Creating value on existing land

  • ‘Property Development’ is essentially forcing or creating additional value on existing land or property via development approval and then construction. This additional value was not present before the added development approval was obtained through the council and the subsequent construction took place.

    A ‘Development Approval’ or ‘DA’ for residential property is a document obtained from the council via an application and a process, granting permission to develop one or more additional dwellings on an existing property and land. It allows you to increase the density of the land with the future construction of one or more additional dwellings that fit in line with the character of the street and comply with all current council regulations. It also gives you permission to separate the land into separate titles for each dwelling, unless it is extremely high density (eg, apartments) and then the main option would be to keep the development on one title and later create separate strata units and a body corporate.

    ‘Gentrification’ is when an area becomes upgraded over time as the density begins to increase in the area, with an overall increase in the population within a city, pushing the urban sprawl outwards. As per the original definition, gentrification involves the restoration and upgrading of deteriorated urban property, traditionally in a working class area by the middle class or affluent people who have moved into the area. This changes the character of that area and often results in lower income people moving to other areas. This would be easy to illustrate if you asked someone who has lived in an urban city most of their life whether they have witnessed gentrification in their particular suburb over a twenty year period. If they have lived in a suburb within a five kilometre radius from the city centre, then their reply might be that twenty years ago there were single dwelling homes and some concentrated industrial areas, whereas now, many of those single dwelling homes have transformed into dual occupancy and duplexes and previous industrial property has now transformed into five storey apartment blocks.

  • A ‘Splitter’ is a type of property development project and development strategy. It involves purchasing a property on a block of land, in the right Deal Belt, with defined criteria on the property and then subdividing that property by obtaining development approval from the local council to separate the property into two separate land parcels, thereby increasing the density in the area and forcing value on the land. At the same time as obtaining development approval to separate half of the land from the original property at the front of the block, we also apply for development and building approval to build an equivalent sized house as the already existing house on the front of the original property that was purchased. This new house will in future be built on the separated vacant land at the rear of the property. Once development approval is completed via council, then the front is immediately sold off to minimise any bank debt on the property, and when this is complete, construction of the new home begins on the land at the rear of the block. This type of development is considered to be very lucrative in comparison to most other development strategies, due to the higher margins and returns when taking into account the risks involving total debt exposure. Also, a large part of the risk is mitigated by selling off the front house first, before starting any construction on the rear block of the property. Here at Landsplitters, this type of development is our main area of specialisation.

    A ‘Duplex’ is also a type of property development project and development strategy. This involves purchasing a property on a block of land, again, in the right Deal Belt (this type of development being different to Splitters), then obtaining both development and building approvals to increase the density of the land to two dwellings, each equivalent in size to the original house on the property. These two dwellings are usually one larger building encompassing two residences. It is usually conjoined with a main wall separating both residences and utilising both upstairs and downstairs as double storey. Both properties are usually situated at the front end of the original block and extend to the rear leaving two separate back yards that are divided off with a fence. This type of development is slightly higher risk than doing a Splitter, as any debt borrowing required for purchasing the original property and undertaking construction is usually carried on for a longer period than a Splitter. It is carried on until after construction and until after any sale of the new dwellings. Also, the debt on the loans to fund this type of development is usually higher than required for a Splitter, as the original property purchase is more expensive due to it being closer to the CBD than a Splitter would be. The margins are also smaller than Splitters and the total loan exposure is usually larger for Duplexes. The good news for a Duplex-type development is that they are a lot more common to find and locate as development opportunities than Splitters. Finding land to purchase to develop a Duplex is easier than for Splitters, as there are a lot more suitable blocks available and the density in the area is already higher than for Splitters and growing at a fast pace. Liquidity for selling the finished Duplexes is also relatively higher than for selling the finished Splitters, as they are closer to the CBD, thus there is a higher population density in the area. This type of development is also very popular with our clients and is our other main area of specialisation.

