In boom times almost anyone will do, properties will pretty
much sell themselves. During a bust no agent will be any good. It is every
other time where the value of your agent comes into play, especially at the
fringes of a changing market. They can be instrumental in launching your
development in the early stages of a rising market or completing those final
sales that deliver you a profit during the flattening inevitable before a
downturn.
Developers in small scale house
and land developments typically engage the services of a professional real
estate agency. Some smaller agencies will have agents that primarily deal with
new subdivisions. Larger agencies often have dedicated project marketing teams
focusing exclusively on new subdivision projects.
Experienced developers with a
pipeline of projects often bring real estate sales people in-house. The reasons
for in-housing agency is to reduce total commission payable and have more
control over the selling process. The individual agent may end up getting the
same per property commission, but there will be no agent head office brokerage
fee payable which ranges from 30–50% of total commission. Control is about
brand exposure, brand protection and marketing consistency — elements more
important for large developers and large projects.
I advocate to maximise profitability, focus on generating the highest income rather than shortcutting sales costs. At least for your first few projects you should use a professional real estate agency and harness their experience, exposure and branding to sell down your development. If are a real estate agent come developer then don’t underestimate everything else you have to do besides selling, and go hire someone else to do the selling.
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
Uncategorized — Comments Off on Selling #1 14 Aug 25
“To my real estate agent, Chernobyl is a
fixer-upper.”
Yakov Smirnoff
Income represents just a few lines on our financial feasibility but unless you can sell your product and generate the income you won’t have a project nor any profit. Selling a new house and land development is quite different from selling existing real estate. Most likely you will want (need) to sell sections or house and land packages in advance of completing construction to secure funding. With these pre-sales you are expecting people to buy before they can touch. That can both help or hinder sales. On one hand people are not sure on the details and may be hesitant whilst on the other you may sell them into a vision they simply can’t wait to buy into. The alternative is when you speculatively develop houses or sections with the intention of selling them once you have completed construction. This can put your product in an attractive position to sell (as you will be brand new compared to existing homes), but exposes you to significantly more timing and funding risk.
You have to determine who will be
doing the selling. This will most likely be a real estate agent. With the help
of your agent you need to arm yourself with a sales strategy to penetrate the
market. Plan to be successful rather than just list and hope. Your real estate
agent may have success in a certain type of sales strategy or have experience
in tailoring custom strategies for different market circumstances. The sales
strategy will be influenced by the target market you identified, the product
you designed and how you are to maximise project profitability. For your
project there may be many strategic options to choose from, each with positives
and negatives. Alternatively, your product may lend itself to a sole particular
selling strategy. The sales strategy is your plan to sell down your development
to purchasers by addressing three fundamental questions:
What are you going to sell?
When are you going to sell?
How are you going to sell?
Once you have sold your product,
you have now inherited a group of purchasers. They need to be managed (loved) throughout
the development period, on settlement and post settlement.
In the next part of this series, let’s look at selling your house and development in more detail……
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
Uncategorized — Comments Off on Restart #9: Replan 07 Aug 25
When repositioning is not enough, and the project you have
inherited simply has no profitable (or sufficiently loss minimized) way forward
then you may have to replan it. That means a completely new start. Replanning
for a completely different use, throwing out the current consents and
demolishing what has been built might be the most profitable strategy. Blue sky
thinking.
There could be dozens of options
and hundreds of permutations if you decide to replan the project. Two critical
features will dictate the range of options available to you: 1) planning
constraints, and 2) the current real estate market.
If you plan to rezone the property
to make allowance for an alternative use, then all the luck of the Irish to you
— I’m not about to embark on the limitless opportunities your project site may
have. However, if you are going to plan within the current planning rules
(perhaps with a few infringements) consider the following first three steps
that often have the most impact on profitability:
Can you increase density, or floor area and put more of the same or similar product on the site? This will reduce your land cost per unit. It can be especially effective if you are not significantly increasing per unit construction costs at the same time.
