Thanks Mary Holm – NZ Herald freelance financial journalist
Your recent advice to your reader, in response to their ‘Time to Subdivide’ letter in the NZ Herald - April 11, 2020 - is noted. Yes, subdividing off the large front or back lawn will undoubtedly bring you returns in most regions of New Zealand. Not just in the aftermath of the coronavirus lockdown, but anytime. Regardless of the subdivision timing, the return will always relate to current land values, be they high or a little depressed at the time. Therefore, the timing is not all that critical, although the market demand for a section will vary from time to time. Some cities, from time to time, have a limited amount of residentially zoned land available to build on and that can raise the value and interest in smaller ‘infill’ subdivisions.
Our experience tells us that, even in the lower priced markets, a subdivision can generate an increase in overall capital value. But only if it is done well. If a section can be cut off, leaving reasonable yards for the existing house and good access from the road to each property, you should be on to a winner. Often the subdivision will not lower the value of the existing house as much as you might think either, as each section has a basic underlying value related to the fact that you can build an independent dwelling on it. Additional value will be dictated by size, aspect, views, slope etc.
The cost of subdividing varies across New Zealand, with the largest cities often having the highest costs. However, development costs generally make up a relatively small portion of the sale price and higher development costs are generally associated with higher section prices in those cities or towns. What is relevant though is the proportion of subdivision costs to sale price.
As a rule of thumb, development costs can typically make up one third of the value of a new section. Another third is the land value. The final third is the profit. As you can see, if you do it right and don’t spoil your house section, there is ample opportunity to profit from subdivision. You get to extract the land value as well as the profit!
Before you launch into a subdivision you will need some cash or ability to loan from the bank (typically one third of your costs), but once you have obtained the Resource Consent to Subdivide, a higher valuation is established with certainty of success. Further costs can often be managed through the bank and expended much closer to the sale date. A Resource Consent provides certainty, setting out the conditions to be complied with and provides the basis for a binding sale and purchase agreement to be signed.
Subdivision is not for the faint hearted. There is some risk at the outset - that can be managed of course. You are required to pay for connections to services and pay financial contributions to Council. The process can take many months to complete ready for sale and within this time the market can change. For this reason, it is imperative to proceed carefully, minimising your early spend and managing the process through to sale and completion of the construction conditions required. As always, we are here to assist you in navigating the minefield of Council Rules and Red tape.