Market Research in Property Development
Scope of Property Development
Property developments are shaped by market research and influenced from resulting market data insights. Determining the scope of a project requires an understanding of the local market place with the assistance of data. Through market data analysis, one can determine the appropriate property type, suite mix, pricing model, density and target consumer market segment among other variables.
After gathering raw data from countless sources including real estate demographics, building activity, sales pricing trends, sales volume, rental trends, an appropriate strategy was carved out to assist in the direction of the development project. Real estate data is dynamic with a population continually shifting market demand and supply numbers from year to year. These market movements require careful analysis and interpretation to develop appropriate market strategies.
Countless data points had to be merged and weighed against each other to form relationships and in turn an understanding of the underlying insights. The building permit data visualization utilizes 1.2 million records over a 30 year history across numerous property segments and regions. This led to forming an understanding of market trends and signals to anticipate future market movements one to two years out when the development would be slated for completion.
Forming a Strategy
With property developers traditionally relying on gut instincts and relating to their personal history in relation to market trends, projects are prone to a higher rate of failure. The margin of error can either make or break a project, and with advances in data monitoring, that margin of error can be significantly reduced, and property developers can hedge their bets through data insights.
Market Research in Property Development
Property developers need to obtain market insight into a local economy in order to determine the number of elements that will determine what kind of building needs to be constructed, suite mix, build quality among other factors. Demographics help lead a developer to better understand the local market demand that would influence the building to be constructed.
The below case demonstrates some of the real estate data analysis that we conducted in order to assist a local property development company to determine what type of project would be constructed on an infill lot they acquired. To expect to ‘build it and they will come’ mentality can prove to be a disaster particularly if a market shifts in a downward direction.
Evaluating Local Neighborhood Demographics
The community in the case example below is a bedroom community situated within close proximity to many amenities geared towards families and accessible transportation providing Point Chevalier with qualities that are attractive to growing families.
On average we can see that around roughly 70% of Point Chevalier residents own one or two cars compared with roughly half of Auckland residents in general. Additionally, around 40% of households in Point Chevalier have at least three usual residents per household compared to around a quarter of Auckland residents in general.
The ownership rates for Point Chevalier are also relatively high when compared to that of Auckland in general. This would indicate the rentership figures for Point Chevalier are relatively low. Additionally, the time that a home is held in ownership is considerably longer with only 20% of homes held for less than one year. Families typically move from a home less frequently compared to that of single people or couples.
Older bungalows with large lot sizes make up for the majority of housing types across Point Chevalier providing for infill opportunity to increase density and provide housing for additional families within the Point Chevalier community. Small bungalows sitting on large lots with low lot coverage ratios provide ample opportunity to help maximize the land use with increased density. The further opportunity lies through the process of land assembly by merging two or more adjacent lots in order to help redevelop a small section of land to improve the densification and in turn provide more families with housing.
Reviewing Macro Level Trends
The speculative frenzy of the past few years had pushed Auckland prices beyond the reach of most first time home buyers, including many of the immigrants settling in the region. Housing prices have also risen more quickly than rents in the Auckland area, which has made rental properties relatively less attractive for investors.
When rental yields start to fall, professional investors tend to look at alternative markets where returns are more attractive. Without a positive correlation between rents and home prices, it is only a matter of time before the gap begins to widen enough resulting in a chasm that proves unaffordable for investors to fill. This is one of the reasons we have seen secondary markets like Wellington start to outpace Auckland in terms of market performance and investment dollars have not dried up to the same extent as compared to Auckland.
While a positive net migration and foreign investment have helped propel housing prices in Auckland, the bubble seems to be slowly deflating. The reason for the deflation is multifactorial but can be mainly attributed to housing prices outstripping local affordability and a slowdown in foreign money flowing into the property market from Chinese investors.
According to a recent survey conducted by Colliers, respondents expect price increases for new stock rather than existing dwellings for the Auckland market. This is positive news for owners of newly built homes, however less fortunate for those hoping to buy a new property.
