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Rezoning: a great wealth creator for investors

Wednesday, 3rd Aug 2016

Rezoning can be a significant capital-growth driver for investors but when’s the best time to buy an investment property in an area that’s being rezoned?

Typically, governments seek to rezone existing residential suburbs to increase housing density, particularly as a means of combating urban sprawl, which is prevalent in many Australian capital cities.

The rezoning of a property, specifically when the changes allow for higher-density housing to be built, can be a significant catalyst of capital growth.

A property that could previously only comprise one dwelling may be able to hold several, depending on the criteria of the rezoning.

So when’s the best time to buy in a rezoning area?

Many suburbs across Australia have proposed rezoning plans in place well before they become broad public knowledge.

Therefore, by investing early in the process, you’ll gain the most upside growth as the future development premium of the property isn’t likely to be known by the seller, sales agent or other buyers.

Once the proposed rezoning is more broadly known, there are still above average capital growth prospects because sellers may have generally factored in some development potential but these properties are still ‘land holds’ until the actual rezoning has been approved.

It’s only after approval that the properties can be developed and the site’s potential can be fully utilised.

At this point, demand for these rezoned properties will typically increase further as developers begin to enter the market causing more upward pressure on prices.

Of course, there is also the capital growth you can achieve through the development of the property as well.

Given the long timeframes for rezoning to be approved (generally between 2 and 5 years), property prices in rezoned areas can be positively rerated several times as the process progresses.

This is why investors will secure more upside growth the earlier they invest.

The earlier the investment, the higher the risk

However, the earlier the investment the higher the risk because rezoning policies or criteria may change, which could negatively affect the development potential of the properties.

Up-to-date information and thorough research are essential when evaluating this risk.

However, investors should remember that no property’s development potential can be accurately assessed until the rezoning is approved and all development policies are finalised.

Identifying rezoning areas and understanding the proposed development guidelines is a critical part of property research because it allows the investor the greatest opportunity to choose the property with the highest capital growth.

While buying a property that’s being rezoned can deliver great returns, it’s also important to couple such properties with other capital growth drivers, such as demographic changes, supply constraints and infrastructure upgrades, which will maximise the property’s performance.