With Melbourne's population expanding at a record rate, property developers are going to play an increasingly important role in providing the variety of housing options that residents will need over the next decade.
For the most part, property development is a way that private investors and builders can bring new property to the market and add to the vibrancy of different areas around Melbourne. From an investment perspective, executing a development can be a profitable venture as you are effectively creating equity by undertaking the project.
A successful property development will not only create a high-quality product that the market needs but should also generate a profit for the developer and any investors. However, the success of any development comes down to having a very good understanding of the process and engaging the right people to help.
The first step in any development project is identifying a site that is suitable for property development. Across Melbourne, there are different zonings put in place by councils and the state government, which allow for different levels of housing density.
As a developer, you are typically looking for zones that allow for multiple dwellings to be constructed on a given site. Some common zonings include the General Residential Zone (GRZ). This is a residential zone, and if you are wanting to build two or more dwellings, you'll need a planning permit under this zoning. Residential zones have different levels or schedules depending on the council. These schedules sit below specific planning zones which still need to comply with the broader residential code.
Another common development-friendly zoning is the Neighbourhood Residential Zone (NRZ). Although NRZ doesn't have as favourable requirements as GRZ it still offers opportunities for development. The purpose of the Neighbourhood Residential Zone is to recognise areas of predominantly single and double-storey residential developments.
Most larger-scale developments will fall into the Residential Growth Zone (RGZ). Acquiring land in an RGZ zone can be expensive because of the increased level of density that you can create under this zoning.
The next element of a property development project is the feasibility of the project itself. A general rule of thumb for most developments is that there needs to be a 20% profit margin available on the final sales price (gross realisation value) when you take into account all the purchase costs, build costs, expenses and sales costs.
To put together a feasibility, you need to engage with a range of consultants including architects, town planners, builders and other experts. You need to first determine what potential the site has and then the costs involved in bringing a product to market. It is also important to ensure the end product is something the market currently wants or needs.
All sites have restrictions and you will need to work with your consultants to ensure that your project has the potential of being approved by the local council and that it is financially viable.
Conducting due diligence on the chosen site is also essential so you can assess any legal, environmental, or physical constraints that may affect the development. This includes land surveys, title searches, environmental assessments and understanding any existing infrastructure or services on the site.
The other factor to consider is that banks and lenders will need to see that the project stacks up financially and has that profit margin in place before they are going to potentially fund the build costs. The developer will also be required to bring a large portion of equity into the project, which is typically around 35%.
After securing a site, you will need to get council approval before you are able to move forward with your project. Your architect will be required to draw up plans that fit in with the relevant state planning codes according to your area as well as the local council's development guidelines.
Your town planner will likely need to liaise with planning authorities and address any issues that the council flags. The approval process can take more than 12 months and is often a process of going back and forth with the council to ensure you are able to meet all of their requirements.
There are also often requirements whereby the development will need to seek community feedback, which can impact the council's decision on whether to approve the project.
Depending on how you are financing the project and the size of the development, your lender might require you to obtain a certain number of presales. This is a way for the lender to de-risk the project from their perspective. If you are required to obtain presales, you will have to engage a real estate agent or project marketing company and market the project.
Once you have received the Development Approval (DA) it's time to focus on the construction phase. The first step is to have your architect create a set of working drawings which will allow you to obtain a building permit or Construction Certificate.
This will also allow you to start obtaining quotes from builders to complete the project.
During the construction phase, the builder will complete the different phases of the work and you will pay them in instalments, called progress payments as they hit each milestone.
The final stage is typically getting an Occupancy Certificate or a Certificate of Occupancy from a building surveyor. This means that the property is completed satisfactorily and can now be occupied.
Upon completion, the final project is typically either leased or sold. If you had to obtain presales, then it would be time for the new owners to get into the properties. At this stage, the developer is able to realise a profit on the project.
Ultimately property development can be a very lucrative business, but there are a lot of obstacles that you will need to overcome to execute the project successfully. However, by surrounding yourself with the right team and being highly organised, you will give yourself every chance of success.
Rowan Crosby is a freelance journalist specialising in finance and real estate. He's written for Australian Property Investor Magazine, Elite Agent and Startup Daily.