Unprecedented sales and lower bureaucratic barriers mean theres never been a better time to be a property developer, one Auckland financier says – but developers warn its not as simple as it might look.
Developers wanting to build affordable housing used to be public enemy number one in most neighbourhoods, but that’s changed now that the housing shortage is viewed as a national emergency , according to New Zealand Mortgages & Securities (NZMS) director James Kellow.
Councils are a lot more confident saying yes, helped by politicians and the public being more onboard. So developers promising attractive and integrated projects are positively working with council staff and communities to deliver some great results.
Renters at Modal are encouraged to ditch cars in favour of bikes. Take a look inside to see why that might just change the way we rent.
He says that Aucklands Unitary Plan, which promotes intensification and the release of land, is proving to be a major catalyst in more people turning their hand to property development.
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Theres serious money to be made if they can buy a full site for $2 million, take the house off it, fully presell and build 10 townhouses. They should be able to make at least a 20 per cent profit.
NZMS believes the risk with such developments is low, so the company is happy to fund most of these developers at 100 per cent of the cost. As an example, Kellow cited an Auckland townhouse development the company is currently financing where 80 per cent of the units sold within two weeks of the consent being granted.
Most of the residential projects youre seeing pop up around the region comply within the new zoning rules. Without infringements means their consents go non-notified which again reduces the risk and, ultimately, costs.
James Kellow, from New Zealand Mortgages & Securities, says now is the best time in a generation to be a developer.
This combination of factors, along with record low interest rates, the fact that new builds are exempted from loan-to-value ratios (LVRs) and insatiable housing demand, mean that now is the best time to be a property developer in a generation, he says.
With construction booming, building consents at record levels and a visible surge in the number of multi-unit dwelling developments underway, particularly in Auckland, it does look like a good time for developers.
It also looks like lots of average Kiwis are having a go at being a developer themselves.
NZ Property Investor Federation executive officer Sharon Cullwick says many more investors than usual have development projects in the works.
If you have land, its cheaper to build than it is to buy. So a lot of people who want to boost the value of their property, or even put something on the market, are doing everything from putting a minor dwelling on to the back of their section to subdividing and building new dwellings.
However, professional developers themselves are urging novice developers to proceed with caution as the business is complex and comes with hidden risks that have the potential to bankrupt.
That has always been the case, and it has not changed just because some aspects of the current climate are helpful to the development process, Auckland developer David Whitburn says.
One of those helpful aspects is the out-of-kilter supply and demand equation.
Theres huge demand for housing but a shortage of housing stock. That means the marketing stage is a breeze as its never been easier to get sales for development projects and you need those pre-sales for funding.
In November, Jacinda Ardern said: ‘It just cannot keep increasing at the rate that it is’ when asked about rising house prices.
He has recently been involved with a multiple townhouse development in Ranui. They sold down the entire development in three months, with no agent involvement and limited advertising, and were left turning potential buyers away. It is pretty rare to do that, he says.
In that sense, it is a good time to be a developer. But a host of other challenges remain. You need to have land in the right place for successful developments, but buying land for the purpose is expensive. Even in lower-cost suburbs, it can cost around $1500 per square metre for land.
Development processes involving councils, such as consents, remain hard as red tape remains firmly in place and theres often a lack of communication between council teams, Whitburn says.
Building itself is that much tougher right now too. There are supply chain hold-ups with materials like joinery, cladding, and appliances, and that makes for price increases. Theres also labour cost inflation. And you cant control how sub-contracting companies in a development are getting along.
This can lead to big blowouts and bring a development down even in a hot market. He says thats why development is not for the faint-hearted.
Its not necessarily profitable, and you cant afford to make too many mistakes. Lots of people dont get that and run into problems.
Its critical to be cognisant of the risks, as well as knowledgeable across a range of areas from geotech to planning to design, if you want to pull off a successful development.
In Auckland, the Unitary Plan means the citys zoning rules have changed, a factor that Kellow cites as a key reason for making development a more viable option.
But while zoning rules in Auckland, and Christchurch, may be far more permissive than they once were, there are many councils which have far less helpful planning regimes in place. That means the type of higher -density developing needed to address the housing shortage is not possible in much of the country.
Gilligan Rowe & Associates director Matthew Gilligan has been doing small to medium-sized developments for many years. He says that New Zealand doesnt have a land supply problem, it has a zoning problem, and that has impacted on the supply of affordable housing.
