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Why Building In A Flat Market Is Not As Bad As You Think

What is a flat market?

When demand for housing declines, the number of properties available for purchase increases in volume generally resulting in a reduction in price. Prices fall until purchasers are prepared to re-enter the market, and then the market realigns itself to the new price allowing opportunistic buyers to take advantage of the market condition.

When prices remain stable and there is little variation in capital, it is referred to as a flat market. When the market is flat there is little advantage for the buyer or seller.

The Scenario

When the market is flat the prices of real estate and established properties generally do not go up or down, creating an environment where the developer can be more accurate when creating a feasibility study for the project. One advantage in this market condition is the developer does not have to speculate on the end product price, how much the construction price may increase or  time frames for approvals.

Negotiating in a flat market

When a developer wishes to purchase a parcel of land in a flat market, the developer usually has the advantage, as the seller has fewer options on who they can sell too. This position generally opens the door for negotiation on the sale price of the land, resulting in the developer buying the land at a reduced price.

A similar situation will present itself to the developer when they negotiate with the builder. The builder knows the market is not as buoyant and will be more aggressive with pricing the construction.

There is no incentive for a builder to discount in a boom market, when the builder can more easily fill his books.

The approval process is also reduced in a flat market because the government agencies are not trying to work beyond their capacity, resulting in prolonged approval times as seen during the boom.

Reduced construction times and costs

Developers also are not delayed going to site with the builders for the same reason. So the time from settlement of the parcel of land through to starting on site is reduced by months, saving the developer thousands of dollars in design, specification and holding costs.

The time to construct and the quality of the builds are also improved dramatically, further reducing the developers holding costs.

So far everything has gone through the systems quicker than during the boom and the houses are ready for handover.

Selling in a flat market

Partnering up with the right real estate person during a flat market is imperative to the success of the project. Anyone can sell during a boom, but when the market is flat, a well-executed strategy is required. Even though there may be more properties for sale in a flat market than a boom, there is also less new properties going onto the market making your product more attractive so long as it is priced right.

Flat market overview

Time frames come down radically  in a flat market, resulting in less erosion of profit in holding costs, an in addition, the calculated profit margin should be the same at the end of the build, because there is minimum change in the sale price for the end product.

The challenge in a flat market is selling the end product. However consider this. A flat market means less competition, which means less people are competing with what you are doing.

Developers looking to make a quick dollar certainly do not operate in this market space, where the more sophisticated developers know they can make money, rely on less speculation and have solid strategies that result in expected profit returns.

Developing properties is not for everyone – so if you’re going to enter the world of property development, ensure you have a solid team around you for the journey.

Ventura iD and Multi Living Developments offer a free consultation service so you can see if developing is an option for you. Call (08) 9241 1600.