Urbizen Journey – Trust your gut, but make sure you know what you’re eating
The whole development journey starts with a plan. For us, our plan comprised of a vision for the development that worked alongside a detailed feasibility study, which is your due diligence exercise to ensure the project stacks up.
The first step in our process was to prepare a draft Feasibility Study that could be used to assess the development potential of each site we were investigating for our project. We ensured we had a robust feasibility from the outset, although on reflection it’s fair to say we left out a couple of key line-items in the study. For example, in certain areas we were perhaps overly optimistic with our numbers for certain elements of the project (i.e., construction costs), which did not translate to the final costs we incurred when it came time to build.
(Key Learning: The lessons we learnt were the importance of the feasibility study being as realistic and accurate as possible from the outset. One must be conservative in your cost estimates and try to account for all major cost line items in the development process. Be mindful of potential price fluctuations as you project goes through its life cycle and if unsure on every line-item, ask your experts.)
We also learnt that in property development, there will always be ‘uppers’ and ‘unders’ in costing throughout the process. Reflecting on it now, it’s fair to say that it’s important that you get this feasibility as accurate as you can as this will follow you through the project life cycle. A simple mistake like leaving Vector costs out, not factoring in Watercare yearly cost increases or not accounting for the ‘add-ons’ (traffic management costs attributed to delays with public works) can cost you at the backend of the project.
(Key Learning: One good bit of advice here is to try and structure your feasibility like a bank or 2nd tier lender would view it. At the end of the day, they are the gatekeepers to financing, so if your feasibility doesn’t align with theirs at the point of obtaining construction finance, you may experience budget increases you weren’t aware of and then find it challenging to obtain financing if your project doesn’t fit the lender’s loan-to-value parameters.)
The second step we took in the process was creating a vision for what we wanted to achieve out of my development. For us, things like being close to public transportation to cut down on parking, affordable sale prices to serve people that were struggling to buy homes, and like all developers, a profitable outcome were top of the list when searching for the ideal development site.
(Key Learning: Your project should start with a vision of what you want to achieve and understanding of the target market you are selling to.)
When we combined these two factors, we had the parameters we needed in place to go and find a piece of land. We knew from the get-go, we wanted to be in Mt Eden. The village-like feel, proximity to the city, public transportation and the views checked all the boxes for us. We started looking and within a few months we found our site. The site we purchased was one of the first sites we looked at! Sounds crazy, but when it checked all the boxes it just felt right. This meant we spent only a short time in this space of looking for a site. Of course, It does not always go this fast, but we do think it can if you have all the parameters locked in.
We then moved into a Due Diligence (DD) stage almost immediately. We had a bit of an advantage here with my town planning background, so we knew what consultants we needed to engage to identify consent risks and had a line in on good ones. Our DD came back with its challenges, but they all were within what we saw as reasonable in terms of their risk profile.
(Key Learning: Have the right team around you from the beginning. Things like civil investigations, ground conditions etc if not thoroughly investigated can sink a whole project)
And finally, the land purchase price is a key factor to consider. It’s worth pointing out here that projects often stretch over market cycles, so ensuring you have a development that is adaptable to market conditions is critical. Our project was no different and rode three property cycles starting with the acquisition of the site (buyers’ market), consenting (buyers/sellers’ market), selling (sellers’ market) and completing (buyers’ market). The market had a minor influence on our decision to purchase the site but when we had all the information around site constraints ironed out, we did not hold back from executing our vision and goals for Urbizen despite the market.
(Key Learning: try not to get caught up too much in the market as these can change throughout the course of the project. Provided you have the capital to deploy, purchasing in a buyers’ market has its advantages.)
Regarding purchasing land, it’s worth also mentioning that overpaying for the land will impact on your LVR position, as the lenders use the value of the land (as defined by a valuer) to determine the total land cost, as opposed to using the actual figure you paid for the site. This was new to us. The reason this part of the process is critical to the success of the development is because the land component accounts for a large percentage of your overall pre-finance project cost (20-30%).
(Key Learning: avoid overpaying for land if you can and be mindful that the value determined by a valuer is the land figure that the QS will use in in the budget they prepare for the lender.)
Another thing to factor in is Banks will not support the acquisition of the site for development purposes, so if you don’t not have the funds to buy the land outright be prepared to bridge any capital shortfalls through 2nd tier lenders. These bridging loans are often finite (~ 18 months), so be prepared as once that loan kicks in the clock is ticking to get the consents in place and development sold. In many cases, it can be crucial to negotiate longer settlement periods for land purchase and delay the need for a bridging loan if possible.
(Key Learning; while bridging loans can be useful in allowing you to purchase a site to begin your development journey, the loan is finite and will mean you will need the ‘readys’ to finance the lender out when the loan reaches its term end.)
Hope you all found the above shared experience insightful. The images included are snippets of the massing studies we explored in the early stages of the project. Happy to answer any questions/share more learnings via messenger or email. The next post will be about the design and consent process we went through.
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