On less expensive land where construction costs are increasing, can you do less density and lower height to take advantage of comparably cheaper rates? There is typically a reasonable difference in dollars per square foot construction costs for five-story condos (high) versus two-level terrace homes (lower).
Does your planning and zoning allow what is in hot demand in the current real estate market? For example, residential may no longer be profitable but the office market is. You can then concentrate on this use.
That concludes our series on Restarting Failed Property Development Projects.
The property development project has flaws preventing it from working in the current market, but they are not terminal if it can be suitably repositioned. Repositioning often includes some redesign and a new approach to sales and marketing. There is no 11 herbs and spices recipe to reposition a development project in trouble. The idea is to find a more profitable feasibility and action its delivery without throwing everything out and starting again. Probably the best way to explain repositioning is to give some examples that I am familiar with across the real estate spectrum:
Residential
Down spec’ing (reducing specification of mainly
fittings and fixtures to a less expensive alternative) to reduce cost to appeal
to a lower price point.
Up-specifying to increase desirability for those
at a higher price point.
Decreasing home or apartment size to appeal to a lower price point and/or a
higher investment yield (a smaller unit could cost much less to build than the
corresponding drop in rental).
Increasing home or apartment size to appeal to a
higher price point.
Joining homes together by duplexing or terracing
to reduce cost or add homes.[1]
Combining or splitting apartment units to create
dual key opportunities (live in one, rent the other).
Selling groups of sections or super-lots rather
than individual sections, appealing to larger developers and builders.
Joining sections to make suitable for larger
homes.
Subdividing sections into smaller ones, to make
more affordable.
Selling sections rather that house and land
packages to appeal to owner builders and small-time spec builders.
Reconfiguring homes or units to have more
bedrooms in the same space, increasing rental income.
Converting garage space into liveable area or
vice versa.
Adding commercial opportunities to residential developments. Include a home
office. Make the ground floor of a multi-level home suitable to lease for
retail or office. Create a gym space that can be leased. Include a valet and
carwash service in the parking garage.
Converting part of the residential to a hotel or
serviced apartments, for example the top floors
of an apartment building, with a separate lobby on the ground floor.
Conversely, converting a hotel or serviced apartments to residential units for
sale or long-term rental.
Converting residential to student accommodation, student accommodation to a
hotel, and vice versa.
Industrial
Cutting larger industrial premises into smaller
sellable or leasable areas.
Turning industrial premises into managed
self-storage facilities.
Joining smaller areas to create larger premises.
Increasing or reducing the office space provided
with the industrial.
Adding a residential use to the industrial
premises, such as an apartment over light industrial units.[2]
Partially converting to retail use; for example,
on a main road frontage.
Lifting the roof to increase stud height — effectively
repositioning to a larger tenant market.
Office
Decreasing or increasing contiguous areas to
attract a larger or smaller (or more varied mix) of office tenants.
Convert to serviced office space, rent by desk
and business incubator type office space.
Install exclusive stairs to join levels of a
prime office internally — to reposition to larger multi-level tenants.
Adding a retail presence to the ground floor of
an office building either because it attracts a higher rent, or it helps to
provide additional amenity to office tenants.
Adding naming rights and signage opportunities
to increase revenue.
Adding a residential use to the office premises,
such as an apartment over office units or making the upper levels of the office
into apartments.
Increasing common area spend (lobbies, elevators,
toilets lighting, artwork, furniture, size space, luxuriousness of materials) and
amenities (onsite gym, showers, roof deck) to attract higher class (higher
paying) office tenants.
Decreasing common area spend and amenities to
decrease operating expenses to attract more cost sensitive tenants.
Spending more capital upfront on low maintenance
plant and equipment to lower ongoing tenant expenses.
Embracing latest ‘hot issue’ for specialist or socially
conscious tenants; sustainability, high technology or alternative transport.
Retail
Decrease per unit size to allow for smaller
tenancies at higher rents.
