The Simple Strategy Outperforming High Yield Projects

[00:00:04] Well, welcome to another episode of the Residential Developer Podcast. I'm your host, my name is Nathan Battishall and we're going into talking about another topic around the market that we're in. It's, for me, it's always important to talk about relevant now topics and I want to talk about some projects that still work in this market. Okay, I want to talk about some projects that I believe will work in this current climate, in this current market.

[00:00:31] You know, for me, there's always going to be projects that, you know, in any market, there'll always be some projects that will work and will stack up. And we've spent a lot of time the last month really outlining the importance of your feasibility, the importance of your numbers, the importance of really being arming yourself with contingency, mitigating risk, all of that piece.

[00:00:57] But there are some projects, you know, there's projects that are just never going to hold under pressure in this time. And there's projects that are going to be really suitable and workable for you to be able to carry out in this time. And, you know, like every market's different, every location's different. So it's impossible to do an episode to really drill down on a blanket project because it all comes down to so many factors, so many elements that can make or break a project.

[00:01:24] And so I don't want to talk about a specific project or a specific location, but I just want to talk about a mentality or what I believe to be some areas to look for and look out for, because there are a lot of people who want to continue to do projects in this market, as you should, because there are deals to be made. There is profit to be made still in this market, but it's about obviously applying all the principles we've been talking about and really understanding your market,

[00:01:53] understanding, you know, that so much of the risk is dealt with at the acquisition stage. So much of the profit is factored in at the acquisition stage. And, you know, it's about becoming very smart with your feasibility. But, you know, there's a gap between strong and weak deals, and that is now widened. You know, we're now seeing a widening of the gap between a strong deal and a weak deal. And the reality is there's going to be a lot of deals that are just going to be flat out weak,

[00:02:23] that just will not work, will not stack, will not, you know, stand the test of time in this current market. That's the reality. And then there's less room for error in these deals across feasibility, design, delivery, acquisition, construction. So that's where you've got to become very strong when it comes to understanding what type of projects you want to do in this market.

[00:02:52] This is where, like I've spoken about recently, go slow to go quick. Take the time to ponder and think about what areas are doing well. What areas are still going to do well? What areas are still working? What areas are still stacking up? What type of projects are still working? You know, so the first thing I want to talk about is what works. You know, for me, the way to understand what works is to take the time to study, to look,

[00:03:21] to see what is working, to see what is stacking, to run numbers. Even when you're looking at other people doing development sites, run your own numbers just to see how they work, how they stack up. So what works? It's a simple, for me, it's the simple, efficient projects in strong locations. Now, for me, one of the things I think that will still work, again, it all comes down to acquisition, getting it for the right price, not overpaying.

[00:03:47] But for me, looking at some of those sites where you can, and I know these are deals I love to talk about, and I know they're deals. I've even had people that have listened to this episode have told me and shared with me stories of how they applied the principle of doing this type of development. They've done really, really well. Now, for me, it's looking at the type of deals where you can keep the property, keep the property and maybe do another property. Now, I've got a client up in the north coast, bought a beautiful property.

[00:04:17] The idea originally was to knock down the house and break it into a three-lot subdivision. I looked at the site. The house is beautiful that's currently on the site. I looked at it, and I said to him, why don't you do, we could do a detached dual occupancy CDC, which is more than possible. More than possible, keep the existing house, do one more dwelling, build that dwelling, sell the existing house.

[00:04:46] All of a sudden, you've got this new dwelling on another property. But not only that, we then have the ability to do another further CDC for an attached dual occupancy, to attach to that new house that's been built, and then do another further Torrance title subdivision across two stages. But the beauty was, able to then create three products on that piece of land, whereas it would have knocked that nice house down, and it was so much more profitable doing this other way.

[00:05:16] And the beauty was, though, we were able to build both of those other products, single storey. Simple construction, just nice, it's on the north coast, a nice buildable, simple coastal, modern coastal type design. Keep it nice and buildable, didn't need to go ridiculous. Fairly flat site, construction cost to a minimum, no scaffolding. You know, nice, simple, single storey, fast construction, in and out.

[00:05:43] You know, for me, it was terrific, because it hit the market, attracts young families, attracts the downsizer, which is, for me, is one of the critical buyers in this current market, who are still going to be out there, generally cash buyers, looking for sites, looking for a property, like to downsize into. So, there are those opportunities. So, for me, it's just the simple, efficient projects. And ones that are in strong locations. Again, get it for the right price.

[00:06:12] Acquisition's key. But then just making it nice and simple. Clean layouts. Making sure it's clear demand for that product. What's your buying pool look like? Okay. You've got to understand who's the buying pool at the moment. Again, if you rush for a project, you don't get the time to think about who is buying. Who is still buying right now? Who is going to look to be buying in two months' time? The reality is there's still a supply and demand issue in our nation. There's still people that need product. There's still people that need properties.

