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The changes that could make or break the fortunes of property developers

Friday, 1st Nov 2013

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The market is throwing up some magnificent opportunities thanks to a number of important changes. But it’s not all good news. Some of these changes could significantly devalue existing development sites and impact on the fortunes of developers.

If you like the idea of substantially increasing your wealth in a relatively short space of time, property development could be a viable option. Depending on your goals and how well the process is managed, a development project can increase your equity, boost rental returns or make you a very healthy profit.

Changes to R-Codes

Earlier this year, the West Australian Planning Commission (WAPC) released a new edition of the Residential Design Codes, otherwise known as the R-Codes. The R-Codes essentially provide a framework for controlling development and population density in residential areas and are therefore of critical concern to property developers.

The new codes outline a series of changes that property developers should know about. One of these, which we have spoken about previously, is the fact that granny flats (ancillary dwellings) can now be occupied by a non-family member, opening the door to new income streams.

However, perhaps the most significant changes relate to the reduction in the average and minimum lot sizes that are permitted under some of the R-Codes. For instance, under the new R20 code the average lot size has been lowered from 500sqm to 450sqm, and under the R60 code it has been lowered from 180sqm to 150sqm.

Minimum lot sizes have also changed. Lots with a minimum site area of 350sqm are now permissible under the R20 code, 300sqm under the R25 code and 260sqm under the R30 code. Bear in mind that although minimum lot sizes have been lowered for many of the codes, lots must still comply with average size regulations. So unless the average lot size requirement has also changed (as with R20 and R60), the reduction in minimum size simply allows for greater flexibility in lot design rather than necessarily increasing densities.

Let’s take a look at a simplistic example to demonstrate how changes to the R-Codes could create opportunities for developers. Under the new R20 zoning, given that the average lot area has been lowered to 450sqm, it means the minimum lot area for subdivision is 900sqm (2 x 450sqm).  Previously, you would need at least 1000sqm to subdivide. Under the current rules, a 5 per cent variation may also be allowed, meaning it could be possible to subdivide a lot as small as 855sqm.

But it gets even better because of the reduction in the minimum lot area. Let’s say a landowner wanted to subdivide their 900sqm lot while keeping the existing house. This could have been quite difficult under the old rules unless the house was positioned just right on the lot to allow enough clear land for the second lot.

With the minimum lot area now decreased to 350sqm, the land could potentially be subdivided into a 350sqm lot and a 550sqm lot (average remains 450sqm), allowing for greater flexibility to keep the existing house and potentially make for a more profitable development.

The changes to the R-Codes provide a great opportunity for savvy investors. Those who understand the codes (or employ someone who does) may be able to find a property with a land area large enough to be subdivided but whose price doesn’t factor in the property’s true development potential. Given the right circumstances, an investor could make a nice profit instantly.

Changes to local housing strategies 

When a local council introduces a new local housing strategy, the changes have enormous potential to benefit property developers, especially those who are ahead of the knowledge curve. The overriding purpose of these strategies is to increase housing density through rezoning. More specifically, they generally aim to increase density around certain activity centres, transport nodes and corridors in order to provide an opportunity for increased diversity of housing.

There are a number of these new strategies at various stages of progress throughout Perth’s 32 local councils. Some are currently out for public comment or awaiting approval by WAPC. If and when these new strategies are eventually implemented, properties in the designated zones will have their zoning increased (to a higher R number), which means some will instantly gain subdivision potential or greater potential than they had.

Remember that having the right zoning doesn’t automatically ensure that a property has development potential as there are many requirements that need to be met to obtain development approval.

Keeping abreast of what is proposed under these draft policies and tracking their progress can produce enormous opportunities.  It does however require considerable time and effort, not to mention a clear understanding of planning regulations. Momentum Wealth employs a team of specialists to research and track these changes in order to identify opportunities for our clients.

Before you rush out and buy a property because it is located in an area marked for rezoning, keep in mind that it can take many years (even a decade) for the policies to be introduced. Also, there can often be numerous changes to the policies before they are finally implemented.

A major worry for developers 

You may recall that Directions 2031 and Beyond, the framework for managing the growth of the Perth metropolitan area, sensibly calls for 47 per cent of new housing to come from infill development.

Despite this fact, however, some of the councils in Perth, including the City of Stirling, are taking a backward step. They are trying to introduce amendments to local planning laws that effectively ban multiple dwellings being built in areas already zoned for development at less than R60. This move, if it gets approved, will remove or substantially limit the development potential of some lots.

What could happen if these changes go ahead? It spells disaster for some property owners. Here’s an example. If the City of Stirling gets what it wants, multi-residential sites within the City that currently allow up to 6 apartments or 3 units to be built could be downgraded to have only duplex potential. This equals a significant financial loss for people with those sites. The value of these sites will drop instantly if this down-coding takes place, which could severely impact the financial plans and retirement nest egg of owners.

Worse still, even before these proposed changes are implemented (while they are out for public comment), the council can take them into account when assessing new development applications. This is likely to result in the rejection of previously sound development applications.

I don’t agree with the council’s move and strongly encourage anyone who thinks they may be affected to speak to our Planning and Development team to get advice and see what can be done. One option, for instance, may be to lodge a development application right away, which would provide up to 2 years to develop even if the zoning changes take place.

Conclusion

Clearly, knowledge is a powerful weapon when it comes to property development, especially in regard to the changes that are taking place in our city. If you can identify opportunities (or threats) before others, you may be in a position to profit handsomely.

However, identifying the opportunities and turning them into reality are two very different things. Property development is a significant undertaking requiring both broad-based and specialist skills. It comes with significant challenges and often involves large sums of money, which is why it’s almost always best to get expert help along the way to ensure a successful outcome.