Pros & cons of higher density residential development

People have long aspired to build and buy a home on a quarter-acre plot of land. These perspectives have shifted in recent years due to a variety of circumstances. Such as -

• Practicality and affordability
• The changing structures of family
• Shifting population demographics

As a result of these causes, there is a greater need for a broader range of housing options, including medium- to high-density housing. New government policies in several states and countries facilitate this demand regulation, resulting in rezoning and amended structure plans in the cities where it has occurred.

Many property developers have taken advantage of the market's new trends and adjustments. Some have achieved great success by focusing on a narrow market niche. Unfortunately, a large number of inexperienced developers have failed. 

They believe this is a get-rich-quick scheme after hearing how much money is being made, and their approach to their developments has been short-sighted and unprofessional.

Before addressing higher density residential development in detail, you should be aware of not to perform any of these property development mistakes. Let's start.....

What is high-density residential development?

High density means the total number of units/acre in residential development. Density does not necessarily relate to high-rise buildings. It simply refers to residential and commercial developments built at a denser density than what is generally found in the current community. 

In the context of residential development, and based on the local zoning ordinances, high density can range from a minimum of 20 dwelling units per acre and a maximum density equivalent to 120 per cent of the maximum allowed density. 

High-density residential development can help activity centres become more economically and socially active. Still, careful planning and design are needed to keep the neighbourhood's character, amenity, overshadowing, and access to public transportation from being harmed or impacted by high-density housing.

Types of high-density residential development

There are several types of housing projects that belong under this category, but they can be divided into two categories:

1. Grouped residences include townhouses, villas, and retirement communities. A group residence is a type of housing that consists of two or more homes built simultaneously, each with its private garden area.
2. Multiple homes - this category comprises apartments and flats and other housing types. This building form is defined as a collection of homes where any dwelling section is built vertically over another.

Benefits of high-density housing

The following advantages apply to residential developments with a higher density.

Land use efficiency

Higher density residential zones typically utilise all developable land to its greatest extent due to increases in covering (the permitted roof cover on a building site) and plot ratios (the allowable building floor area on a building site). 

Generally, land with a more excellent density zoning commands a higher price. It is located in prime locations, forcing real estate developers to construct to the maximum permissible unit count on the site to maximise their return on investment.

A wide range of sizes and pricing 

No professional developer builds and sells only one typical floor plan. They make an effort to provide as many adaptable designs as possible to appeal to a broader range of tastes in the market. They can modify the room combinations and floor spaces by employing a standard framework.

A lower level of sophistication is required

The internal and external elements of the buildings require less intricate design because the units are standardised, and the elevations are not always visible from all angles. Unless the customers request alterations, standard finishes can be utilised on all units, depending on the market niche.

A larger market

Higher density residential buildings serve a broader market depending on their location. Not only do they appeal to most people looking for a house with proximity to amenities, but they also appeal to property investors looking for a long-term investment in a decent location with minimal care.

Improved control

Unlike many single-family developments where the developer is building on several sites, one can control the higher density development because it is all on one site.  

For example, initial costs (such as set-up costs) are minimised, and artisans have a consistent schedule and workflow, allowing management to oversee the flow of supplies on site.

Risks in high-density residential development

Over-building exposure

Because these developments are more significant in scale and require longer to construct, you may find yourself in the middle of a project and at the tail end of the boom cycle, with many unsold units.  

High-rise apartment buildings must be finished within a given contract time, even if only 50% of the flats are sold.

Higher management responsibilities

The increased construction activity, with a higher number of clients to deal with, necessitates a larger development team and, as a result, more experienced management.

Increased demands for finance

These initiatives necessitate higher finances and more personal investment. It would be best to sell as many units off the design as possible before you begin construction to give yourself peace of mind.  

Unfortunately, this is easier said than done, as buyers have become savvier when using this form of purchase.

Changes in consumer preferences

Property developers and their designers constantly create new concepts to attract purchasers and renters, invariably setting new trends. Other developers must keep up with these fresh concepts to ensure that their intended development aligns with current market preferences.

Development strategy for high-density housing

Most developers in the higher density residential category, particularly builders, sell the units in their developments to design and begin their next project. This is frequently the case for a builder-developer with a considerable crew who needs additional work to keep his employees engaged. 

On the other hand, an investor-developer would sell part of the property while keeping several apartments for rental as part of a long-term investment strategy.  

