Boom markets are often thought of as synonymous to positive returns for a property developer, but how does a boom market really affect property developers? And when is the best time to benefit from a boom?
Defining a “boom market”
A “boom market”or building boom is often the result of conjecture and media activity reinforcing speculation of investors and first home buyers. A boom is when property value increases, fueled by more purchasers entering the market (increased demand), while properties available for sale decreases, resulting in a spike in capital growth.
A boom is generally a mismatch in the number of buyers prepared to purchase a property compared with the volume of properties on the market at a given time, increasing the value of properties.
How does a “boom market” affect a developer?
Booms will affect the developer differently depending on when they have entered the market. If a developer enters the market a few months prior to when the boom has started, and before the media is reporting the boom, they could greatly benefit.
However, if the developer enters the market too late, they could be greatly disadvantaged, and in the worst case, end up with a finished product that they are trying to sell just as the market softens in the aftermath of the boom.
Kerrian Devlin, Ventura Developments General Manager explains the affects a “boom” market has on developers.
The effects of a “boom” market on a Developer run through from land purchase, approvals, construction and the sale of the end product. By the time the media is reporting on a “boom” market, time frames, costs and competition will increase in these areas, causing numerous affects on a developers project.
Land Prices for the Developer
By the time a developer has read in the paper and heard on the news that the real estate market is starting to bubble with an above-average level of property growth, the developer will find there’s already substantial competition in purchasing land, as others have also heard the news, and have the same idea of developing. The developer will find that land is increasing in price and selling quickly, as the new demand created by increased purchaser activity has pushed up prices.
Approvals and contract review
Now that a “boom” has been reported, a great number of developers are entering the market at the same time. This places pressure on the authorities to obtain the required approvals, leading to prolonged approval processes.
If the approvals time frame is not met, the builder is entitled to review the cost of the building contract before proceeding to construction. Due to the higher number of homes being built, suppliers and trades will have increased their prices to the builder, so this could see the developer receiving some of these costs due to the delay in approvals. This will erode some of the potential profit from the developer.
Construction in a “boom”
When you build in the middle of a boom the construction process can take many months longer, with suppliers running out of product and trade availability not being sufficient to meet the number of homes being constructed.
When the developers units are finished, quite often the quality of the project is not as good as the examples shown to the developers of homes built in a flat market, simply due to the trade availability and high demand during a boom.
Aftermath of the “boom”
Although the market was booming, and real estate went up in value during the building process, the gain was offset by additional holding costs, and increased construction costs effected by the boom resulting in the developer receiving a similar profit to what was forecasted in the developers feasibility. The cost outlay to complete the development was higher than originally budgeted, so the return as a percentage of cost, was still less than predicted.
Ventura Developments and Multi Living Developments offer a free consultation service so you can see if developing is an option for you. Call (08) 9241 1600.