Recent publicity around the difficulties that hit the 39-level St James Suites development in Queen Street and the aborted 91-unit FLO apartment development in Avondale, illustrates how tight the financial viabilities are for apartment developments in the current construction cost environment.
Escalating construction costs are currently a major issue and often the purchase price that was paid for the site is at a level which, in the current costs environment, means there is now insufficient margin on the development. This may well be the case now for many other high density, mixed use zone sites permitted under the Auckland Unitary Plan.
We recently completed financial modelling for a client on eight development scenarios identified for a site, ranging from high rise apartments to lower density options all of which were marginal or negative after all development costs were deducted from estimated net sale proceeds.
Due to the current inflationary construction cost environment it is prudent to apply unusually high contingencies in these studies. The recent tighter bank lending practices also need to be taken into account.
The natural tendency is to assume that the highest density development permitted under the Auckland Unitary plan will be the highest and best use for the site. We have found this not to be the case in several instances recently and the lower density options in our feasibility studies have been found to be more profitable; definitely a case of “less is more”.
In this part of the property cycle it is critical to seek expert advice on the financial feasibility of development options at an early stage, preferably as part of the due diligence prior to purchase of the site.
The Property Group has development advisory experts who can give truly independent, impartial advice as there is no conflict with the same advisor hoping to be retained to sell the end development.