The best thing the Government could do is to take the Auckland Unitary Plan medium-density model, including its mixed housing and terraced housing and apartment building zones, and spread it around New Zealand to ensure zoning rules are appropriate for current housing needs.
A render of one of Matthew Gilligan’s developments at Waimumu Road in Massey, Auckland.
He contrasts what is possible with a similar-sized section in Auckland and in Rotorua as an example of why. I have a number of 1000 square metre sites in Rotorua. If there were zoning rules like Aucklands, I could put 6-10 units on each of them. But the Rotorua rules mean I can put two on each section. And yet the community there is telling us they have a major supply problem.
The mismatch between community needs and what its possible to build in many areas is in itself frustrating for developers. But Gilligan says its also frustrating because generally the more dwellings that can be put on a site, the more profit that can be made, which is why suitable sites are considered valuable.
Having said that, he does warn that anyone thinking of developing a site intensively should investigate whether putting more houses on a site actually makes more money.
It is necessary to look at what sells in a given location, to neither over-capitalise nor under-capitalise a site, and to build what the market is demanding in that location. A developer must work this out before they instruct an architect and consultants, or they might build the wrong product, which is a disaster.
Even in areas where zoning rules are more flexible, Gilligan doesnt believe its easier to be a developer these days. Like Whitburn, he says local government in New Zealand is not as supportive of developers as many of their overseas counterparts are, and council processes are a quagmire.
Additionally, margins are lower for infill housing development than most people think, he says. All the design, consenting, compliance and civil construction costs add up. The actual house is easy to cost, as you basically just need a fixed-price build contract. It is all the other stuff that catches you out, unless you are experienced at costing out a development project.
Having the experience, knowledge, processes and team in place to navigate the challenges thrown up over the course of a development are the key to success. Thats the point Williams Corporation director Matthew Horncastle wants to emphasise.
Experience, knowledge, processes and a good team are key to successful development, Matthew Horncastle, left, says.
It is a complex industry, yet one which there are lots of assumptions about, he says.
I wouldnt recommend doing a development if you want a get-rich-quick scheme. It is hard work and it can be risky. Anyone thinking of trying developing needs to act with caution and be super careful.
It worries him that Mum and Dad investors could embark on small-scale developments without the necessary balance sheet or any real experience and run into problems as a result.
You cant just build some houses on a property and make heaps of money. It isnt that simple. If it was, everyone would be doing it.
Horncastle, whose company currently has 77 developments across the three main centres on the go, also says he doesnt think its currently an easier environment for developers despite initiatives which allow for more intensification of housing.
Getting consents is still a lengthy process. Weve seen price increases of 10 to 15 per cent, or even more, for building materials this year. And if you have strict fixed prices when you sell, but you operate in an environment where prices are going up, its difficult to preserve your margin.
He doesnt believe the average Mum and Dad investor has the funds and experience to absorb the costs and make a profit in such circumstances.
Its easier if you are a bigger developer as economies of scale are possible, as are standardisation of systems and processes. You can also employ the best talent for your projects.
Ultimately, its a high-risk, high-reward industry that can be brutal, and anyone having a go at a development needs to be prepared for the financial risks that come with it, Horncastle says.
However, some developers do believe its a pretty good time to be in their line of business.
Ockham Residential director Mark Todd says Aucklands Unitary Plan provides developers with the opportunity and scope to help create a high-quality, compact city.
Tuatahi, a housing development by Ockham Residential and a local iwi, will feature 18 affordable apartments through KiwiBuild as part of its wider design.
It enables developers like me to scale up and provide the sort of more affordable options, like one-bedroom apartments in city-fringe areas like Sandringham, which there is huge demand for.
Pre-sales are extremely strong and while dealing with council can be annoying, the consent environment and culture at the council is as good as it has ever been in the 20 years he has been building, he says.
The council is not perfect, but its not bad, and I dont think the Resource Management Act is too difficult either. There are some problems on the delivery side, particularly because of construction labour constraints, which mean there is a real shortage of tradies skilled in the apartment space.
Overall though, its an exciting time to be working in the apartment space, Todd says.
There are some interesting urban design solutions coming about in response to new zoning rules in Auckland, but we need more large scale commercial apartment builders.
