Australian Residential Property Development for Investors. Forlee Ron

of commercial developments

      Commercial properties can be categorised into the following areas.

Office buildings

      Office buildings are rented to non-retail commercial users. These structures are designed as low-rise, mid-rise or high-rise buildings and can consist of one to 20 stories or more depending on the zoning and density regulations. Users of the office space sell and administrate a service to the public. Offices do not need a retail location and depending on their quality and finishes can be classified as class A, B or C offices. Following are various types of office accommodation:

      • renovated house

      • strata title offices

      • office parks

      • multi-storey office blocks.

Retail centres

      While individual investors without any particular expertise frequently own small strip shops and neighbourhood shopping centres, more experienced, knowledgeable and financially able investment groups usually undertake investment in larger retail outlets. The bigger retail developments also involve complicated analysis, planning, financing, leasing and management problems. These retail centres include:

      • corner-shop convenience store

      • strip shopping

      • neighbourhood shopping centre (1000m² − 5000m²)

      • district shopping centre (5000m² − 20 000m²)

      • regional shopping centre (20 000m² plus)

      • hyper-centre (20 000m² plus)

      • theme centres (size varies) – these are retail centres designed around a common theme, such as a:

      • – discount centre

      • – factory outlet centre

      • – fashion centre

      • – car care centre.

Industrial buildings

      Buildings that provide rental space to users of bulk storage are defined as industrial buildings. These buildings are designed for users, requiring a small percentage of office space (10 to 20 per cent) with the balance being large warehouses with loading facilities. Industrial properties are broken down into:

      • office–warehouse

      • service industrial units

      • distribution centres

      • bulk distribution

      • manufacturing facilities

      • storage facilities.

Tourist accommodation

      Tourist buildings include varied facilities common to different types of short stay or destinations such as accommodation, restaurants, eateries, entertainment, leisure and relaxation. They can be further defined as:

      • hotels

      • serviced apartments

      • motels

      • casinos

      • entertainment centres

      • resort golf course estates

      • marina developments

      • waterfront developments

      • theme parks

      • conference centres.

Educational centres

      Educational facilities can vary from private primary schools to tertiary centres such as colleges and universities with adjacent science technology parks. Categories include:

      • child-care centres

      • primary to high schools

      • colleges

      • universities

      • science and technology parks.

Medical buildings

      The development of medical facilities can be lucrative if well-located sites are found. Facilities can vary from small doctor's rooms to operating theatres in larger buildings. The buildings can be categorised into:

      • clinics

      • suburban medical centres

      • neighbourhood medical centres

      • private hospitals

      • regional hospitals.

Mixed-use developments

      A mixed-use development can vary with different asset classes, with a mix of residential and commercial buildings. This type of development is found closer to the central business district or transport nodes.

Niche markets

      These specialised developments are not normally available to the average investor or developer and can include:

      • petrol outlets

      • sports stadiums

      • parking lots and garages.

      Benefits and risks in property development

      Development, whether of a residential or a commercial property, can be a very exciting and financially rewarding exercise. However, it is a business where the stakes are high and where fortunes are made and lost. It is therefore not for the faint-hearted but rather for bold entrepreneurs who are willing to test their abilities, vision and smart decision making. These decisions can shape our environment and communities or win immortality for the developer who creates a striking architectural building or complex.

      When calculating the risk–reward equation, developers should weigh up all the positives against the negatives. A common analogy is that higher potential returns call for higher degrees of risk, and conversely lower returns require less potential risk. Although there are a number of risks associated property developments, the following lists include the most universal.

Rewards in property developments

      Despite economic changes, property development and real estate in general retain many unique benefits compared with other investments. Real estate offers tax and leverage advantages that are not easy to obtain with routine stock and bond investments. The following are a range of possible benefits with property development that should be balanced against the potential risks.

      Entrepreneurial opportunities

      Compared with other investments such as shares, property development can offer a number of entrepreneurial business opportunities. By providing their own labour and limited capital input, developers can realise a vision to improve or renovate existing buildings, or rezone and subdivide land, resulting in healthy profits. Many real estate millionaires started with small-scale residential or renovation developments. Today these entrepreneurs are building our cities and creating job opportunities.

      Cash flow

      Cash flow can be generated by sales of residential units or strata commercial office or industrial units that have been completed or sold off plan. Alternatively, units can be rented at market value, thereby generating cash flow and further capital growth. The rental income should exceed the interest cost to ensure a positive cash flow.

      Financial leveraging

      Most property developments are made using borrowed funds from financial institutions, otherwise known as leveraging (or gearing). A small amount of personal equity is used to borrow the total capital cost of the development in order to realise a larger return than the initial deposit invested.

      Tax benefits

      To assist the various housing and infrastructure needs of our increasing population, governments offer a number of tax incentives for the private sector to invest in property development. In addition to depreciation, a number of other expenditures involving property development can also be deducted as expenses. It is often possible to deduct the development costs, property rates and taxes and any payable interest as expenses, ultimately reducing taxable income.

      Creative financing

      Yields from property development can