Property development: what it is and how it works

What property development means

One Australian guide to getting started describes property development as covering many activities and processes, from buying land to building facilities on it. The same guide gives a broad description of it as the ongoing reshaping of what has been built, so that it meets what society needs, and notes that development can take in anything from roads to high-rise office buildings.

The developer's guide says the same sequence of steps applies whatever the scale of a project, and that complexity climbs steeply from a dual-occupancy to an apartment tower. The getting-started guide keeps its focus on smaller residential work, the kind an individual investor might take on, and describes a developer as an investor putting equity, expertise and talents into moving land from its current use to a more intensive one.

The team around a project

A first project does not rest on one person. The developer's guide names a core team for a first development: a town planner to work through the local planning rules and the approval process, an architect for design and documentation, a quantity surveyor for cost planning, a project manager to coordinate delivery, a real estate lawyer for contracts and settlements, an accountant for structure and tax, and a broker or development finance specialist to arrange the capital.

The getting-started guide lists the wider group a project can call on, among them estate agents, finance strategists and accountants; lawyers for contracts; town planners and urban designers; architects and landscape architects; engineers; building contractors, development managers, project managers and quantity surveyors; and project marketing specialists. It adds a caution about one of them: an estate agent's job is to sell property, and that guide says an agent is not the person to judge what a site can carry. For that judgment it points to a town planner or an architect.

How a project usually runs

The developer's guide sets out seven steps: building foundational knowledge and qualifications, assembling a professional team, securing development finance, sourcing and assessing a site through residual land value, obtaining development approval, managing construction, and handling sales and settlement. It notes that no single licence is required to work as a property developer in Australia, though common routes include a degree in property and real estate or in construction management, a postgraduate qualification, or experience with an established developer.

The getting-started guide walks the process in stages: investigating a site and testing its feasibility, negotiating the purchase, town planning and development approval, working drawings and documentation, letting the building contract, construction, and completion, when a plan of subdivision can be lodged and separate titles obtained. It is direct about choosing a site: a large portion of the profit margin is settled at the moment the property is bought.

The developer's guide gives indicative durations: two to four months to secure finance, three to six months to find and assess a site, nine to eighteen months for development approval and eighteen to thirty-six months of construction on mid-rise work. Sales can run during the build or wait for completion, with a ninety-day defects period after handover.

Money, approvals and risk

The getting-started guide reports that development finance is harder to arrange than a loan for a simple investment purchase, and that lenders will treat any project of four or more dwellings on one site as a commercial undertaking. It says development loans are drawn in stages, from a deposit through base, frame, lock-up and fixing stages to a final balance at completion, and that lenders often decline to fund “soft costs” such as architect's fees, council fees and other consultancy charges.

The developer's guide puts senior debt at 50 to 70 percent loan-to-value from the major banks, with mezzanine debt or preferred equity added where needed, and says developer equity typically covers 20 to 30 percent of a project's total cost. It describes residual land value as the most that can be paid for a site while still earning an adequate return, worked out as end sales less delivery costs less the developer's required margin.

The getting-started guide says a study sets out the sum paid for the property and stamp duty, conveyancing and legal costs, consultant fees, construction costs, rates and taxes, a contingency, and the income expected from sales and rentals. The developer's guide names the largest risks it sees: cost overrun, program slippage, market movement while the build runs, the availability and cost of finance, a shortfall in pre-sales, and defect liability after handover. In NSW, it notes that the Design and Building Practitioners Act 2020 has, since 1 July 2021, required registration of practitioners doing regulated design and building work on Class 2 buildings, and that the major defects warranty runs for six years after completion.