The Australian residential property market, deeply ingrained in the cultural fabric and touching every Australian’s life as a renter, owner, or landlord, has long been an appealing investment destination for a broad spectrum of investors. The tangible nature of residential and commercial real estate in Australia, coupled with broader societal views that Australian residential real estate is traditionally robust investment option for long-term growth, enhances its attraction. Many Australians perceive it as a straightforward ‘set and forget’ strategy, reinforcing its status as a common route to potential long-term wealth accumulation.
Property development is a somewhat more sophisticated concept which involves projects including land subdivision, building higher density dwellings and even developing entire estates or suburbs. More often than not, it involves bringing additional stock of housing to the market to meet demand.
The combination of strong historical real estate demand from both owner-occupiers and investors, population growth and lagging supply has made property development a worthwhile endeavour for those suitably experienced and qualified.
Property development, being at times a volatile industry, hinges on forecasting currently unseen market demand and careful consideration of potential risks and uncertainty.
Property development is also a complex and interdisciplinary undertaking. Achieving success requires delivering the appropriate real estate product to the market at the optimal time and price, while simultaneously balancing project and input costs against the anticipated end value of the project. To accomplish this, a dedicated team comprising individuals with various skill sets and expertise is necessary, along with the coordination of many interrelated activities. Poorly managed projects or an inability to address and adapt to sometimes rapidly changing market conditions can lead to challenges for property developers and those who finance them.
Poorly managed projects or an inability to address and adapt to sometimes rapidly changing market conditions can lead to challenges for property developers and those who finance them.
In this article, we explore some of the key things that can make or break a property development project or a property developer.
Keys to a successful property development project
A successful property development project requires careful planning and execution. Some key characteristics of a successful project include:
- Location– A project in a desirable location with easy access to amenities such as transport, schools and shopping centres is more likely to be successful. The location should also have potential for future growth and development with any key infrastructure, including those aforementioned, being capable of dealing with population growth. Adverse weather events typical to the area (e.g. propensity to flood, exposure to bushfires) need to be well-understood. Areas which State and Local Governments are supporting infrastructure and advocating for growth have more promising prospects.
- Clear Market Demand – At its essence, property development involves creating a product for a specific market, so a deep understanding of that market is critical. The developer needs to identify the target market and ensure that there is demand for the development. This includes profiling individuals in the area from a demographic and behavioural perspective, . , and that the project will meet those needs. In addition to understanding the target market, it is critical to be aware of any competition targeting the same market.
- Experienced Development Team – A successful development team requires a strong mix of experience, skills and expertise. This includes architects, builders, contractors and project managers who have a proven track record of delivering successful projects. The individuals and organisations who bring the expertise, labour, equipment and materials to the project are all subject to their own constraints and risks. Their financial strength, their exposure to various markets, their relationship with their workforces and unions and their relationships with their own suppliers all have an impact on their ability to deliver as contracted towards a particular project.
- Financial Feasibility – The project must be financially feasible and meet the expectations of investors. The developer must ensure that the project’s costs align with projected returns and that there is sufficient capital to complete the development. Accurate forecasts and contingency planning is critical, as the prices of inputs can change quickly, as can the future value of completed projects. In current markets, the rapidly rising costs of building materials and supply shortages have caught many projects off guard.
- Effective Project Management – Strong project management skills are essential to ensure that the development is completed on time and within budget. This includes managing contractors, suppliers and other stakeholders to ensure that the project runs smoothly, in addition to cutting through and managing red tape associated with councils and government departments.
- Project and Site Alignment – Developers often stumble when they fail to align their projects with the site’s potential. Over capitalising by constructing a product that is too expensive or under capitalising by building one that is not good enough for the specific location can be detrimental. Trendsetting and attempting to set price records is a risky approach since it may not be support
Traits of highly successful developers
The success of a property development project also depends on the skills and experience of the developer. At Trilogy Funds, we look for certain characteristics when assessing builders and developers to work with, which helps us avoid exposure to unsuccessful projects. We also acquire third-party advice as required to help manage the investment, to assist it aligns with typical valuations and current cost estimates.
Highly successful developers possess the ability to look beyond the current market conditions and predict upcoming trends. They create projects that meet future market demand, positioning themselves for long-term success.
Highly successful developers possess the ability to look beyond the current market conditions and predict upcoming trends. They create projects that meet future market demand, positioning themselves for long-term success.
Strategic in their planning and decision-making, successful developers conduct extensive research and analysis before making any decisions and they have a clear understanding of the market and the competition. With a strong network of contacts including industry professionals, suppliers and investors, successful developers have access to the resources they need to complete a successful project aligned to the property market conditions.
Successful developers are financially savvy and have a clear understanding of the financial aspects of the development process.
Property development projects can be challenging, with unexpected obstacles and setbacks. Successful developers are resilient and able to adapt to changing circumstances. They will also have strategies in place to help weather economic impacts on the housing market
Builders and developers going under
The recent insolvencies of a number of prominent construction companies, in particular those in the house building sector, have raised concerns about the possibility of further failures in the industry, and have highlighted the various pressures that property developers and builders are facing such as low profit margins, limited availability of capital supply chain disruptions, project delays, escalating costs and poor insight into supply chain risks.
Our position
At Trilogy Funds, our team are proactive in managing and monitoring emerging trends and industry changes in the property development and construction sector that could impact the general market. Our current default rate is 2.18% based on funds under management (as at 31 May 2023), and our overall loan to value ratio is 62.67% on an ‘as if complete’ basis (as at 31 May, 2023).
With a strong belief in supporting developers with quality projects, our team focuses less on pre-sales and more on a holistic outlook, taking into account property development experience, the construction delivery solution, project merit, risk mitigants, project gearing and the borrower group’s financial strength.
With a vested interest in ensuring each property project in our portfolio delivers on its financial goals, our team works closely with borrowers from loan inception through to completion, offering tailored loan support where needed.
This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the management investment schemes mentioned in this article. Application for investment can only be made on the application form accompanying the relevant Product Disclosure Statement (PDS) and by considering the Target Market Determination (TMD) available at www.trilogyfunds.com.au. The PDS contain full details of the terms and conditions of investment and should be read in full, particularly the risk section prior to lodging any application or making a further investment, together with the TMD. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.
