Washington Brown has crunched the numbers on The Block’s latest development in Melbourne’s inner-city bayside suburb of Port Melbourne, and something just doesn’t add up.
From a financial point of view the development, which consisted of transforming a 1920s art deco building into a luxury apartment block, was one of the worst he has ever seen.
While I understand the magic of television, Channel 9 has outdone David Copperfield in creating the illusion of a profit to the public!
Let’s look at the numbers:
According to reports Channel 9 bought the site for around $5 million, which allowed for 6 apartments. Only 5 were sold on TV and for calculation purposes let’s say the acquisition costs is $4.2 million.
The construction cost and depreciation allowances totalled over $11 million, for the 5 apartments alone.
That’s $15.2 million alone in construction and acquisition costs.
It’s worth noting that under the Income Tax Assessment Act 1997 the initial vendor (ie. the developer) has an obligation to pass on the actual costs of construction to the purchaser, where the costs are known.
Let’s not forget there’s then a variety of other costs involved in buying and selling, and undertaking a property development, including:
- Stamp duty
- GST on the sale
- Agents’ fees
- Legal fees
Whilst some of these costs may have been avoided due to contra deals, the bulk would have to be outlaid by Channel 9.
I estimate these additional costs to conservatively be $2 million, which brings the total cost to $17.2 million.
The Block’s total sales realised just a little over $12 million, leaving the development in the red by around $5 million, yet it has been indicated that profits of up to $715,000 were made by the contestants.
That something David Copperfield would be in awe of.
You know it’s the peak of the market when reality TV shows are pulling rabbits out of a hat to show a profit.
Whilst the contestants may have walked away with some ‘profit’, if the numbers are to be believed as shown on the show that development was a stinker.
The worry is these shows give an unrealistic expectation to would be budding renovators.
Every investor – whether expert or amateur – should be looking for the same things in a property investment to ensure its success.
While there is no exact formula for buying a successful investment, it’s handy to have a checklist to consult to make sure you’re on the right track.
Below are some of the fundamentals you should be looking for when buying. Be aware that this isn’t an exhaustive checklist. However, it can serve as property investment tips that will help guide your decisions.
Property must haves:
- Good location – The old adage still rings true; it’s all about location, location, location. Well, maybe it’s not all about location, but the fact is you can change a property, but you can’t change a location. Being close to amenities such as shops, schools, public transport and even major transport routes is key when it comes to selecting a good investment property.
- Growth drivers – Are there any major projects taking place in close proximity to drive up the value of the property? This might be in the form of new or planned infrastructure or commercial developments that will improve amenity or access to the area. This is likely to draw more people to the area, pushing up demand for homes.
- Population growth – Are people moving to the area? Look at population growth figures in the area you’re buying in. Then determine whether there are factors drawing people in, such as employment nearby and improved amenity.
- Tenant appeal – Is there demand from renters in the area and for the type of property you’re purchasing? Does your property have the features tenants want? What are the vacancy rates? Demand from your target demographic is the key to securing a strong return.
- Build quality – While location is key, the property you buy is important too. This is especially true if you want to attract quality tenants. Do your due diligence, which includes getting a building and pest inspection, to ensure the home you’re buying is of a good quality.
- Value-adding potential – A well-selected property should see capital growth. However, it’s always a good idea to have the ability to add value through a renovation or by adding a room or a car park, for example. Value-adding potential also comes in the form of a change in zoning that will allow for development. If the market slows you may need to manufacture growth to increase your equity.
- Liveability – Does the property have a good layout? Does it have the features people want, such as extra bathrooms, car spaces, security, and a nice outdoor area, whether it be a roomy balcony or a good deck and backyard? All of these things will make it more sought after. Liveability also goes for the suburb. Ensure you buy in an area with a good community due to plenty of amenity and nice aesthetics.
- Individuality – A property that is unique is some way – or that stands out from the crowd – can experience strong growth as it will be in high demand amongst buyers. This is especially the case when it comes to units, particularly in areas with a lot of supply.
- Scarcity – Does demand outweigh supply in the area in which you’re buying? This applies to the area in general as well as the property type. If there is greater demand than supply in terms of both buyers and renters, the property value and rental rate will be pushed up.
- Low maintenance – Select a property that won’t require a great deal of maintenance. This will save you money and keep your tenants happy.
- Proximity to employment – People like to live in close proximity to work, so make sure there are employment options nearby. If you’re buying in a regional area make sure there’s more than one industry in the town.
- Stability – Have property prices been stable in the area in which you’re buying? Ideally you want a history of consistent growth, avoiding areas that have experienced big price falls.
- A solid history – Do your research and make sure the property hasn’t been sitting on the market for a long time, and if it has, determine why. Make sure it’s not due to an inherent problem with the property. Finding out why the sellers are moving on is also important. The last thing you want is a property that isn’t selling for a good reason.
- The right numbers – You want the property to stack up from an investment perspective, with good potential for capital growth and decent rental yields. Make sure the numbers add up! What is the rental yield, what are the total costs, how much will you be out of pocket for?
Construction cost estimating examples Case Study
Client: Commonwealth Bank/Ecove Group
Project description: Site 3, Sydney Olympic Park, NSW
This development comprised a 25-storey tower, housing two retail tenancies and 267 apartments over four basements. A two-storey commercial pod, consisting of six commercial tenancies, including associated site works, also formed part of the development.
Washington Brown provided pre-contract cost planning services to the developer, as well as a full cost management auditing service to the financier during the construction phase.
We also provided monthly contractor payment recommendations and reporting to the financier, along with variation assessment, cash flow analysis and contractor reviews.
Washington Brown worked to ensure the builders maintained the lump sum contract price and the financier’s/developer’s interests were maintained at all times.
Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.
This blog is an extract from CLAIM IT! – grab your copy now!
Whether you’re building a block of residential units, a commercial or business centre, a high-rise tower or developing a subdivision, it is a must that you are in control of the project cost. We all know that effective cost management is critical to a project’s success.
Washington Brown has extensive experience in all major sectors of the property industry over the last 30 years. This expertise and knowledge is fundamental when assisting our clients in completing their projects on time and on budget.
We have been involved in a wide range of development projects where we have acted as the cost controller on behalf of lending institutions. Our best-practice cost planning service ensures you get accurate cost and construction information for every stage of your project.
We offer specialist advice in the following nine broad areas:
- Financial auditing of projects
- Development monitoring
- Construction-contract review and assessment
- Feasibility studies
- Sustainability advice
- Risk identification and management
- Value engineering
- Tender review and selection.
Washington Brown’s ongoing project monitoring, coupled with our robust reporting systems, helps us detect issues early, giving you time to address them quickly and in the most cost-effective way.
We can monitor, analyse and report on:
- Construction progress
- Cash flow
We have developed a cost report for the project monitoring that easily identifies the current project financial status, cash flow analysis, variation assessment and risks.
If you need help minimising the risk of overruns on your next construction project – talk to our construction estimating team today.
This blog is an extract from CLAIM IT! – grab your copy now!