Monday, 16 May 2016

Less is More

The profitability of residential property development depends on the tendency for smaller dwellings to sell for more per square meter than larger ones in the same area.

You can see this reflected in sales records.

Theoretically, one could buy an 800sqm property in the 5043 postcode for $500-$1000/sqm, demolish, subdivide, develop into four 200sqm dwellings, then sell all for around $2000/sqm, making a delicious gross profit of around $1250/sqm, or $1,000,000.

This practice has lower and upper bounds. You won't be able to buy a piece of land of infinite size, subdivide it into an infinite number of lots, and sell those for $infinity/sqm. Suburban parcels of land over 1000sqm are rare. Local councils have minimum sizes for subdivisions, often above 200sqm.

While construction costs for a project home can be as low as $1085/sqm, smaller blocks may necessitate the building of townhouses at prices of $1535/sqm and up, which brings net profit to ...

$1250/sqm minus $1535/sqm ...

Oh dear.

Larger developers lower costs through economies of scale. Smaller fish like tradesmen do much work themselves, essentially paying in kind with their own labour. Their respective deep pockets and know-how also keep projects - and thus borrowing risks - on track.

Property development for the inexperienced like me though, may be a case where more is actually less.

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