How to Assess a Site’s Development Potential (Medium Size)

How to assess a site’s development potential is a question we get asked on a regular basis. When you are evaluating land for suitability, how do you know whether it is going to work for development? Is it worth all the hard work that it takes to develop the site? And what about profit? How can you assess the site’s profitability even before you have laid your first brick? Whether you intend to build multi-dwellings and live on the block yourself or sell them all upon completion of the build, there are a few things you need to factor into the equation.

Double check the zone

Firstly, you need to check the zoning of the property to ensure that you are allowed to build more than one dwelling on it. Generally, there are three residential zones (in NSW) that allow multi-dwelling developments:

  • R2 Low Density Residential
  • R3 Medium Density Residential
  • R4 High Density Residential

If the property has a non-environmentally rated residential zone, then you basically have a green light to take it to the next stage. An R2, R3 or R4 zone rating permits you to build multiple dwellings such as townhouses provided everything else meets Government and Local Council standards.

Know your property size and floor space ratio (FSR) requirements.

Knowing your property size and FSR will allow you to determine the density (number of dwellings) you can numerically fit onto your site.

FSR definition: The floor space ratio of buildings on a site is the ratio of the gross floor area of all buildings within the site to the site area.

Example:

  • Site Size: 1200m2
  • FSR: 1 to 0.55
  • Max. Floor Space: 660m2

If you consider that an average townhouse measures 120-130m2 (internal floor space) not including the garage, we could potentially have 5 x 130m3 townhouses on a 1,200m2 property. At the early stages of planning, this is an easy way to start testing the viability of the project.

Ascertain the Site Frontage.

When building multiple dwellings, you must have a specific size frontage. Property maps and/or a quick chat with the duty planner at your local council will be helpful in this situation to determine the exact measurements. Generally, in NSW, there must be a minimum road frontage of 20 metres for multiple dwellings.

What if the property is sloped?

As long as the back of the property is higher than the front and the slope is a gradual one, then it should not be a major issue. Ideally, you want to maximise the potential of your block without having to resort to expensive excavation. But, sometimes you have no choice. Remember, however, that slopes can be an attractive feature of the land due to the elevated views they offer. Your choice of architect and builder will be able to determine your options.

What are the costs involved?

While the cost of the actual build will depend on a lot of factors, at the early stages of planning you can assume that each townhouse will come in around the $460,000 mark. Basement townhouses will range from $400,000-$500,000.

Example:

  • Site Size:                                  1200m2
  • FSR:                                         1 to 0.55
  • Max. Floor Space:                   660m2
  • Proposed 5 Townhouses:        $2,300,000.00 (5 @ $460K)
  • Basement:                               $500,000.00

The above figures should give you a good idea if it is worth moving forward for a development of this type, as always, we are happy to advise on the suitability of your site, so please feel free to drop us an email.

Below are some other elements to keep in mind, when reviewing the feasibility of these types of projects.

What about Development Approval?

Development Approval (DA) and Construction Certificates (CC) for the construction, etc, including consultants, will come in around $100,000-$200,000 depending on the specific processes applicable to your build. This cannot be avoided as it is essentially the grant of formal consent provided by Local Council to undertake the development. Architectural and landscape drawings such as your site plan, floor plan and elevations and sections will need to be submitted at the time of application.

What is the demand like for townhouses?

Single-storey townhouses, in particular, are easy to sell as the current demand is quite high. Depending on the size of your double-storey townhouses, you need to take into consideration whether they will attract families or those looking to downsize. All these factors provide great marketing potential.

Can I apply for a construction loan?

Construction loans are typically harder to get approved than a general mortgage, as most lenders don’t want to lend more than 60% of the cost of the project. If you have no prior experience in the development of land, then it can be even more difficult.

Can I go into partnership with a builder?

Going into partnership with a builder is definitely an option. There are many advantages to use a builder just as there are many advantages for a builder to take on such a project.

Advantages for a builder to go into partnership with a landowner

  • They will know how to make a profit from the project.
  • They will get paid for the project and take a percentage of the profit share for fronting the money for the construction.
  • The builder will save money because he doesn’t have to buy the land and pay interest on the loan.
  • The builder does not have to pay any stamp duty on the purchase of the property.

Advantages for a landowner to go into partnership with a builder

  • You don’t have to pay interest on a construction loan as the builder will cover the costs.
  • A builder will know how to build to budget and maximise the profit for both parties. If you are not experienced in building, it can be very easy to underestimate the actual cost.
  • You may be able to claim GST credits.
  • The builder will be more familiar with local planning rules and regulations.

How much profit should I be looking at?

While you may be seeking a high-profit yield, the average you want to aim for is approximately 15-20%. Most builders will aim for around 35%, and if it comes out slightly above budget, then the figures will work in their favour. Whether you are working solo on the project, or are utilising a builder for assistance, this kind of profit margin will make everyone happy. The overall aim is to keep the costs as low as possible to enable a higher profit