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Five key factors to consider before subdividing

Tuesday, 21st Aug 2018

Subdividing an existing block to develop or sell can be an incredibly lucrative strategy for investors seeking to extract more value from their investment property, but property subdivision isn’t always as simple as dividing a site in two and selling each lot for a profit. Whilst it can hold significant benefits for investors looking to add value to their property or create an additional income stream, the reality of subdivision is far more complex, and there are a number of requirements and risks that need to be taken into consideration before you commit to a project.

Does the site meet zoning requirements?

property subdivision

The first step towards subdividing a property is to understand the zoning requirements that apply to your site. In addition to the Residential Design Codes of Western Australia, lots of land in Australia are subject to the individual policies of local councils. These set out standards such as minimum lot sizes, and are therefore critical in determining the scope and subdivision potential of your property. As an investor, it’s important to bear in mind that these individual policies can vary considerably between different councils.  In some cases, as little as one clause can dramatically impact your site’s development potential, so familiarising yourself with the specific requirements that apply to your site is crucial.

As well as setting out zoning restrictions, local council policies can also contain clauses that could significantly increase your site’s development potential, many of which can be easily missed by investors who don’t have a full understanding of these documents. Depending on the location and proposed lot configuration, for example, councils are willing to apply a 5% variation to lot sizes subject to the approval of the Western Australian Planning Commission (WAPC). It may not sound significant, but this additional 5% could mean the difference between building two blocks and not being able to subdivide at all.

Is there enough demand for the subdivision?

Many investors assume that subdividing a property will always lead to profit. However, just because you can divide a site into multiple blocks, doesn’t mean you should. Before you get started on your subdivision, it’s important to research the local market to assess whether there is enough demand for the project you have in mind. If, for instance, there is already an oversupply of duplex properties in the area, or there is a premium on larger properties within that particular suburb, you may want to re-consider your subdivision plans. When you’re carrying out your research, consider what’s selling well in the area, and compare similar properties to find out what profit margin you can expect. This will be critical in determining the budget you are working with, and ultimately in assessing whether the project is feasible in the first place. If you are looking for a site with the specific intention of subdividing, you may want to consider enlisting a property buyer’s agent to help you identify a site with strong growth drivers in place.

Are there any additional restrictions that could hinder the subdivision?

As part of the planning process, you or your development team will need to carry out detailed due diligence to check for any issues that could impact your subdivision. In some cases, these feasibility checks can uncover issues that could have serious implications on future development plans, such as nearby sewerage systems that prevent you from building in a specific area.

As part of this feasibility check, you will also need to identify whether any site-specific restrictions apply that could prevent the site from being subdivided or dictate the manner of the subdivision itself. For instance, if the site is located in a bushfire prone area, this may change the specifications required when redeveloping the site (if you choose to do so). Similarly, many councils also have their own requirements relating to aspects such as restricting additional driveways or upgrading an existing dwelling, which could impact the required specifications of the subdivision and increase the construction costs involved in the project.

Are there any easements that affect your subdivision plans?

An easement is a property right that that allows someone to cross or use your land for a specific purpose. For example, if you have a gas or electricity line running under your land, it’s likely that the relevant utility company will have an easement in place to guarantee access to these lines. If you’re planning a subdivision, this is something you need to be aware of, as it will be your responsibility as landowner to ensure this access isn’t hampered by the development works. Whilst an easy way to do this would be to alter the setbacks of the property, this isn’t always possible with properties on smaller lots, which means you could be facing significantly higher expenses to build over the top of the easement in a way that still allows access. This is something you will need to factor into your overall costs when assessing your projected profit margin to determine whether the project is worth your while.

Have you factored in head works and council contributions?

In addition to standard expenses such as construction costs, building permits and planning application fees, there are a number of additional costs many investors fail to factor into their subdivision plans. When you subdivide a lot into multiple dwellings, Western Power and Water Corporation will often need to upgrade their existing infrastructure to support the increased demand for their services, the cost of which lies with you as the developer. Depending on the number of new lots being created, the local council may also ask for a development contribution to support the increased demand for amenity and community infrastructure created by the additional dwellings. These costs can vary from $50,000 to $400,000 per additional lot depending on the individual council, and can therefore have critical implications on your profit margin if you have failed to factor them into your budget beforehand.

Property subdivision can be a considerably profitable investment strategy with the right research and planning in place, but it also carries a significant amount of risk for investors who don’t have the time and expertise to commit to the project. In these circumstances, having the expert advice and support of a professional property development team can be crucial to avoiding key mistakes and ensuring you don’t miss out on opportunities to further the value of your property.

Momentum Wealth is a Perth-based property investment consultancy dedicated to helping investors accelerate their wealth through property. We offer an advice-driven service to help clients in the strategic planning, financing, acquisition and development of their investment properties.