Back to the drawing board - fast

For a few years prior to 2012, the once-sleepy Bowen Basin town of Moranbah transformed into an investors’ paradise, offering almost unimaginable rent returns and massive, quick capital growth.

Demand for housing seemed insatiable, as a raft of mining projects ramped up and thousands of new workers came to town. They had to be housed somewhere, so modest properties that once collected a few hundred dollars per week in rent were suddenly raking in upwards of $1500. Development escalated as a result, with dozens of new unit and townhouse projects being churned out and older homes being built in beneath or extended. Then, everything changed thanks to a combination of floods that crippled mine productivity, a long-running industrial dispute that saw workers disappear and a growing reluctance from resource companies to shell out astronomical rents.

For investors caught in the midst of this ‘perfect storm’, the consequences were tough to comprehend. It’s a sensation that Queensland developers John Brierley and Jennifer Barclay know too well.

Back in June 2011, these investment partners bought a five-bedroom house in Moranbah for $668,000. It was bringing in a remarkable $2200 per week in rent that might have satisfied some lower-risk investors, but the asset offered much bigger potential. “The house was on an 800-square-metre block and we were planning to build two townhouses at the back, strata title everything and sell the new builds,” John explains. “We were then going to keep the old dwelling at the front as a rental investment.”

As they made a start on early planning works, the owner of the property next door got in touch for a chat. It turned out the neighbours were building a new family home elsewhere and had been considering selling anyway.

In August 2011, John and Jennifer agreed to buy the three-bedroom house, also on an 800-square-metre block, for $508,000. “After we bought it, we had a re-think about our options. Initially we figured we’d simply build two townhouses at the back of the second house, but we realised we could knock down both dwellings and build 10 townhouses across both sites.”

As part of their negotiations with the owner of the second property, John and Jennifer agreed to a deferred settlement. “They were still building their new home so a condition of the contract stipulated we’d take possession 10 days after they moved out of the old place. We figured they’d be gone by Christmas that year, based on what they told us, but thanks to bad weather their build came to a halt. In reality, they didn’t leave Moranbah until August 2012.”

They busied themselves with obtaining planning approval from council, which he says was a relatively smooth process. Within three months and at a cost of $12,000, they received the green light to proceed.

“Council were very keen. At the time, authorities were desperate for new housing supply. They wanted someone to build anything – whatever could add to rental stock and perhaps help affordability.”

A sought-after builder was signed on to do the job and quoted a turnkey price of $300,000 for each dwelling, with a construction timeframe of 12 to 16 weeks. “The builder has quite a good reputation for being very well-organised and switched on, so we were confident of his commitment. Construction would’ve been knocked over fairly quickly.”

John and Jennifer crunched the numbers and expected to achieve $650,000 for each of the 10 townhouses. Factoring in the purchase, planning and build costs, that would’ve equated to a gross $2.3 million profit. With approval under their belt and the builder ready to go, all John and Jennifer had to do was wait for the owners of the second house to move so they could kick off a pre-sales campaign.

Their lender only required four off-the-plan presale contracts to release construction funds.

Bowen Basin property climate shifted

Unfortunately in the meantime, Moranbah was almost wiped off the investment map. The number of properties available for rent began to steadily climb from early 2012 onwards, while sales volumes dried up and prices tumbled shortly after.

Before things went pear shaped, John says a property available for rent would be gone within a day. Those for sale would be subject to a bidding war – if they made it to market at all before being snapped up by desperate buyers. “All of a sudden, there were 200-odd properties for rent at any given time. Sales were much the same. There were some hints about what was coming in the early part of last year, but we certainly didn’t anticipate what was around the corner.”

Despite mounting negative headlines, the closure of a large mine in the region and a firm stance by the parties involved in the industrial dispute, John and Jennifer didn’t really start to panic until their rents came up for review. The first house they’d bought dropped significantly from $2200 per week to $1600 per week. When it was finally vacant in August, the second house was leased for $750 per week – a far cry from the $1600 per week they’d expected.

“Things in Moranbah came to a head and for me it felt as though someone had just suddenly turned the light off. It was a very stressful period,” John says. “Our view was that we needed to get a development done as soon as possible and get out, so we went back to the council and asked them what their preference was for housing in the area.They indicated they’d now like to see more family friendly dwellings rather than just anything suitable for a revolving door of workers to sleep in.”

Back to the drawing board

The pair went back to the drawing board and assessed their options. They wanted a project that would still deliver a profit but without the much higher risk of their previous plan.

In October last year, they lodged a new application for a four-bedroom house at the back of the first property and four new townhouses on the second block.

“The first house was to be retained while the second would be knocked down. We got development approval in about three months and they gave us a discount on planning fees – Jennifer asked for one, so we saved about $5000 in the end.”

The new designs call for larger dwellings with more generous living spaces and bedrooms, to suit either local families or future mine workers. Each townhouse and the new house also have double garages. “That was partly to appeal to a wider mix of buyers and provide a point of difference, but also a tactic to meet council requirements,” John explains. “In this area, if you do a single garage you’ve still got to provide a second parking space somewhere else on the site. Council want cars off the road, so you’ve got to pay for a lump of concrete anyway.”

Shortly, a pre-sales campaign will begin and John and Jennifer are hoping to secure four contracts, even though their lender no longer requires them for a project of this smaller scale. “Our construction finance isn’t dependent on pre-sales but I think we’d prefer to offload a few before we begin work. It’s more for our peace of mind.”

Although John feels the sales market might have bottomed in Moranbah, it’s still difficult to gauge an accurate comparable value given the continuing volatility.

Based on their observations, the pair realistically expect the two slightly smaller townhouses on the second site will sell for around $630,000 each and the other two for $650,000 each. The new four-bedroom house at the back of the first block will be priced around $690,000. The original home at the front will be retained as a rental regardless of what the others sell for, he says.

The builder is still quoting a turnkey price of $300,000 for each of the new dwellings, although given reduced construction activity in town he may be open to negotiation. On that build price and factoring in other costs, achieving those anticipated sale prices would still result in a gross $555,000 profit. It’s not bad given the circumstances, but much less than what they originally stood to walk away with.

“If we’d just done the first house with two townhouses behind and ignored the second property next door, we could’ve been in and out in several months with a very nice profit. That’s the lesson – get in, get out and go sit back to see if it’s worth going in for another go. If not, walk away.”

Copyright Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.