Property Development & Investment 101 – Density and Yields
I have previously summarized how the different types of property development in Melbourne are primarily dictated by planning zones.
Residential property development in particular can be further separated into different types (like apartments, units, townhouses, detached houses to name a few) and similar to other real estate types, can be classified according to ‘densities’.
In property development terms, density is a measure of yield per area such as how many dwellings (or buildings) per given area. For example, the more dwellings (or floor space) in the same defined land area, the higher the density.
Apartments would be considered ‘high density’, with ‘medium density’ for villas, units and townhouses, and detached dwellings (or a single house on its own separate land title) generally considered to be ‘conventional’ or ‘standard’. There is also ‘low density’ development in rural or semi-rural areas, and others with special uses such as retirement villages and resorts for example, but most of these special types can be considered to fall under one of the ‘density’ categories.
Density is quite an important factor in property development for a number of reasons. It is used as a reference when assessing feasibilities, particularly when you are conducting the very early assessment of a sites pre and post developed value. Some call it a ‘back of the envelope’ assessment, and understanding densities can be a powerful advantage to assess whether your project might ‘stack up’.
BUT, just like other things, power can also be dangerous if it’s not used in the right context. I have seen it so many times, and continue to do so. Logic tells you that the higher the density you can achieve on a site (and therefore yield), the higher the profit because the end value would be higher relative to the cost to develop, and the undeveloped site value may increase accordingly. That in itself makes sense, but if you rely on this alone before you commit to buying you could be asking for trouble.
Why? Because you not only need to take the relevant planning and design constraints into account, but consider market suitability and acceptance. In other words, the ‘horses for courses’ approach.
As mentioned briefly in my blog on understanding property zones, there are always other planning & building ‘layers’ that govern outcomes and must be complied with. If you are thinking of buying or selling a developable property, you may have sought some opinions and even looked at comparable sales to get an indication of what the property would be worth. My advice is that you could be doing yourself a major disservice without doing a more thorough development assessment and feasibility.
Maybe ask yourself questions like what will the current legislation allow, what does the market want and what do they expect to pay for the end product right now? The answers to these questions will make your assessment much clearer, so please feel free to contact us should you need some assistance. Our experience can help you answer these questions and give you a clearer picture of your property development value.