Everyone wants to be a Property Developer
Everyone wants to be a property developer. Back in the late 80’s and early to mid-90s there were many “mum and dad” developers who owned a quarter acre property with a house on it and were demolishing it to build “6-packs” of units and making a nice 15% to 20% profit.
This was being ably supported by the investors following the Jan Somers negative gearing philosophy and investing for capital growth.
Those days could not be more gone!
People tend to blame the GFC for the structural changes in the marketplace. The real issue is the GFC was a symptom of years of unchecked capital growth. In 1987 when I was with one of the major banks, we were doing home loans at 18% and commercial loans at 21%. I was getting 13% interest on my savings account and CPI was over 10%.
The structural change that has arisen from those years of growth has limited access to capital and has hence focused property development into those who are strongly capitalised. There is little capital growth in the regular market and the risk for return is simply not palatable anymore unless you have a unique property, or you have economies of scale.
As I’ve alluded to, access to capital is the major stumbling block. Access to debt funds has tightened which has subsequently meant the requirement for real equity has increased dramatically.
Having said all that, Property Development will remain a cornerstone of our economy for many years to come. People have to live somewhere, they have to work somewhere, and they want to socialise somewhere. What is changing however is that the structural change as discussed above, plus technological advancements, are and will have an enormous impact on what property development will look like as we move further into the 21st century.
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