A look at those inefficiencies
A piece over at Interest.co.nz illustrated the risk and costs developers often face when coming to development residential complexes. If it is not the price of land that will kill you it will be mostly for sure the bureaucratic nightmare over at a Council’s Resource Consenting Department with you facing a risk of being dragged through the Environment Court (if the Bunnings Arch Hill, and Great North Road – Arch Hill apartment developments are anything to go by). If you manage to get through the resource consenting relatively unscathed then here come the development contributions. Now while these contributions are needed to pay for both physical AND social infrastructure questions do crop up from time to time around a Council’s financial management of these contributions and whether they are being used to future fund infrastructure “appropriately.”
The beginning extract from Interest.co.nz gives light to some of the risks developers face when undertaking the building of residential complexes:
John Bolton shows what a property developer is up against when constructing houses. The costs of system inefficiencies get priced into the properties
Over the past two and half years I’ve dabbled in property development, and am in the process of building 35 houses in Avondale.
The end result will be 35 finished houses (of which 90% have been pre-sold) in April 2015.
The project will have taken three years and the only reason we’ll come out of it ok is that we purchased the land cheaply back in 2011, early in a rising market.
We spent $650,000 upfront on getting the resource consent which involved taking the council to the environment court twice.
It is hard to spend hundreds of thousands of dollars on planners and lawyers when you’re not overly confident you’ll get the result. We eventually got the consent and that is a story in itself.
Our original plan was to build 27 units on a slightly smaller site. Based on our actual costs, that would not have been feasible. The extra units are where we have made a profit.
Scarier still we worked out our original feasibility based on a sale price of $460,000.
The sale price ended up closer to $570,000 but our profit halved due to cost increases.
Some of that was simply under-estimating costs, especially the cost of getting the resource consent. But I also think that with costs it’s all about the incremental costs (another report here, another report there.)
The consultants spend of close to $1m is a reflection of that constant paper shuffling.
The project budget looks like this:
| Development contributions | $1,000,000 |
| Consent costs | $650,000 |
| Sales commission and marketing | $750,000 |
| Finance | $1,000,000 |
| Consultants/Contractor Margin | $1,650,000 |
| Sub Total (Consultants, Funding, Sales) | $5,050,000 |
| Build cost | $6,800,000 |
| Earthworks | $2,600,000 |
| Land | $1,300,000 |
| Sub Total (Land and Build Cost) | $10,700,000 |
| GST payable | $2,500,000 |
| Total | $18,250,000 |
The project margin is only 8% and house prices went up 25% between buying the land and selling the units off plan.
In the absence of that significant lift in prices our project would have been underwater.
The thing I can’t figure out is that land is now selling for about 25% more than we paid for ours (after allowing for our higher earthworks costs.) What does that say about the viability of land still being sold?
Most people I talk to agree that land is being significantly over valued.
I blame the hype that came along with the Unitary Plan combined with the media reporting around the housing shortage.
…..
So a mixture of issues ranging from Council policy and development contributions, the price of land running away, to the out of whack residential market. Effectively inefficiencies in the systems to allow the freer market to supply the housing typologies needed in the locations that topology is needed to satisfy the demand in an efficient and affordable manner (something we do not have now obviously).
This leads on to the argument stemming from the Minister of Finance Bill English’s quip about Councils “contributing” to the housing affordability and poverty situation. I will cover the quip in upcoming articles but I will say I agree with English to a point and do not agree with our Deputy Mayor’s reaction at all. Not when English has been sounding this out since 2009 (okay more subtly), 2010, 2011, 2013 and of course now in a more direct and blunt fashion. The old saying goes when you have annoyed the “opposition” to a great extent then you must be doing something right. I say we are going to expect more from English over the next 18 months.
Watch that space.
Talking Southern Auckland 