Project Feasibility Study and Timeline

Introduction 

The Australian housing sector is highly a small business affair as recorded by Dalton, Wakefield, and Horne (2011). As such, an investor willing to put up a few dwelling houses is not out of place or working it out against huge corporations likely to put them at a precarious position. This gives confidence to the commencement and progressing of this project. The National Housing Supply Council (2012) observed that even though the Australian housing sector has grown steadily over the past three decades, the country still faces undersupply problems. The problem is heightened by the fact that demand outstripped supply. Further, this confirms that there are significant opportunities in the sector for a well-organized investor. 

Earnings for two at the price of one, is the defining statement of a duplex housing development. This feasibility study will focus on looking for the opportunity an investor with $800,000 as investment capital in duplex housing development. The study will look at how such an investor, investing in the suburbs of Melbourne, Victoria can optimize the funds to set him/her on a journey of maximum financial gain. This feasibility study seeks to determine if it is feasible for the project to be undertaken in 9 months. The critical part of this feasibility study is the evaluation of how the investment can reap the maximum benefit to the investor in terms of creating the most equity possible. A project timeline will be featured. To do this, different aspects of both the micro and macro environment will be evaluated. 

Why Melbourne?

In a report released by Jones Lang LaSalle Inc (2018), Melbourne was touted as a neighborhood that is characterized by strong population growth fueling demand and consequently pilling pressure on the supply side. The report further explains that the city has experienced strong economic growth thus pitting Melbourne housing industry against success. The report mentions that the housing sector in the city is reaching a maturation point where property demand is moderating. Financial Review (2018) reported that Melbourne was featured as Number 1 on the Housing Industry Association in its listing of Top 20 building growth areas. Financial Review (2018) attributed to the positive ratings to a population boom, improving infrastructure projects and a rise in the services sector. More than 12 suburbs in Melbourne found a place in the report as shown by Figure 1. 

Melbourne saw building approvals amounting to $222.9 million in 2016-17 and the same level of robust investment was expected to be sustained in 2019 due to population growth of more than 2% (Financial Review, 2018). Further, the housing sector has been mentioned as a strong driver of the local economy since the construction of a total of 114,087 detached houses was commenced in 2017 which was a 2.9% reduction from the previous year. Chau (201) of ABC News observed that average house prices fell 0.2% in the month of May 2018, a decline that was heavily influenced by price falls in Melbourne and Sydney. This indicates the importance of Melbourne to national housing sector. The price falls not withstanding this project is not aimed at selling. It is aimed at renting or leasing out. As such, falling prices indicate that the populace is not willing to buy, but rather to rent or lease, which is an opportunity for this project. From the above statistics, it is clear that Melbourne is the city to watch when making decisions to invest. 

Project’s Constraints and Goals

Constraints 

Development of housing in Australia was evaluated by Dalton, Hurley, Gharaie, Wakefield, and Horne (2013) and time constraints were revealed as critical. The study revealed that housing development time has increased from about six to ten months. To demonstrate the impact, the study demonstrated that houses completed reduced from a quarterly average of 27,000 t0 25,000 between 1993 and 2010. Increasing housing sizes have been ruled out as the reason. The position has been demonstrated by the Australian Bureau of Statistics (2008) and Gharaie (2011) 

The other constraint is the cost factor. Gurran, Ruming, and Randolph (2009) observed that a third of the cost of a new house and land on which such building is build are sucked up by taxes, levies, and compliance costs especially during building approvals. Such approval costs rose by about 300% in the last 5 years of 2007. To mitigate costs, Dalton, Hurley, Gharaie, Wakefield, and Horne (2013) observed that builders have now adopted a methodology that allows them to negotiate with materials suppliers rather than leaving the same to subcontractors. As such, negotiating with large contractors who are likely to enjoy cordial relationships with suppliers due to the volumes they purchase is critical in safeguarding the timeline constraints as well as cost efficiency in both purchasing and installing such materials. 

Zoning is also a constraint in that the project cannot be undertaken in just any place. The State of Victoria has planning provisions which zones regions into Priority Development Zone, Activity Center Zone, and Comprehensive Development Zone. All these zones are designed to handle the element of housing. The project must fit into a suitable zone and in this case, this study suggests the Comprehensive Development Zone. 

Overly controls are significant constraints in housing development. The first overlay is the environmental audit overlay. Costs of doing environmental audits are passed to the builder not mentioning the time such audits take. A builder needs to be well averse to the heritage overlay. If the building will be on grounds listed as heritage, since such sites are significantly controlled by authorities. Should the property be within 200 meters of water catchment, it follows that there is an environmental significance overlay. As such, there are time and cost implications. 