[00:06:41] There's still people looking to downsize. So, there's still things out there, but you've got to understand by slowing down, look at what areas people want to move to. Where's the demand? You know? And then by creating simplicity, that enables you to scale. You know? And then efficiencies protect your margin. Where you can look at ways to do things simplistic. That's where a lot of... And we've seen that the last 12, 18 months. The single storeys have been making a comeback.

[00:07:08] Now, we had a client did really well in the Shire recently on a site. Next door, they knocked a really nice house. Knocked it down. Only to build a duplex. This was dual road frontage. We looked at it and said, keep the front house. Just do one house at the back. We ran the numbers. And like, who's one of the biggest markets right now for downsizing is elderly people just wanting a single storey.

[00:07:36] So instead of building the big, you know, five bedroom, two living area, 250 square metre duplex, said EC, in the Shire, we looked and said, let's keep the front house. Use the backyard section that has its own road frontage, which is a rare site in that regard. And looked at, okay, let's just do a single storey. Three better. Double garage. Two bathroom. Really nice, simple open plan living. Not overcooking the size of it.

[00:08:06] Just making it nice and efficient. And that one there was so profitable. Our client made it absolutely killing on that site. You know? Only sold it last week for record price in the so-called tough market. The reason was is because there was enough of a buying pool that demanded that product, where there was a limit of that product. So that's where you've got to look at, is there, what's there a big demand for? Okay. What's a big market pool for that product?

[00:08:36] And look at an area where there's a limited supply of that product. And I believe that's where you can do well. Some of those coastal areas, you know, were involved in a project at the moment, which is, could have easily maxed out a big double storey duplex. You know, in an area. It's close to the beach, close to the shops, close to services, close to everything. It's fairly flat, the site.

[00:09:02] And it just made sense to do a single storey duplex, no steps, everything flat. Didn't need to overcook it and just went single storey. Faster build, simpler process. Able to create a product. But we knew that that product, there's a limited supply of that product.

[00:09:25] But we knew, this is the exciting thing, we know that there is a high demand for downsizers who want single storey, no steps, low maintenance, close to the beach, flat, not having to walk up hills. Can walk their dog to the beach, can walk around the corner of the coffee shop. There's a bottle shop nearby. There's an IGA nearby. You know, there's a bus stop nearby.

[00:09:52] There's a train station only one, like less than one kilometre walk away. Everything was there in that spot. So all of a sudden you've got a supply issue where there's not enough supply of that product. There's a demand. Even in a tricky market, in a tough market, there are people like downsizers who might be selling, you know, who might be selling a $3 million house.

[00:10:14] They've had, you know, close to the beach, big double storey behemoth of a thing that they want to get out of because it's only, they're empty nesters now. And it's only the two of them. So the idea of selling that for three and a half, $3 million, you know, then they spend 1.5 on the single storey duplex. You know, that's the difference. They might, where they can spend a little bit more and they'll pay above market for that property, even in a trickier market, because there's a demand for it.

[00:10:44] And there is still things out there like that. I think that's one of, for me, one of the strategies I think people need to look at, look at where, what is the demand? For me, we've got, I always talk about it and I'll continue to talk about it for a while. We have a record number of baby boomers retiring. We have a record number of Aussies who own their houses outright.

[00:11:09] Large houses that they built in the 80s, in the 90s or bought it a long, long time ago, who are now at the point where they want to downsize or some of them need to downsize. Especially in coastal areas where they're on sloping sites, tricky sites where the houses are big split level homes, large, high maintenance, lots of lawns, lots of maintenance.

[00:11:31] And they're looking at the opportunity for lifestyle, maybe downsize, sell that house, buy something smaller, have a bit of cash, do a bit of travel, you know, maybe invest a little bit of it. Enjoy the quality of life. There is a record number, I believe, of those type of people in the East Coast areas of New South Wales, especially, but also the East Coast of Australia and all over Australia for that matter. But there's a record, I'm just talking, especially the East Coast, there's a record number of these people that are coming available.

[00:12:00] And I believe there's a market for them in the right areas, but the right products that you can create. So have a look in this current time. Can you create a product and build a product that is for a market that is still strong and is still thriving? That's why you've got to look at what works. You know, demand drives outcomes.

[00:12:24] When you understand there's a demand, it will drive a great outcome and a terrific outcome. And if you run your FISO all the way through the system, methodical system, like we've spoken about, you could do highly well, even in a market where people, where a lot of people are walking away and backing away. It's important to know what doesn't work in these markets. You know, for me, a lot of complex over-designed projects are not going to work in this market.

