One of the more recent trends property investors are now factoring in to their portfolio is the possibility of a long-term strata site amalgamation. Amalgamation expert Tom Doran from Burgess Rawson explains what is involved, the potential and how to choose a suitable building.
Listen to the interview now:
Kevin: It’s interesting that one of the more recent trends that investors are now factoring in is the possibility of a longterm strata site amalgamation when they’re looking at strata units.
Kevin: According to Burgess Rawson’s Associate Director Tom Doran, who joins me as our guest, this is one of the considerations you should be looking into, if you’re looking at investing into a strata development. Thanks very much for your time, Tom.
Tom: Yeah, absolute pleasure, Kevin.
Kevin: Can you tell me what’s involved in site amalgamation, and are you witnessing it happening in many locations?
Tom: Yeah, it’s become a lot more prevalent over the last five or six years. Basically, with a site amalgamation, it’s when a developer comes along and either makes an offer to strata owners to buy out all the lots individually.
Tom: And quite often, they’re doing that just because the strata that’s in place is underutilised in terms of its floor space ratio. So, if they knocked it over and start again, they could build a significantly bigger building than what’s on there at the moment.
Kevin: I suppose the value of these together, for that scenario, is a lot more valuable than them as individuals. If you combine them all for that reason, Tom.
Tom: Yeah, that’s exactly right. I mean, you could have a strata of a few properties on a big block 1,000 square metres of land. The value from a retail or investment point of view could be 2 or 3 million. But with all the vacant sites that underutilised, it could be 5 or 6 million, to use an example.
Kevin: Is it more prevalent, say in New South Wales, where there have been some recent changes to the law, allowing these sorts of things to happen? Or is it right around the country?
Tom: Well, I’d say New South Wales and Sydney Metro is where it’s happening most. That’s because we’ve got more established markets. And you tend to find the more strata properties within the CBD or city fringe areas. So if you’re looking at targeting these type of investments, I’d say stick to the major capital cities: either Melbourne, Sydney, and the CBD areas.
Kevin: My memory, correct me if I’m wrong, the New South Wales reform that was made, made it mandatory for all of those to sell if there was a certain number. In other words, if one or two people decided not to, they would almost be forced to sell. Is that correct?
Tom: Yeah, that’s exactly right, Kevin. So previously, to end the strata plan, you needed 100% of owners to agree. But now, it’s only 75% of owners that need to agree to activate the renewal rule. So the renewal rules run through the Land Environment Court for the other 25% of owners, so they get fair market value.
Tom: So the Land Environment Court runs out and they resolve any disputes. Or they can run a mediation process between the owners, to get fair market value for everyone.
Kevin: Your company, Burgess Rawson, is this actually what you’re doing? And if so, can you cite a couple of examples of where it might have happened?
Tom: Yeah, so Burgess Rawson, we sell investment properties all over New South Wales. Strata and also Freehold. Also a couple of retail investment properties in Ermington late last year. And that’s out in the western suburbs of Sydney, on Victoria Road.
Tom: That was an older, 1960s-style building, ground-floor first floor. Had 27 stratas in total. And that was a building that was built when the floor space ratios, and also the height limits, were significantly less.
Tom: So, when the buyer came along and ended up purchasing at one of our portfolio auctions, he raised the point as well. He just looked at it and said, “It’s not highest in best use as it is. However, it’s a really strong investment property.” So he could see the upside for holding it.
Tom: Now, we might have an overnight, Kevin, in terms of the strata renewal. But it might be five, 10, or 15 years away, when there’s a little pot of gold at the end of the rainbow.
Kevin: What do you look for? What you your tips in looking for sites that are going to fit this amalgamation, become a prospect for it?
Tom: Yeah, there’s probably four main tips that I’d give any property investor. Firstly, you have to look at the fundamentals as an investment. Okay, that’s the main thing. So you want to make sure that you’ve got a good strong tenant. Long lease, and good fixed annual increases.
Tom: They should also, secondly, they should look for all the buildings. They’re the ones that would have built 50 or 60 years ago. So there certainly could be some further FSR or height that’s been added in zoning over the last 50 or 60 years.
Kevin: Sorry, FSR means?
Tom: Floor space ratio.
Kevin: Yep, thank you.
Tom: That’s the amount you can build on a particular building, and counsel will give you the FSR if you search their web site on a particular site.
Tom: Thirdly, I’d say developers love corner locations. So if you’re going to look at a strata building, see if you can find one that’s got a corner location. It’s just more efficient for developers to build residential developments with light wells and so on.
Tom: And then lastly, I’d just say look for strata buildings with underground parking. Developers save a lot of money; the underground parking’s already been built out.
Kevin: Very good tips. And it’s an interesting area that we’ve never explored, but it’s certainly a developing area. Tom Doran is from Burgess Rawson. Tom, thanks for your time.
Tom: Thanks, Kevin, have a great day.
Kevin Tuner worked in radio as General Manager of various east coast radio stations. He started in real estate in 1988 and was ranked in the Top 10 Salespeople in the state until he was appointed as State CEO 1992. He also operated a number of real estate offices as business owner and was General Manager of several real estate offices in Christchurch.
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Disclaimer: while due care is taken, the viewpoints expressed by interviewees and/or contributors do not necessarily reflect the opinions of Your Investment Property.