Include different sized spaces to attract a varied
tenant mix.
Adding a residential use to the retail premises,
such as apartments above, or live-work combination terrace home.
Converting space to an office use to absorb
areas where retail does not lease well (like the second level of most suburban
retail centers). Offices, for example, can add retail patronage.
Providing internal access to link harder to
lease upper or basement space to ground floor retail.
Adding naming rights and signage opportunities
to increase revenue.
Turning every surface and opportunity into an
advertising revenue stream.
Increasing common area spend and amenities to
attract higher class retail tenants.
Decreasing common area spend and amenities to
decrease operating expenses to attract more cost sensitive tenants.
It’s all about repositioning the project
in line with current demand and supply.
[1] This overlaps with the re-planning option we
discuss in the next chapter.
[2] This will more than likely be constrained by
planning rules when placing a residential use into an industrial zone.
The existing property development project doesn’t work in its current structure, but there is an opportunity to make it work if ownership is restructured. The intention is to keep the design, consents and construction works predominantly as-is, complete only what is absolutely necessary and restructure future ownership. Here are some examples of restructuring projects:[1]
Convert sales
into leasing. Assume a 100-unit condominium project has
contracted sale prices that do not cover the cost to complete construction. The
lender now controls the project and you have been brought in to assess how to resurrect
it through restructure. Selling a half-completed project will mean a
substantial loss to the lender so they are prepared to work it through. The condominium
market has deteriorated below original list prices so there is no opportunity
to ask buyers for more money. All contracts will need to be terminated. However,
there is no point trying a new marketing campaign to sell condos as market
prices do not support the remaining construction costs. The best course of
action you determine (at least the lesser hit to the lender’s wallet) is to complete
the project and lease the units in the rental market. You would continue to
rent until the ‘for sale’ market appreciates, and you can sell down units or
until a suitable long-term investor is found to purchase the completed
development. Taking it further down the ‘for rent’ spectrum would be a conversion
into short stay serviced apartments.
Convert
leasing into sales. Typically, this type of restructure occurs
mid-cycle in an appreciating residential real estate market.[2] As the market improves,
yields generated by for rent units generally get surpassed by the effective
yields home buyers are prepared to pay. The arbitrage gap allows a developer to
purchase a block of residential units at say 10% yield, undertake cosmetic
renovations, create separate ownership titles and sell to individual buyers at
an effective 5% yield.
To
illustrate, assume a 10-unit apartment project, when complete, is worth
$5,000,000 with a gross rental of $500,000 (10% yield). Unfortunately, the
‘for-rent’ developer has defaulted on the loan and you are looking to purchase
the half-finished opportunity from the bank. You determine that if you
restructure future ownership to individual home buyers, they will pay $750,000
per unit. The total income you receive is $7,500,000. The rental remains
at $500,000 but dividing it by the for-sale price represents an effective yield
of 6.67%. There are costs — $500,000 in legal, utility separation, marketing
and some redesign. But you have created two million dollars by magic!
Another example is converting a for-lease building to for-sale office, retail
or industrial condominiums. Rather than continuing to
try and lease a large space you sell off individual units (like floors or adjacent
spaces). This restructure is viable when the market to smaller investors and
owner operators is superior to the general leasing market or selling to larger
investors.
Sales or
leasing into hold. Selling the project is only feasible
with a heavy discount. Leasing it on completion carries too higher operating cost
and low rentals and detracts from a more profitable use in the future. In this
case you complete construction to a certain point and restructure to hold until
a better time to sell or lease eventuates. An example is where you have created
a residential subdivision but take the sections off the market and move
it from an expensive debt leveraged position to a long-term hold and equity
position. Or it may be farmland originally to be developed, where the market
has changed, and you decide to continue to hold as farmland. Or it might be
leaving the expensive internal fitout of the penthouse in an apartment building unfinished
until the market improves.
[1] You see restructures all the time post the
peak of a market cycle.
[2] Americans know all about the condo-conversion craze!