[00:12:54] Anything that creates complexity from a construction point of view is going to create a lot of assumptions. You're going to get a lot of builders due to fear and worry about cost blowouts and cost control having to make a lot of over-assumptions in this time. So there's going to be a lot of people over-capitalizing on products where they've over-designed the product.

[00:13:18] They haven't factored in that side of it, you know, and those really complex sites from a constraint, a site point of view. I think we're going to see a tricky element of that. You know, for me, tight deals with no buffer. Those types of deals where there's just no room for error, no room for movement, they're just not going to work. Those ones where everything has to go 100% planned, they're just not going to work.

[00:13:44] Most of those deals are going to fall over, I believe, in this little period of time. You know, and the reality is complexity often almost always increases risk. Tight margins don't survive movement. Where the margins are too tight, the danger is there's no room to move. And in these volatile markets, you can get movement.

[00:14:05] There can be a movement in cost increases, but also reduction in resale, reduction in land values. There's all, there's the movements that come into play and where the margins are too tight and you haven't factored in the fat and the feasibility and you haven't, you know, really just made that fee so airtight. These type of deals generally won't survive the market.

[00:14:30] And, you know, I think just a lot of over-design and over-complication of sites are going to create inefficiencies. We're already seeing even in the class two space, we're seeing it's just not feasible now. The amount of class two sites I've seen people just selling them. Like we recently had someone who had a class two site in Tweed Heads going to do apartments, just didn't stack up. So they're looking at now just changing it to single-story villas.

[00:14:59] Like that's a big, that's a huge level of effort to go all the way down that pathway to get a DA for apartments. I need to realise it doesn't stack up and having to re-look at what can work and what may work and what will work. Like huge pivot shift and that's an example of where you can get it wrong and really come unstuck and come undone in that space. Now, I think it's important to look at margin and simplicity.

[00:15:27] You know, look at predictable projects that are easy to deliver. You know, when I say predictable projects, predictable projects that the market wants and that are simplistic and easy to deliver, the ones that aren't going to have too much complexity from a construction point of view or too, or too much room for error and concern. Like you've got to look at that sort of thing.

[00:15:51] That's why I love the idea of, you know, keeping the existing house and maybe doing a single-story villa with a subdivision. Try and do it CDC if you can. And these type of deals are terrific because it's a single-story design, keep it nice and simplistic, you know, build it into the type of market, the type of buyer that may be looking for that type of product. Now, for me, the downsizer, I believe that there's a big market of those people, demographic, still have cash,

[00:16:19] still willing to buy and have the ability to weather the storm, understanding that if they're in an area where capital growth is good, that even if they're paying a little bit more for a property that may not be quite worth that much now, it'll go up in overtime. But they're looking at lifestyle. They're looking at downsizing. Because there's a lack of supply of that type of product, they're locked in and, you know, they will often compete for that type of product. So even in a down market, I believe that there will be people that will compete

[00:16:48] for a scarce product that's out there and go after it. You know, there's fewer moving parts and fewer problems when the margin, when you deal with, when you're, you know, tight with your margin, you've got strong margin and you've got just a simplistic type execution of a type of project that you want to do. You know, less moving parts, fewer problems. You know, simplicity then increases your control over the project,

[00:17:17] over the life of the project. And it's a simpler project where you can move through it a lot quicker than, say, 10, 15, 20 townhouses or apartments or anything large in nature where, you know, you can really just move through that project, through that product. So for me, I just think with these, looking at these type of projects that do work and the market that does work and the demographics that you can go after, I just think there needs to be a bit of a mindset shift.

[00:17:47] You know, you've got to focus on reliable profit instead of maximum upside. You know, some people look at the maximum upside of a site, but it doesn't factor in the current market. Just because you can fit 10 townhouses on a site doesn't mean that it's what the market wants right now. Doesn't mean what's going to work right now. So like, you've got to look at what is reliable. What's going to be reliable? What's going to stand that,

[00:18:16] what's going to stand the test of time right here and right now? Because it's pointless building a product. The market one doesn't want, and two can't afford at the moment, or three does not want at this point in time. You've got to look at what the market wants, what the market needs. Is there, who is in that market? Is there enough of the people in that market? And you've got to create a reliable product that will work. You know, you've got to create the mindset,

[00:18:44] you know, to prioritize downside protection. You've got to put, you've got to make sure there's protection for the downside of things that can happen in that project. You've got to make that a priority. In your feasibility, in your numbers, in your calculations, you've got to look and factor in plenty of downside for the different elements and things that can happen through that project. You know, for me, reliability beats potential. It's all well and good to have potential,

