The build-and-hold model explained
Investor developers favour this model over all others, to take advantage of real savings.
Blogger: Andrew Fawell, director, Beller
Slow food, slow dancing and a slow, long-term view are advantageous for property investors and not simply because of capital appreciation.
As there are significant commercial benefits available for property that is built and held for five to 10 years, which add up to a significant saving and retained equity.
A dollar saved is a dollar earned but, surprisingly, this saving is not common knowledge except for those who have been through enough property cycles to know.
The ‘build and hold’ model is an approach favoured by investor developers who know the cost of development and where the real savings are to be had.
There is a new emerging force in the market, a different style of investor developer, who does not flip over projects quickly but is content to wait. This is a model that he says is gaining momentum given the low yield environment.
There is a term at Goldman Sachs which is 'long-term greedy', these people have investment plans mapped out for the next 10, 20 and 30 years.
These are astute individuals who can pay more for sites because they take a long-term view with their assets. As they know there are significant savings to be had aside from capital appreciation, which adds up to a significant increase of their asset’s value. The benefits are:
- Depreciation benefits: 3 per cent (including 2.5 per cent straight line on buildings and 10 per cent straight line on plant and equipment)
- Sales commission costs: 5 per cent
- Advertising and marketing savings: 2 per cent
- GST saving if retained for five years: 9 per cent
There is a saving on gross sales value on the margin scheme for GST if the property is held (and not marketed) for an excess of five years. Astute investors look at a 10-year cash flow and generally find that mixed used developments offer up the best results.
The build and hold model does require the individual to have other cash flow, which normally requires the capacity to hold his or her assets and a significant balance sheet. There is also a formula that needs to be adhered to, to ensure a successful resale if the need arises.
For those considering to build and hold, I would recommend buying within 10 kilometres of the city. Some suggested locations for Melbourne would be Armadale, South Yarra, Windsor, St Kilda, St Kilda East, Malvern, East Melbourne and North Melbourne. The key is any hotspot where the underlying land value will continue to go up over a 10-year horizon given the scarcity of supply in those specific areas. I have eight projects with clients ranging from 2-89 apartments/townhouses that have bought into this strategy and are being rolled out.
