What is Your Property Really Worth? (Part 3)

property investment melbourne - sales volume 2004-2013

 

 

 

 

 

 

 

 

 

 

More Property Development Deals to Protect Everyone’s Interests

As highlighted in part 1 of this blog, time is money, and the ‘time value of money’ can provide quite a different perspective on the true value of your developable property.

If for example you are the seller (the property owner) of a land parcel which has already been zoned and offers you have received to date have been lower than what you are looking for, chances are that your price might be too high, and if your only wish is to wait and see if you can get a better offer, you may in fact end up in a worse financial position.

Why? Because markets (and the overall economy) move over time and prices generally move relative to the whole supply and demand equation.

To try and simplify this complex animal, I like to use the following equations to more easily understand how these market forces work:

Increased demand + decreased supply = reduced competition (undersupply) = upward price pressure

Decreased demand + increased supply = increased competition (oversupply) = downward price pressure

So how does this relate back to the selling landowners situation right now?

There are a few things that come to mind.

1.  The lack of property transactions can impact your cost of living

As highlighted in part 2 of this blog, we have seen a lack of developable property transactions (and therefore new property development) over recent years, and as you can see from the graph above, post developed (retail) property has followed in the same direction, to the point where 2013 volumes are significantly lower than their peak in 2009, and surprisingly lower than they were 10 years ago.

The worry is that our population keeps growing, and new property development needs to occur to support that growth. The longer it takes for you to get your deal done (ie your property to become a new development project and produce retail supply), the higher the risk of post-developed supply shortage. This reduces retail competition and potentially pushes up prices, putting pressure on inflation and interest rates, which increases the cost of living.

If wage rates (or household incomes) don’t follow (and in contrast to the last decade they aren’t at the moment) you end up with reduced affordability which can put financial pressure on households, including yours. Increasing council rates, land tax, electricity bills and food, just to name a few.

Compounding this for the selling landowner is the potential oversupply of pre-developed property, particularly for property in growth areas on the urban fringes. How?

2.  Increased financial pressure can reduce the demand for your pre-developed property

Firstly, if households continue to be under financial pressure you are more likely to see a continued downward trend in post developed property sales, as less people will be able to afford that new investment property or dream home. This will mean your developable property will be less attractive because developers only need to keep up with demand.

3.  More re-zoned land will increase your competition and put negative pressure on pre-developed value

Secondly, the reality is that more and more pre-developed land in these areas of Melbourne is getting re-zoned and going to market, and an increase in pre-developed land supply will further increase competition amongst selling landowners. It will simply provide property developers (buyers) more choice, and just like anything else, the more choice there is the greater the chance of either prices heading downwards, your deal going somewhere else, or both.

Putting all these factors together, you can see that time in fact could be your enemy, because waiting for a better deal could ultimately result in both an increased cost of living and downward pressure on pre-developed land value, or a ‘double whammy’!

Maintaining the right balance between supply and demand is critical in retaining a stable economy and promoting sustainable growth. The property development industry is a key contributor, but sustainable (or ‘balanced’) property development can only be achieved with sufficient developable property transactions occurring.

Despite you knowing that your land has development potential, that additional value can only be unlocked over time through the development process, and in fact you can. Think you can’t afford it? You might be surprised how little money is needed, if at all. One option is using the equity already in your property. Alternatively, Joint Venture type arrangements, or longer settlement terms are always an option that can get the ‘deal done’ and create a win for the seller and the buyer.