[00:19:13] but you know, for me, reliability will always trump potential, especially in this type of market that we're in right now. Develop for reliability. reliability. Create projects that are reliable in this point of time, not ones of potential of what it could be. You've got to look at things, what is going to be a reliable source of income, what is going to be a reliable type of project that I can do in this point in time. They're the ones I believe a lot of people need

[00:19:41] to be thinking about and looking about. Risk-adjusted thinking is going to win in this time. You've got to adjust your risk, you know, adjust for risk in this time. Adjust your feasibility for the different risks that can come into play. That is the type of thinking and mindset I believe that is going to win over this period of time that we're in. And you know, one thing I've learned too,

[00:20:10] a mindset shift is that experienced developers will adapt faster, both experienced and secondly, teachable. Teachable and experienced investors and developers will adapt faster. They will grow, they will adapt and they will move strongly into that place. So for me, a few mistakes I believe that will get made and do get made during shifting markets, markets that can become a little bit tricky

[00:20:39] is I think one of the mistakes it can make is over-complicating the planning and the design piece. Over-complicating it to the point where there's an over-capitalisation and a product that the market does not want. That's where it's dangerous to just rely on your architect or your designer or your planner to come up with a product because at the end of the day, they're not the ones that have gone out and researched what the market needs. You need to go clear within your brief

[00:21:06] what you, before you've even bought the site, you need to be clear on what does the market want on that site. Because the danger can be, you let any designer run with a designer on that site. 10 out of 10, they're just going to want to create a masterpiece because that's what they're paid to do. That's what they're good at is creating designs. But they're generally often not very good at creating products that the market needs and that the market wants.

[00:21:35] And that's where it's not about you doing their job for them, but it's about you being knowledgeable enough to go with a very clear brief of what you know, that you know, that you know, that you know that the market wants and that the market needs in this point of time. So that's where overcomplicating the design can kill it. You know, another big thing that will kill these smaller developments at this point of time is ignoring the build efficiency, ignoring buildability. That's why it's so critical and key.

[00:22:04] Have your dream team, have your builder, have your designer, have your plan, have your team, working together, pushing together, looking at the sites. You know, you're leading that obviously and orchestrating that because you understand what you need and what's going to work and what type of product is needed for this market, but then relying on the great people around you. Designer, understanding what the compliance is, the constraints, putting that vision on paper and then a builder, helping guide that as well from a cost

[00:22:32] and a construction point of view to make it buildable. And I think the other mistake can be chasing yield without margin. You know, yield doesn't necessarily mean profit. You know, like I said, you've got to de-risk some of these products. You've got to look for simplicity in some of these markets right now because what happens if you create six townhouses but you can't sell, you know, sell one of them. You know, it can be tricky.

[00:23:02] Sometimes it's looking at maybe building three single-story villas might be better because maybe there's a market for that at the moment. Maybe there's a market of downsizers who want to downsize into something nice and spacious that's all on one level. You know, you've got to look at those sorts of things. It's not always about yield. Yes, the margin on paper can look great but in trickier markets, the buying pool may not be there and again, it's pointless having great yield

[00:23:31] and looking great on a FESO if you can't sell the product. You can become unstuck. So, look, for me, a couple of take-homes on this one just around these small projects I think that will work in this time is, you know, for me, the projects that are clear and efficient and in demand are still moving like I spoke about. I gave you my hint and my thought around what I believe is going to still work in this market.

[00:24:01] Those small, efficient deals that are chasing up the buyer that's still there, they will still work in this market provided you run everything through the right feasibility lens. You run your numbers right. There's a demand still for some of that product but the difference comes down to how they're assessed early. Okay? Like I always say, for me, so much of the profit is won or lost before you've even bought the site. Okay?

[00:24:30] At the acquisition stage, that's where it's lost. That's where you've got to win this project early. You've got to hit it early. You can't, sometimes you can get lucky and wing it and do well later on but you've got to look at this early. So what I encourage you to do, if you're excited by this type of prospect, start researching an area, start searching for what the demand is and start looking around of how can you execute some small projects in this time in areas that are still in demand and be someone

[00:25:00] who's not only ahead of the game but someone who can thrive in a time where you weren't supposed to based on the negativity of the world around us right now and all this doom and gloom that we hear in and around there is deals to be made, there is opportunities out there, there is money to be made even in these tough times and it sounds hard to say that and maybe it sounds hard to hear that but the reality is there is still money to be made doing projects, profitable projects in this time.

[00:25:29] You've just got to be, you've got to be consistent, you've got to have a good system, a reliable system but for me one of the big keys is to look at simplicity in this time, remove a lot of the risk, look at the markets that are still working, look at the markets where there's still some demand and that will help shape your strategy. So look, I hope you enjoyed this episode, don't forget to like, share, subscribe and we'll see you next week.