Constraints related to infrastructural and services must get into the picture. A proposed site needs to be closer to amenities such as roads, have sufficient parking, access to shopping centers, and have access to drainage and sewerage. These constraints have a cost dimension but will often increase the value of property. As such, rent and rates are likely to rise with time. 

Social constraints that affect the project include density preference and social exclusion and stigma preference. According to Freestone (2000) Australians have traditionally have had a preference for low density suburbs. The appetite for low density areas declines with reducing incomes. As such, for this project to gain maximum capital and returns, it needs to go to low density areas, which consequently cost more. 

Goals 

The primary project goals are creating as much equity as possible and have the project gain as much income as possible. 

Macro-Environment Business Drivers

The building of houses with an intent to use it as an income generating venture is heavily dependent on the macro environment. The performance of the economy as well as policies will determine the costs and timelines to be incurred in the venture. As mentioned earlier in this study, it has been demonstrated by Dalton, Wakefield, and Horne (2011) that the Australian economy supports the housing sector being a small business affair. This means that investors with as small as a single unit are supported and accorded a level playing field. 

Having overcome the hurdle of appreciation of small time investors, the next aspect is to confirm the supply and demand factors to establish whether there is significant opportunity. The National Housing Supply Council (2012) elaborated that the country is experiencing a glut in the supply side. This means that there is a mismatch between demand and supply. The Treasury (2006) estimated that house demand per year till 2021 would be 154,000 units per annum. The city of Melbourne was estimated to need more than 29,000 units per annum. The projections made in 2006 seem to have been realistic. Jones Lang LaSalle Inc. (2018) reported that Melbourne was the fasted growing city in terms of housing supply. Buildings worth $222.9 million were approved for building in 2016-17. According to the Australian Bureau of Statistics (2017), population growth of the country stands at 1.6%. Wilson (2015) explain that Australia has been experiencing rapid growth in cities as compared to non-metropolitan areas. This is a clear indication of the appetite for housing in the city. 

The Reserve Bank of Australia (2018) espoused that the economic indicators for the year 2018 are positive and point towards a robust economy. The economy grew at 3.1% while inflation sustained rates of 2.1%. The cash rate was held at 1.5%. Employment growth rate has been at 2.8% while unemployment rate is 5.4%. Wage growth has been at 2.1%. With these statistics, it can be seen that the economy is strong and ready to support long term investments. 

Micro-Environment Business Drivers

Land buying is a somewhat lengthy and delicate process. The process starts with the identification of a suitable piece of land that meets the development needs in terms of size and its zoning (residential). On this light, land was found at Cranbourne East Victoria which lies in the jurisdiction of the Casey City. The land has a price tag of $287,000 as advertised by realestate.com.au (2018). With the land identified and determined that the price fits within the investment’s budget and specifications, next comes the process of land acquisition. A land conveyor is necessary and it has been determined that conveyancing fees will total to $1,050 (thinkconveyancing.com, 2018) as indicated by Figure 3. To effect the process, the City of Casey Municipal will demand stamp duties amounting to $12,290 (Figure 2). The entire land acquisition process is likely to take 6 weeks after which pursuing of necessary permits will commence. 

The Building Act 1993 and the Building Regulations 2018 provide that for all building works, a building permit is necessary. Before the building permit is acquired, the City of Casey where the construction is taking place requires the issuance of a planning permit. Both the documents will require the project to be put on hold for two months. Compliance with legal requirements is critical in ensuring that the project does not find itself at the eye of a legal storm. To get the approval to develop the land, Development Planning Fees are applicable and in the City of Casey, the amount totals to $1,510 (Figure 4). This is because the development is not a single dwelling and falls in the category of other development as indicated by City of Casey Municipality (2018). The permits are also critical in certifying that the project and materials used are environmental friendly. As a business, it is a duty to be sensitive to the environment. Next follows the process of building.  

To execute the process of building, a contractor is needed. After evaluation of prospective contractors (Welsh Group, Stockland, and MAB) Welsh Group appeared the most suitable in terms of experience and terms. Welsh Group maintains sufficient and very helpful contacts upon a client’s request. Their advice on building materials and designs is highly useful especially to a client who has not had experience with land development. The company alluded to costs hitting $320,000. To cover for contingencies and unforeseen occurrences, it was deemed appropriate to adjust the duplex construction costs to $363,000. Construction was estimated to take about five and a half months. 

