A common mistake we find developers make is failing to do adequate research into the market they are developing into. Understanding how what you are building will fit into the market is a crucial part of property development and a key focus for lenders. If you push forward without properly making this assessment you might find yourself spending a lot of money and time pursuing a development that may not be successful.
Research into your market involves several things including understanding the price point of the product you are building for the location, the demand for that type of property, the current and forward supply and many others. We briefly discuss what we consider the top 5 below as well as suggesting some places that can help you navigate that research.
Value of the proposed completed units.
One of the most crucial elements to a property development is understanding how much you might be able to sell your completed units for. Your prospective sale prices will drive how profitable a development may be and directly influence what your borrowing capacity is.
We often see developers take a rosy or ill-informed position when looking at the value of what they are completing. This will be tested in the finance process either by the mechanism of a valuation or internal checks from the lender.
We recommend looking in some depth into what the value of the completed units will be. There are a few different ways of doing this.
Speak with an agent
The most common approach we see is speaking with a real estate agent about what you are proposing to develop and what their view is it will be worth. We recommend you engage with more than one agent in the area and speak with someone who specialises with off plan or new build sales.
Remember that speaking with the same agent who sold you the land might not get you the most unbiased opinion (they want to make the sale naturally) so tread cautiously there.
Real estate agents like OPES, Staircase or Wallace and Stratton are good to engage with as they specialise in selling down new build units and can give you some good guidance around values.
Do your own research
There are a few online tools that can help you do some research into what the properties might be worth on completion. Below are a few that you may use;
TradeMe / Realestate.co.nz – These are the two most popular property listing platforms in New Zealand. Doing some research on here to get a feel for what the current listings are in a certain suburb / location for what you are going to build and what they are marketed for can give you an idea of what the price point of your product could be.
Relab / CoreLogic – Relab and Core Logic both offer a Comparative Market Analysis function on their platforms. This is a mechanism where you can search in a certain area for all recent sales of properties with selected criteria such as number of bedrooms, lot size and number of car parks. From there you are able to compile a report of those recent sales selecting the sales you think are most comparable to give you an idea of what the market value for what you are developing might be.
Rental Rates
If you are developing with investors as your target client for sale then understanding the local rental rates is a crucial part of the puzzle. Determining what the properties you are developing might rent for can have a direct correlation to the value you may be able to achieve on the properties. The higher the rental the higher the value you may command for the end units.
There is some good online tools to help with this one;
The Tenancy Website – this allows you to search by suburb and have a look at the lower, median and upper rental quartiles for that suburb for each property size and type. It also gives you the number of active bonds which should be a good reflection of the unit types being rented in that region (see demand section below).
Market Supply
Anyone with a basic understanding of economics will appreciate the importance of understanding the market supply of properties where you are developing (think supply and demand curves).
To do this effectively it involves looking through to the type of market you are targeting (owner occupied or investment) and then seeking to determine an understanding as to how many comparable units are available for purchase or in line to be developed in the location you are targeting.
Understanding this you will have a good idea how competitive the sales process might be and what effect that might have on your value and ability to sell the units.
This isn’t the easiest thing to do, however, there are some helpful online tools.
Pacifecon – Pacifecon is a market research tool that allows you to search in certain suburbs or locations for consented projects at varying stages. It is very helpful to get some high level data as to what is being developed and where, however, it can be a bit clunky to use and you need to pay for a subscription.
OPES Housing Stock Graphs – OPES have worked with www.RealEstate.co.nz to create graphs for several regions in NZ that detail the monthly listing data on the Realestate.co.nz website. This is just regional listings and not particular to a suburb but does give some idea of the trend in listings.
TradeMe / Realestate.co.nz – These are the two most popular property listing platforms in New Zealand. Doing some research on here to get a feel for what the current listings are in a certain suburb / location and the type of homes being listed.
Relab – Relab is an online tool designed for agents and developers. The premium offering has a detailed search function that allows you to search for consented projects within a radius you can determine. It is a great tool to uncover nearby projects and their details.
Market Demand
Beyond the supply, understand the market demand for the type of property you are developing is crucial. There is little point developing properties that do not appeal to the market.
This can involve looking into the population base for certain areas and the profile of that demographic. This involves age, size of the family unit and income amongst other items. You may even want to consider car ownership in the region (links to car parks).
You also want to understand how many people are looking for rentals in that region, albeit that can be harder to determine.
OPES’ Tenant Tool – OPES have created a ‘tenant tool’ which will help you determine some of the important tenant aspects discussed above. It also allows you to compare suburbs next to each other which is a real help.
Stats NZ – Stats NZ has some great statistics about different regions. Unfortunately a lot of data is based on previous census data which can make it outdated. Despite this there is a lot of great information.
Future Infrastructure for the location.
This is something not always considered when looking at where to develop, however, can be quite an important consideration. Often spoken about in NZ is the lack or poor quality of infrastructure and this has a direct impact on the saleability and price of completed units in that suburb.
Looking into the existing infrastructure is something often considered but occasionally overlooked is the future infrastructure and a consideration as to how that might impact the value of your property.
Normally the provision of infrastructure would be a benefit to the value of a property, however, you do want to look into the timing and scope of the works. If there are significant and prolonged works near your proposed development that may impair your ability to sell the units down artificially dragging down the value whilst those works are underway. You can give consideration to this and the timing of your project and sales programme.
Big projects may, however, also drive demand for property (think the new Hospital in Dunedin) and therefore add value to your development.
There is some online resource you can use to try to determine what infrastructure projects may be coming up. Consult ANZ have put a good blog together on future infrastructure work. BCI has also put together a list of the 20 biggest projects in NZ.
The easiest place to search projects, however, is via the government website where they have a search function that allows you to narrow down project types, locations and status. It also gives an estimated programme which is helpful to understand.
Hopefully the above list has helped, as always if you have any projects coming up and you want to talk through them please reach out!
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