cereal approach to investment. You just reach out and take down the box. No rush and certainly no need to think, many hundreds exist and you try and fit the investment rather than the investment fit  you.

The opposite to the cereal approach is the tailored approach. Now this requires more effort and maybe some upfront expense on your part.

You move from buying something in abundance to buying something with scarcity. This requires more time and skills, yet often pays off in the long run.

If a product being offered to you is ‘Australia’s most exciting golf resort with over 1000 apartments to choose from!” then to me that’s a prime example of buying abundance. Seek out scarcity and avoid the cereal choice, it’ll work better for you in the long run.

Community tension and real estate

If you’ve looked at the Auction Wrap then you would have noticed the story about 12 North Terrace Clifton Hill.

It’s an interesting one because clearly this auction attracted plenty of emotion from many members located in the local community.

It reminds us that as much as we talk about about maximising investment into Real Estate or the type of home to purchase, we are dealing with a very sensitive and emotional subject, especially for communities.

Some areas are particularly against development and are worried by big changes. It’s an issue that as Melbourne grows larger, will face more and no ‘easy quick fix’ is likely.