The investor-developer is usually a business person who runs his own company (not a construction company) and hires several expert consultants. Because there would be several fees to payout, the profit margin would be lower than the builder developers. 

The strategy you will select depends on whether you are a builder or an investor-developer.

The demand of higher density housing

The population growth and migration reasons that affect single-family homes fuel demand for higher density housing, but there are some distinctions between the two types of residential development.

Lifestyle change

Many people have changed their habits due to profound economic changes, lavish facilities, new technologies, and improved health. Both partners in young relationships are increasingly working, and more women are pursuing a career before starting a family. As a result, there is a greater demand for more compact, low-maintenance, and convenient living designs.

Distances to travel

As the population grows, new suburbs are springing up in places far from the businesses and significant leisure and recreational activities, increasing the cost of travel to these events and sites. 

Because most higher-density residential buildings are closer to these activities, they have grown more appealing.

Ideal location for higher density residential development

When looking for ideal locations to build high-rise residential buildings, consider the following points - 

• Shopping amenities, especially for the elderly, should be within walking distance.
• Restaurants and recreation facilities should be close by, particularly for the young, career-oriented crowd.
• The importance of public transportation cannot be overstated.
• Parks, playgrounds, and reserves should all be within walking distance.
• The location should be within a reasonable distance of a significant business district.

How to do a site analysis?

The site analysis process for this development is same as I explained earlier, here are few more points to consider-

Group dwellings

Build on ground reasonably flat with a sufficient gradient for stormwater run-off and ensure that all essential facilities, such as water, electricity, gas, and sewerage, are placed near the development site to save money on retaining walls.

Multiple dwellings

The site's slope isn't as important as it once was, especially if it has a view. Check the soil quality since structural loading in unstable soil may necessitate costly piling.

The site's shape

Economically, it is preferable if the unit layouts are identical, necessitating a regularly shaped site. When working with an irregularly shaped site, you may need several distinct designs to accommodate the maximum number of units.

If you have any concerns about a site's state or abnormalities, you should consult an architect or designer before making any decisions.

Market profile for higher density residential development

The following segments make up the market profile of potential purchasers or renters for higher density residential development.

Single adults

Unmarried people and students fall into the single adult category. Their preferred type of lodging is one with a larger living room and master bedroom.

Retirees

Retired couples, single retirees, and people approaching retirement comprise the retirees' group. A requirement is single-level dwellings with no stairs or units with elevators.

Young married couples

Young married couples choose a living and dining room combo, primarily when both partners work.

Families with empty nests

Empty nesters are yearning for a simpler lifestyle now that their children have left home. A lock-up-and-go unit with minimal outside maintenance is preferred.

Investors

Property investors are always looking for a good deal. Still, they will invest in development if the long-term capital growth prospects appear promising and the location has a solid rental demand. 

Furthermore, these prospective buyers and renters are more concerned about commuting lengths, public transportation accessibility, shopping, recreational and cultural activities, and security concerns.

Market analysis

A market research firm can be helpful if you're planning a Greenfields development or a development that's larger than usual. However, if your project is in a well-known region, you may be able to gather enough statistical data from prior sales and established trends to help with market research.

Understanding the property market cycle is essential to analyse the market better. To build the proper development brief, you should research the following areas.

Demographics

Demographic research examines the demographics and profiles of potential buyers. Age, sex, marital status, income, and occupation are all factors in the study.

Competition in the area

You should research the details of current and potential competitors in the area and determine whether there is enough space for your intended development.  

In addition, it should be determined whether there is a sufficient development margin among current competitors with the current pricing structure.

Consumer preferences

Consumer preferences will differ by region, necessitating research on current and future consumer preferences. Architectural taste, accommodation, and planning are all factors to consider while analysing these trends.

Customers demand 

To justify the construction of the development, you need to evaluate the analysis of current and future growth patterns in terms of population and immigration.

Current and future prices of units

Identifying current and potential unit prices will aid in determining whether there is any profit after the deduction of the development fee. It can be challenging to determine the correct market pricing for new developments, relying on prior sales and several assumptions.

Design considerations

The appointment of an experienced architect or building designer who knows the customer's demands and can create a cost-effective design is critical to the success of a group housing or multiple-dwelling construction.  

A good designer considers the following points.

Theme

If a unique character or theme is chosen, it should be carried out in all the building's designs. Developing a distinct theme establishes the development's individuality and provides a marketing advantage.

