Have you ever stood at the boundary of a property and wondered whether the site was viable for development?
Sites with old warehouse/manufacturing plants might be suitable for redevelopment into residential or a new industrial facility, maybe something else. But how would you know?
If it is an existing industrial property it’s a reasonable bet that it is zoned for industrial but if there is residential uses in very close proximity then it may be zoned residential/mixed use. First call; the local council land zoning maps. Either give the local council a call or get onto your smartphone or tablet and have a look yourself.
If you are looking at a house block (or two) in an area with many apartment blocks in close proximity then it is likely to be zoned residential. A quick call to the local council can confirm this.
As most people are interested in residential development I will focus on residential “quick assessment”. You may have heard about “back of the envelope” feasibilities; well that’s what I would do now. Note that everyone has their own way of doing things, this is my way and you might not agree with it; that’s fine though. This works for me and that’s why I use it.
Lets say you had a 2,000 sqm block of land and there are 4 or 5 storey apartment blocks near you. To me this means that you could develop about 4,000 sqm of gross floor area. In NSW Australia we have a new Apartment Design Guide that stipulates minimum apartment sizes. Taking an average 2 bedroom and one bathroom apartment as typical, I would allow 85 sqm of gross floor space per apartment. This results in a potential development yield of about 47 apartments, which I would round up to 50.
Now I’m going to work backwards, starting from the gross realisation. Lets assume 2 bedroom and 1 bathroom apartments sell for $800,000 each. You need to know your market to do this. This means the potential development has a gross realisation of $40 million.
From the gross realisation I would deduct my profit margin that I wanted. Lets say its 25%. I divide the $40m by 1.25 to get $8m profit. I now know that my total development cost is $32m.
Remember we are doing this on the back of an envelope so it is very high level. My next step is to consider construction cost; the cost of land and every other cost that may be applicable to my project.
From this process I am looking for a residual land value so I need to know construction and other. I start with other.
From experience I assume that other development costs account for 30% of the total development cost so I divide $32m by 1.3 to give me other development costs of $7.4m and a remaining value of $24.6m for construction and land.
Next the construction cost is deducted. Depending on where you are located the construction cost will vary. I’m going to use $280,000 as the construction cost for a 2 bedroom and 1 bathroom apartment. This results in a total construction cost of $14m.
I deduct the $14m from the $24.6m and end up with a residual land value of $10.6m. If the asking price of the land is below this your site could be feasible. If the site is not for sale and you want to approach the property owner, you know roughly what you could pay for the site and still make money.
Remember this is exceptionally high level and you must undertake a proper feasibility before making any financial commitments.