Don't Built It, They Probably Won't Come

As featured on Property Observer:

It seems the urban renewal of middle ring suburbs has created a clique crystal ball holders within councils that every 50 unit tower that pops up on every street corner must have a retail component to “activate” the street front.

In a Truman Show style utopia of urban planning that would be ideal, however the economics of it can be a fool’s game.

Let’s have a look at the numbers of a typical residential project based on an actual example, to consider the value of the completed product and the relevant cost to deliver it:

The resultant feasibility shows that there is $5m profit to be made from a 65 unit project however, there is $5m of value tied up in the 800m2 retail / commercial component.

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Even assuming the developer gets it right in terms of the demand for his apartments and they are all sold prior to completion and that all the stars align for the construction process, our man takes on all this risk to deliver a $30M project only to be rewarded as the proud owner of a vacant shell of retail space.

This is a common occurrence and there is a very real risk he will find himself struggling to fill it and wind up dealing with mum and dad operators undertaking a start up a take-away shop/cafe selling $5 items to the “masses” of foot traffic passing their secondary street location.

Let’s also look at it from a capital invested vs capital return standpoint;

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Based on a very healthy bank lend of $19.2m the developer needs to put in $5mil of cash together with any DA and preliminary costs which aren’t shown in the feasibility.

Now, let’s think about it from a developer point of view assessing their risk vs reward in terms of a timeline.

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Some of these processes can be run in parallel or overlap, but it still demonstrates the amount of time effort and money a property developer will contribute to a 65 unit mixed use development.

So in summary, after 20-24 months of planning, negotiating sales, finance, supervision of a $20M construction program to completion and risking $5m of real capital, you end up being rewarded with a retail / commercial asset of somewhat dubious value relative to its original estimated “on completion” value.

And unless you can find a way to actually realise that value, you have effectively done it for all for practise!

So, before you commit to building a project of this nature, do your homework carefully because just because the town planners say it’s a requirement doesn’t mean it is a viable and profitable option.