Scale

The scale, height, and density of the development should keep with the surrounding area's features. Make sure the structures don't feel oppressive or claustrophobic. Create a relaxing atmosphere with beautiful views.

Privacy

When density requirements are high, planning for privacy can become a challenge. Designers should consider visual privacy and noise transmission between units and from the outside.

The use of natural light

You should include as much natural light as possible in the internal design. More oversized windows can help achieve this, providing improved ventilation and a greater sense of spaciousness. However, avoid expansive windows facing the scorching western sun.

Conservation of energy

Architects and designers should create units with the proper orientation to reduce the demand for air conditioning and artificial heating with harsh weather.

Security

Security has been a critical architectural consideration in higher-density structures. The incorporation of various security systems will improve the unit's saleability.

Free of maintenance

External maintenance can become a financial burden for a body corporate, forcing it to raise levies. As more buyers and investors become aware of these issues, they are drawn to developments that require less care.

Facilities for communal use

Depending on the development scale, the developer should consider some shared facilities, such as a swimming pool, gymnasium, or workshop, and make the project more marketable.

Costs of higher density residential development

As opposed to single home construction, a larger density project will necessitate a more extensive feasibility assessment and should consider various cost variables. These are some of them:

• The price of land
• The price of land
• Rezoning fees (if necessary)
• All essential services such as water, electricity, gas, and sewerage are included in the connection fees.
• The expense of providing bulk services (water, electricity, sewerage, and stormwater) - if they are not near the land could significantly impact the project's feasibility.
• The site price: Is there a gentle fall over the property, and are there any large trees that need to be cut down?
• Construction fees: Determine the type of contract you'll utilise for building.
• Holding cost - Design your stages to fit your cash flow.
• Escalation fee: Consider the cost of escalation while determining the unit's sale price.
• Fees for development approval and construction plans
• Fees for a development manager or a project manager
• Fees for professionals
• Employ a knowledgeable broker and study all of the fine print regarding insurance.
• Taxation and rates
• Transportation levy, as well as any other taxes or fees imposed by the government
• Cost of external development (road widening)
• Bank fees
• Marketing and commissions 

How to finance higher density residential development?

Your feasibility study will be crucial, but so will the financier's sales evidence within the development area. Most lenders will base their loan decisions on this factor and whether or not there is still a need for such a development.  

Pre-sales or off-the-plan sales are required to obtain project financing; in some cases, up to 100% pre-sales are required before financing is approved.  

However, financiers would typically want up to 30% pre-sales or developer equity, equivalent to other development projects. While the amount of pre-sales is crucial, the nature of the sales, particularly buyer type, is equally important.  

Financiers prefer Owner-occupier sales since they demonstrate the developer's product quality and meet owner-occupier demand.

Construction contract for higher density development

If you're not a builder-developer, the type of contract you'll sign will be determined by the project's size and, maybe, the entire development's phasing. Your architect or development manager can help you determine which contract is appropriate. 

Regardless of whose contract you select, make sure you have rates for variants confirmed before finalising the contract because your buyers will almost certainly request changes to your basic plans or specifications.

How to market your development project?

When it comes to marketing your development, keep the following points in mind:

• If your project is of a modest scale and will take several months to complete, having your marketing section may be desirable. You will not only have better marketing control, but you will also have sales advisors that are solely focused on selling your project. If you go this way, make sure you hire sales associates familiar with the scheme and construction concepts.
• If you need outside help, make sure you keep them on their toes and that they follow through on their promises.
• Using an off-the-plan sales approach will necessitate some good presentation drawings and advertising material when it comes to marketing. Modern computer-aided-design (CAD) software can build virtual walkthroughs of various interiors so purchasers may see the final product.
• Because some buyers will not buy homes or units off the plan, having a finished display unit might help with marketing. The showcase unit should never be the more significant and better unit since buyers will demand it, resulting in disappointment and arguments.

Viability

Most high-density developments are developed with the primary goal of selling rather than renting the homes; therefore, seeking the highest profit margin. The average return on risk will be determined by market conditions and the speed of selling the development.  

Furthermore, it would be best to consider the tax consequences on overall sales and how the GST would affect your cash flow.

Bottom line

Start building a portfolio of housing units instead of waiting for a government pension or superannuation to payout (which may eventually dry up). If you're worried about over-gearing, sell one part of the development but keep the other for rental or enlist the help of an equity partner.

If you are still not sure about further steps, enrol for structured property development courses and get the needed help and guidance for your property development project.