Developer Gambles on Stafford
PROMISE . . . developer Justin Clarke is confident his Stafford site will be a success. Picture: Campbell Scott.
New developer gambles on Stafford property
December 29, 2007 11:00pm
THERE were nights Justin Clarke lay awake, wrestling with a crisis of confidence over his decision to redevelop a tired-looking industrial property at Stafford in Brisbane.
And who could blame him? He had never redeveloped industrial property before, there were hundreds of thousands of borrowed dollars on the line, and he had taken the leap believing "if you redevelop it, they will come".
"Sometimes you just have to trust your own judgment," says the Brisbane father of four, who terms his Harvton St project a "repositioning" rather than a redevelopment.
"I could smell it, this was going to work," he says of the 26-year-old auto workshop and car yard that he is turning into a modern storage and distribution centre with offices and 20 car parks.
Ultimately, Mr Clarke's faith that his logic was sound and his sums were accurate meant he could push through the inevitable bouts of doubt, and he now expects his 715sq m building on 1100sq m of land to sell for up to $2.5 million when it's finished in May after 12 months of work.
He reasoned that central business district office vacancy rates – thinner than Donald Trump's hair – were forcing a spill-over into city fringe areas such as Fortitude Valley, where light industries were being made offers they couldn't refuse for their premises. These light industrial operations would then need to move somewhere, and Mr Clarke's crystal ball told him the migration would tend towards areas such as Stafford, Eagle Farm, Northgate, Nundah and Hendra on the northside, and Fairfield, Yeronga and Salisbury on the south.
Mr Clarke, who has a background in real estate sales as a director of McGees Property, says that unlike residential property where emotional factors can influence the developer, commercial property projects are solely about the numbers. A developer should aim for at least a 20 per cent profit when they offload the finished project and the buyer, if an investor, will expect a 7-8 per cent annual net return. Knowing that, it is possible to work backwards to how much can be spent for the site and other expenses to make the project viable.
Then you must find the money. Mr Clarke used a finance broker and because he put up 30 per cent of his own equity, he was able to secure the funds at normal commercial rates, which are a couple of percentage points above what most people pay for their home loan.
Other developers undertaking more risky projects, or with little or none of their own money at stake, sign up for higher risk "mezzanine" funding, which carries interest rates of 15-20 per cent.
Mark Heinrich, director of Premium Property Group which develops residential projects, advises would-be developers that it's always safer to start with a smaller project as the selling risks and holding costs are lower.
"It would be ideal to ask someone who has successfully completed developments before or someone who has an idea of the hidden costs associated with property development," he says.
Mr Heinrich says it's critical to be organised, patient and, like Mr Clarke, he stresses the need to understand financial modelling "or know someone who does".
Premium Property is developing 17 units and 18 townhouses at a site in Greenslopes, and 52 townhouses at Capalaba.
Mr Clarke cautions that care must be taken when deciding the ownership structure for the project.
He regrets holding his in a company because it means he won't qualify for the 50 per cent capital gains tax discount that kicks in when the asset is held for greater than 12 months. He has already been forced to knock back a healthy offer for the site because too much of the proceeds would be eaten up by tax.
His other tip is to consider a joint venture, whereby the builder works for a cut of the end profits. This keeps costs down, but will also lower the developer's profit.
Coronis Realty managing director Andrew Coronis says anybody considering their own development needs the help of a good team with experience.
"Research every aspect of the project thoroughly and talk to a successful developer," Mr Coronis says.
"It's a complex business and not one for the faint-hearted. Having said that, successful developers are the top income earners in the community."Source www.news.com.au