In contrast to Wellington, Auckland has remained below Wellington for two quarters, with Auckland’s net score being reduced by half over the past six months, and Wellington’s almost doubling.
The share of sales to investors has risen in many areas, but given that the overall number of sales has dropped almost everywhere, sales to investors, particularly those needing a mortgage, has actually dropped dramatically. The share of first time home buyers has held firm, while movers have continued to weaken.
When the Chinese government clamped down hard on the amount of money people could send out of the country, and the Australian owned banks raised the threshold for providing mortgages to people whose main source of income is from overseas, the capital that fueled much of the speculative growth in the Auckland market started to dry up. Where it was common for 80% of auctioned homes to be eaten up by Chinese buyers last year, it is now far less common to be competing against a Chinese investor at an auction as of late.
Identifying Potential Property Market Shifts
The average price for the Auckland area from July 2016 to July 2017 is 5.3%. Click on the above graph to view a further breakdown of changes in property value by area including different districts within Auckland.
Going back further from February 2016 to February 2017, the median sale price of existing apartments in Auckland was $535,000, up 15% in the one-year time span.
According to a Collier’s study on pricing trends by number of bedrooms, out of 9,900 apartment units currently in the construction, marketing or design phase the average asking prices per square metre have increased the most for three bedroom units in the suburban area, up 20% between the second quarter 2016 and first quarter 2017.
Real Estate Bubble Deflating?
Prices in Wellington have more room to move as the house prices are more affordable compared to Auckland and property prices are now playing catch up with Auckland. Wellington’s housing market is among the strongest in New Zealand in 2017 and Auckland’s intrepid growth has been slowing relatively.
Wellington house prices are only 29% above the price reached in 2007, the last time the housing market peaked. That compares to a 52% rise for average prices across New Zealand, while Auckland prices are more than 90% higher than in 2007.
On a macro level across New Zealand, net migration has continued to increase steadily and has risen 5.8% between February 2016 and February 2017. Unemployment rates have remained fairly steady as well and have only risen 0.3% over the previous year.
Mortgage financing for residential home purchases has become more restrictive with new policies imposing new loan-to-value ratio for investors purchasing property secured with a mortgage severely limiting deposits less than 40%. The mortgage interest rates have also been creeping up slowly impacting the market primarily for first time home buyers.
Building Permit Activity
The number of new dwellings and the value of residential building consents (building permits) have been increasing for five years in Auckland, but are slowly decreasing in early 2017. The number of new dwellings reached 10,026, for the year 2016 – the highest since 2004.
Residential building activity has increased each year since 2011, reaching the same value as consents in 2016 – $4.8 billion. Additionally, the value of building activity has been lower than the value of building consents in the four years leading up to 2016. The building activity may increase over 2017 where construction can catch up to the rising demand and clear the backlog. The costs of construction have been steadily increasing (7.2% between 2015 and 2016) and labor shortages have also put a damper on alleviating the backlog of consents.
Click on the interactive graph below to filter by region, property type, construction state and time period (06/1990 – 06/2017). When comparing the Auckland region to others, we can clearly see there is a steep drop in building consents from 2016 to 2017 whereas other regions in New Zealand have experienced a relatively calmer decline or modest stability.
The above analysis provides a brief overview of some real estate market research we would undertake when evaluating a local property development opportunity. Past and present trends are evaluated and weighed to gain a deeper understanding as to where the market may be heading.
A property developer may take a quick market snapshot and rule that perhaps a higher suite mix of larger and expensive condo apartments may be the best strategy but if the market shifts gears and heads in a downward direction with reduced demand then there will be less demand for larger units with higher-end finishes. The profit on luxury units may be tempting, it is wise to consider the potential market shift and hedge against such a risk.
We evaluate local market demographics as well as data from the local MLS board to gain market insights before formulating our evaluation and eventually drafting our recommendations.