In the middle of the pandemic, most property investors were understandably getting very nervous wondering when was the best time to develop property. Especially as there was talk of prices plummeting by as much as 40%.
Some of the price fall was predicted due to the expectation that renters would lose their jobs and not be able to pay their rent. The government then placed a moratorium on evicting tenants. All this led many to believe the property market was going to collapse.
... but did the property market collapse?
We know now that this did not happen. Despite all the 'expert' predictions, the reality was far different. The rental vacancy rates tightened to the point where ordinary people found themselves sleeping in a van. Property prices jumped faster and higher than most recent upswings in memory.
The fact is most of us cannot accurately predict the property market cycles. We can interpret the growing troves of property market data that give us advanced insights at a local level ... which is certainly an improvement in recent times.
But how do we know how to time the market ... to choose the best time to develop property ... and ride the property price upswing?
Understanding market cycles for property development
Typically, property investors believe that you BUY when the market is low and you SELL when it is high. Imagine that?
In reality it's very different.
Timing the market has traditionally been very difficult.
The 'Market Alerts' feature of our capital growth calculator, Boomscore, gets us one step closer to this investing utopia ... where we invest in a local property market before it booms and then, with a notification from Boomscore Market Alerts, potentially sell before prices plummet.
Remember, there are thousands of property markets in different cycles!
There could be some locations in Perth where prices are climbing fast ... while, at the same time, there are locations in NSW where prices are plummeting. The 'property market' is actually made up of thousands of micro-markets. Boomscore tracks over 30,000 micro-markets (that's 15,000 suburbs further split into unit and house markets).
It's clear from our property market data that these markets do not move in unison. Some markets might be reliant on mortgage rates staying low to stimulate the market. Other markets might be more focussed on cashed up buyers who want to be on the beach when everyone else is in lockdown.
Smarter property developers not only understand the forces of supply and demand across all the areas in a property market but also the changing psychographics.
You'll notice I did not mention 'demographics'.
In our experience, targeting a development in a location favoured by cashed-up down-sizers or interstate migrators (end of 2021) - and understanding what they want - is crucial. Their buying criteria, opinions, likes, wants, etc. are more important than their age and other demographic characteristics.
Developers can cater for these buyers when 'the market' is flat or declining. I might term this a 'micro-psycho' market where the suburb itself is outpacing the larger market and there is bubbling activity amongst a certain group of buyers. That is, demand is outstripping supply.
But it takes money to invest in property development ... doesn't it?
We all assume developers are wealthy and have unlimited cash lying around.
This is simply not the case.
Boomscore, my boutique investment business, has helped many developers get a project going by funding various stages in the development project cycle. What this means is they need to fund this using either debt, equity or a combination of both.
[Read my blog on 5 Creative ways to fund a property development project]
Of course there are incredibly smart ways to fund a project with 100% of other people's money or zero cash input from the developer. Assuming, however, that they do have the cash to spare then purchasing a site can incur many costs over the project timeframe. These can include holding costs like bank interest, rates and taxes and other costs associated with starting the project.
Many inexperienced developers would tell you they will not develop in a hot market. The risk of paying top price for a development site, waiting a year or two to complete the project and then the market cycle dropping is too much for them to bear. Nobody likes the idea of buying in a market peak and trying to sell completed stock in a trough.
Of course there are a number of strategies the developer can use to mitigate these risks ... like buying a site with 24 months to get approvals and test the market with pre-sales. If it flops, you've lost some initial costs rather than a total outright loss (negative returns).
Finding the most suitable location for development using data science
The overall economic cycle is never a good indication of whether to develop or not. It simply guides the strategy.
When we drill down into each local property market/suburb, then tactically a decision can be made that meets the market condition.
Boomscore has a site location grading system that highlights the suitability of a location for a project in the current general market cycle. It looks at indicators such as Days on Market dropping (shorter sales cycles) but coming off a slightly higher base so it's not too competitive when finding a site. The 8 other indicators in Boomscore are examined for their trends that correlate with the project returns we are after.
So if the use of the economic cycle is not a good indication of the best time to develop property, then what is?
Well, any serious property developer will tell you that if the financial feasibility analysis and due diligence analysis on a project shows an adequate return for the risk involved then the project should be undertaken.
This is not to say that broad macro-economic factors should be ignored but rather the financial feasibility analysis and due diligence analysis of a project should be the determining factors in deciding when to develop.
And besides, a thorough financial feasibility analysis incorporates such macro-economic factors as interest rates and inflation and their effects on project returns.
Whilst there will still be those who advocate the use of the economic cycle for timing property development projects, in our experience we have tended to do just as well irrespective of which stage the economic cycle is in.
During the growth or 'good' times suitable property development sites are HARDER to find, are often overpriced by sellers, and often have to be purchased without local authority permits and without suitable contractual conditions. Local authorities are overworked and are slow to issue permits causing frustration and sometimes increased land holding and finance costs for developers. Building contractors are busy and their profit margin and the cost of materials increase. Sales will happen quickly and marketer's fees may decrease due to the higher turnover. Fear of an overheated real estate market by the financial regulators may initiate an interest rate rise in an attempt to dampen demand.
During the recession or 'bad' times suitable property development sites are EASIER to find, are often fairly priced by motivated sellers, and can often be purchased with local authority permits and on attractive contractual conditions. Local authorities are not as busy and are quicker to issue permits. Building contractors are not as busy and their profit margin and the cost of materials will generally stabilise or possibly decrease. Sales will occur more slowly and marketer's fees may increase due to the lower turnover. Interest rates are generally stable and may even fall in an attempt to stimulate demand.
It really comes down to pinpointing areas that are MOST suitable for the kind of projects the developer prefers: Selling to high-end luxury home buyers versus yield chasing property investors.
So then... when is the best time to develop property?
In reality, if the local property market data supports a project even if the general market is in decline, if the feasibility stacks up and your due diligence is thorough, then there is probably no reason to be worried about timing 'the market'.
>> The best time is all the time.
In a 'bad' market, vendors are more likely to give generous terms and a very good price for their site. This gives the developer more time to test council (will I get this approved?), to test the market (get some pre-sales) and secure funding (lenders love pre-sales on a project that is 'shovel ready')... all for a paltry option fee (for example).