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The Cost to Produce Land

The Cost to Produce Land

We regularly have people ask us about subdividing  or ‘splitting’ small blocks in regional and outer suburbs. There is no doubt it has some major attractions, mostly affordability and availability, but there is a number of negatives, most of which investors are aware of, but the cost to produce the vacant land is one they often forget about.
 


The positives of regional subdivision


When we talk about subdivision here we are specifically meaning the small sites... typically a one lot into two lot subdivision, which may or may not involve a house.

The two big advantages are the get in price and the availability.

It is much cheaper to buy any type of site in a regional area or outer suburb and splitter/subdivision blocks are no exception. This holds great appeal as there are plenty of investors out there that are financially limited, plus the appeal of a cheap property will always remain attractive. You can buy a house on a large block in a lot of cases for less than half the cost of a similar site in an inner city location.

The other attraction is the availability of these blocks. There is a lot of competition and limited supply of inner city subdivision sites, but the further out you get the more of these sites you come across. This unfortunately can be the downfall as well as we’ll explain later.

There are a few other advantages and attractions to subdividing in outer suburbs and regional areas. Quite often the blocks are bigger so there is more potential to retain existing houses and still produce vacant blocks. There is usually less restrictions on keeping dwellings as well, like Demolition Control which prevents hundreds if not thousands of Brisbane properties from ever being subdivided. Also access to services and infrastructure, believe it or not, can often be easier in outer suburbs and regional areas. One reason for this is the infrastructure is younger and more appropriately located and engineered.

But for every positive there is a negative.


The big negatives

The end value of the vacant land can be surprisingly low, or at least surprising to those investors who did not do their research and were unrealistic with their numbers. The simple fact is you have competition! There are very limited opportunities to produce vacant land in inner city locations so these blocks attract a premium price tag, but the same can’t be said in the outer suburbs and regional areas. The more supply there is of vacant land the less demand there is for your property and therefore the price and ability to sell quickly are drastically diminished, especially in a quiet market.
 

And the one people forget about

One thing you need to keep in mind, and which we believe a lot of people don’t think about, is the cost to actually produce a vacant block of land. We have discussed the relative affordability of development sites in outer suburbs and regional areas, and going hand in hand with that is the cheaper end product, but you can argue this cancels each other out. Inner city equals high buy in but high end value and outer suburbs and regional areas equals cheaper investment and cheaper end product. But what about the cost to produce that land?

Believe it or not, the cost to produce a vacant block, whether you are in a regional area, outer suburb or inner city, is all about the same. Obviously it does differ because every council has different charges, but they don’t differ by as much as you may think.

For example, the town planning application, survey and application fee should not differ too much from location to location. It takes about the same amount of time to do the town planning and the survey in outer suburbs as it does in the inner suburbs. Infrastructure charges, the other big ticket item, may also have limited difference from area to area.

To illustrate our point check out the following hypothetical examples.

 

Inner City Site

Regional Site

Purchase price

$500,000

$200,000

Buy costs (5%)

$25,000

$10,000

Consultants

$12,000

$12,000

Services

$10,000

$10,000

Infrastructure Charges

$25,000

$25,000

Total Costs

$572,000

$257,000

End Value

2 x $330,000
= $660,000 or
32% increase on purchase

2 x $$132,000
= $264,000 or
32% increase on purchase

Profit Margin

$88,000 or 15.4%

$7,000 or 2.7%

 
Note in this example that the increase in end value of each property is the same in percentage terms in relation to the original purchase price. The difference, however, is the costs to subdivide is far higher when talking in percentage terms for the regional site.

The lesson?

Always do your research and make sure you keep in mind that what appears to be an inexpensive subdivision site might be a costly exercise if you haven’t approached the costs correctly.

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