After construction, it is letting and insuring the estate. Insurance of the estate was calculated on the houses alone and not the contents. AAMI insurance company was found suitable since their evaluation and quotation process can be done entirely online. After going through the process, the insurance costs totaled to $563.11 annually (Figure 5) and when translated to monthly rate, it amounted to around $47. To determine the appropriate rent for the houses, a survey of rent rates in the neighborhood was done. it was determined that the most appropriate rent is $380 per unit per week. This, when both units in the duplex were factored in, amounted to 380*2*4weeks=$3,040. Agency fees were not applicable as the developer is willing to administer the estate personally. 

To determine the amount of capital that the project has accumulated, a 25% on top of the land and construction costs was added. This brought the duplex value to $812,500. As such, the equity generated by the project has been tagged at $147,650. This is within the acceptable limits in the industry. 

References

AAMI Insurance. (2018). Home Insurance. Retrieved from AAMI Insurance Website: https://www.aami.com.au/home-insurance.html

Australian Bureau of Statistics (2008) Average quarterly completions times for new houses. Australian Bureau of Statistics, Canberra. Retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbyCatalogue/B5F0A06445F59CDDCA2580FF001689EE?OpenDocument

Australian Bureau of Statistics. (2017). Australian Demographic Statistics, Dec 2017. Retrieved from Australian Bureau of Statistics Website: http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/3101.0

Chau, D. (2018, June 1). Housing market posts first annual drop in 6 years, driven by Sydney and Melbourne. Retrieved from ABC News Website: http://www.abc.net.au/news/2018-06-01/housing-market-first-annual-drop-6-years-sydney-melbourne-hobart/9825136

City of Casey Municipality. (2018). Planning and Subdivision Council Fees 2018/2019. Retrieved from City of Casey Municipality Website: https://www.casey.vic.gov.au/building-planning/planning-permits/fees

Dalton, T., Wakefield, R. and Horne, R. (2011) Australian suburban house building: industry organisation, practices and constraints, AHURI Positioning Paper No. 143, Australian Housing and Urban Research Institute, Melbourne.

Dalton, T. R., Hurley, J. R., Gharaie, E. R., Wakefield, R. R., & Horne, R. R. (2013). Australian suburban house building: industry organisation. Housing, Theory and Society, 16(3), 106-21. Retrieved from https://www.ahuri.edu.au/__data/assets/pdf_file/0020/2198/AHURI_Final_Report_No213_Australian-suburban-house-building-industry-organisation,-practices-and-constraints.pdf

Gurran, N., Ruming, K., & Randolph, B. (2009). Does planning make housing unaffordable? Assessing costs of planning requirements for residential development in three Australian cities. State of Australian Cities Conference (4th : 2009) Retrieved https://research-management.mq.edu.au/ws/portalfiles/portal/17158312/mq-17509-Author+final+version.pdf

realestate.com.au. (2018). Land for Sale. Retrieved from realestate.com.au Website: https://www.realestate.com.au/property-residential+land-vic-cranbourne+east-202116242

The Reserve Bank of Australia. (2018). Key Economic Indicators. Retrieved from The Reserve Bank of Australia Website: https://www.rba.gov.au/snapshots/economy-indicators-snapshot/

ThinkConveyancing. (2018). Conveyancing Fees. Retrieved from ThinkConveyancing Website: https://www.thinkconveyancing.com.au/conveyancing-fees

Treasury. (2006). Projections of Housing Demand in Australia, 2006-2021: Projection Results. Retrieved from Treasury Website: https://treasury.gov.au/publication/projections-of-housing-demand-in-australia-2006-2021/projections-of-housing-demand-in-australia-2006-2021/projection-results/

Jones Lang LaSalle Inc. (2018). Australia Melbourne Housing Market Overview June 2018. Jones Lang LaSalle Inc. Report. Retrieved from http://www.jll.com.au/australia/en-au/research/700/australia-melbourne-housing-market-overview-june-2018

National Housing Supply Council (2012) Housing supply and affordability—key indicators, 2012, National Housing Supply Council, Department of the Treasury, Canberra. Retrieved from https://www.ahuri.edu.au/__data/assets/pdf_file/0020/2198/AHURI_Final_Report_No213_Australian-suburban-house-building-industry-organisation,-practices-and-constraints.pdf

Wilson, T. (2015). The demographic constraints on future population growth in regional Australia. Australian geographer, 46(1), 91-111.

Appendix

 Figure 1 

Figure 2: Calculation of Stamp Duty 

Figure 3: Conveyancing Fees

Figure 4: Development Planning Fees

Figure 5: Insurance Cost