There were once two identical buildings – building A and building B. They sat side-by-side and remember they were exactly the same.
They each had 50 nice little apartments in them.
Both building A and B started selling at the same time. Each of the apartments in both buildings sold for exactly the same price and attracted the same exact rent once completed. They were both promoted as being affordable and were targeted to house key workers.
Now children, a key worker is a local resident such as a nurse, school teacher, bus driver, police officer or fireman for example, and reflecting today’s society, baristas are included also.
Nearly all of the apartments, in both buildings, sold to investors. Both projects each employed 200 people during their construction.
But this is where their similarities stopped.
And the moral to this story, like all good tales, comes at its end. So best we listen carefully.
Building A was sold locally. The developer built an expensive display suite and advertised in the traditional way via print advertising. He staffed the display with a receptionist and several salespeople who all drew a wage and got paid the standard industry commission. Only government rebates applied, such as the first home buyers boost.
Building A took three and half years to sell, with the first tenants moving in a full five years after the first sale was made.
All of the apartments settled without much of a hiccup, with most of the buyers’ bank settlement valuations coming in within 5% of the purchase price. And for the older (read smarter) children in the class, there was very little resale price or rental growth across the market between the first sale and settlement.
The developer, given the project took so long to sell, ended up spending close to 20% of his gross realisation (kids, ask one of your parents when you get home what GR is) on promotion and commissions. He made very little profit – and the stress from such an arduous haul almost killed him – and he vowed never to do another property development again.
Building B was a completely different kettle of fish. It sold out in under six months and was ready for tenants to move in within 18 months of the first sale. The developer spent less than 10% of GR on promotion, sales commissions and rebates.
The 200 people employed during its construction all got paid and are now off working on another building job, making good money and helping house even more key workers.
But this developer, too, will not be doing another project any time soon. Why? Because only 35 out of the 50 little apartments have actually settled. So the developer has made no profit and might have to sell her house to make ends meet.
Now, in order to sell these apartments quickly, the developer offered a higher sales commission; targeted interstate and overseas buyers (as there are lots more of them than local buyers) and also offered to pay buyers’ stamp duties if they bought before construction started.
You see children, these buildings were located in a backward state where electioneering, not sense, prevails. In this dark place, full stamp duties are charged on presales and even things like 27c¹ still exist.
In order to make her marketing budget stretch, the developer of building B didn’t build a display suite, nor directly employ anyone, she was smart and promoted her project digitally and utilised the expertise of others to help make sales.
For building B it was a fight from the get-go with regards to buyer settlement valuations. The same valuers were employed as in the case of building A. They even used the same “comparable” resales to bench market value.
But because a higher commission rate was paid, sales weren’t made to yokels (oops, kids I meant to say locals) and rebates were offered, the apartments in building B were apparently worth much less, despite them attracting the same rent.
As a result, the buyers in building B had to find more money in order to settle. Most did, some begrudgingly (and who could blame them), whilst several just couldn’t afford to do so. Hence, 15 apartments have yet to settle.
So children, what is the moral to this story?
No, Jane – buying in Building A isn’t the answer I am looking for. And no, Jimmy – we cannot get rid of valuers.
In fact children, there are two main messages here:
Firstly, an investment dwelling’s worth should be determined by income – that means rent – just like it does for offices, shops and factories. It shouldn’t be determined by a “comparable” resale.
Secondly, how and where the developer spends his or her money on a project shouldn’t affect the market’s (nor valuers’) perception of value.
Now everyone get out your note books and write down these two things:
An investment’s value shouldn’t be determined by what a buyer once paid but by its income.
The distribution of costs has no bearing on the end value of a product.