  • A ‘Deal Belt’ is an area covered within a certain boundary of a city that is considered suitable and allows developers to develop a particular type of development and create value, after purchasing the land and completing a development on that land. It is where price meets demand to allow for a development profit for a developer on a particular type of development project. A Deal Belt is a geographic concentric circle from the centre of a city outwards forming a perimeter around the city. This geographic concentric circle could be in the form of a perimeter right around the city or sections of different perimeters at a radius from the city encompassing a particular suburb or several suburbs.

    All property sectors for all the different types of developments that include Large Residential Land Subdivisions, Residential Splitters, Residential Duplexes, Residential Apartments, Industrial Property, Retail Property and Office Buildings, all have their own deal belts within certain city perimeters.

    All major cities around the world also have their own geographical Deal Belts for each of the above property sectors. Each Deal Belt differs geographically for each sector and is also quite distinct and separate. This is predetermined through federal government planning based on managing population influx into the country. From there, population is then directed into major cities. Also, government planning takes into account projections of future population growth and dispersement of population from the centre of the city outwards. This planning is then passed onto local government councils to manage. Hence, the requirement for developers to deal with councils for development approvals.

    A Deal Belt for a Duplex development would differ considerably from that of a Splitter development in that the Duplex development area or suburb would usually be found on one or two suburbs in towards the centre of the city where the price and population density are both slightly higher as opposed to a Splitter development.

    All developers know about Deal Belts and if a developer was to go outside of their required deal belt when attempting to develop, the project will fail. Locating a Deal Belt requires considerable research before considering any development. This is a prerequisite in development.

    There are two tests to apply when trying to gauge a Deal Belt for a particular type of development. The first involves a mathematical equation where the End Sales figure of the development, minus the Land Cost, minus the Development Costs, equals your profit. (ES-LC-DC=P).

    The second involves you to ‘look’. That is, to go to the area and see whether any other developers are also developing the type of developments that you want to do. Is the gentrification happening in the area? Also look via Google Maps. Confirm that the population in the area is forecast to increase over the next 10-20 years by obtaining the statistics on growth forecasts from either the federal government website or the appropriate local council. In addition to this, ask the local council directly whether they are in favour of this type of development in the area to increase the density. This will give you some guide.

  • There is sometimes confusion created for many when analysing or attempting to detect a particular Deal Belt. That is, they may observe particular types of developments being constructed in an area that do not necessarily fit the mathematics for a developer to even consider taking the projects on. For example, you may see a Duplex or a Splitter development taking place in a suburb that you would not expect to occur, because if you undertook a feasibility study in that area, you would find that you would price yourself out of the market and you would not make any profit. Although, you may ask, how then does this development in this area still occur? Well, the answer is very simple. The developer is not a developer by profession. What we mean here is that this developer is a ‘temporary developer’ where they have purchased the property a very long time ago and have held it all this time. So when comparing the purchase price from those days with present time, it can be considered that the cost of the land for this developer is insignificant to this project as opposed to purchasing land at today’s prices. They are considered more of a ‘landlord’ than a developer. It is possibly a one-off project of this type in this area for them. A true professional property developer will find a Deal Belt, then can go into that area, purchase a property or land today, then begin the development process right away and make a good profit after the process is complete. A professional will not hold the property over the long term to wait for gentrification and land appreciation to occur first, before commencing the development process. This is the purpose of understanding Deal Belts.

    At Landsplitters, we have already done all of the research and know our Deal Belts well. The above is only a guide. There are many other additional variables and factors which apply to our developments that are just as important as Deal Belts, which we will endeavour to educate and guide our clients in detail about, before they commence any developments.

    At Landsplitters, we also understand what all larger scale successful corporate property developers have known and understood since the beginning of time, but do not generally advertise this knowledge for everyone to see. We understand that LAND is the ultimate global currency. What we mean by this, is that banks all over the world consider land or a property sitting on plot of land as the ultimate security for most loans. They call this ‘equity’. The terms offered by banks on most property loans are often more favourable when there is additional equity in the form of property or land that banks can use for the purpose of security in comparison to even having direct cash itself sitting in a term deposit. Anyone can investigate this with their own bank and see it for themselves!

    So, if land is the ultimate currency, then when our clients develop property, they create it! As successful property developers, they print this currency. This is their business.