You are working for a developer, Flatout Developments, who is active in the industrial sector and eager to bolster their pipeline of development projects. A compelling opportunity has recently arisen, and you have been tasked with putting forward a recommendation to the Investment Committee (IC), with the purpose of obtaining approval to submit an offer to acquire the site.
Recommendations of this nature are commonly referred to as IC Papers within your organisation, and they are a crucial quality management tool for sharing the key details with the senior leadership team. The site is located in Prestons, in Western Sydney, and the opportunity is listed by commercial real estate agency Cushman & Wakefield at the link below in the instructions.
The site is being sold with an approved development application on foot, which gives some certainty of the ability to develop the property. However, the existing development application was completed by an owner-occupier and is not considered the highest and best use for the property. The primary reason for the site being listed for sale is that the current owner seeking to capitalise on the strong demand for industrial land. Through word on the street, you are aware that some of your competitors are also interested in the site for its higher-order warehousing uses and therefore, bids can be expected to reflect the highest and best use for the site, which you believe would be a warehouse facility or distribution centre. Given neighbouring properties are currently being used as distribution centres for a major supermarket and poultry producer, there would appear to be demand for this type of facility in this location.
To determine the acquisition price, it will be necessary to complete a Residual land value (RLV) assessment. This residual land value assessment should be static (not influenced by price inflation) and need not consider returns that take into account the time value of money. Your organisation is more concerned with Margin on cost, for which it sets a minimum hurdle at 20 per cent.
Having undertaken some preliminary discussions with a friendly town planner regarding what is the maximum size of permissible development for a new development application, you have been advised that multi-level warehousing is an option for the site and that the facility must be setback 15m from Bernera Street and 5m from all other boundaries. Furthermore, 10% of the total site area must be dedicated to landscaping, and car parking must be provided at a rate of 1 car park per 250sqm of Gross floor area. You are reminded that authority fees in the form of development contributions are…
Describing the opportunity, your recommendation and what you are seeking approval for
Return metrics from the RLV analysis
The recommended acquisition price for this site
The method of sale being utilised by the bidder
Describing the rationale for investing in this particular location and this particular site, including:
Why is industrial development preferred over other asset classes?
Why is the existing development application approval unlikely to be the highest and best use of the land?
Why is Preston a suitable area for developing industrial property?
What are the tailwinds supporting industrial as an asset class?
What are the headwinds challenging industrial development and property development in general?
Title Structure and Land Zoning
What type of titling structure is the land to be acquired under?
What LGA acts as the consent authority for this property?
What is the land zoned as?
What is the permissible height limit of the land?
What is the minimum lot size of the land for the land? Should future subdivisions be of interest?
Are there any environmental considerations that may restrict the development of the land (flood, fire, environmental protection?)
Are there any easements encumbering the land?
What are the development contributions payable?
Explaining any risks that will need to be mitigated and managed post-acquisition
A sensitivity analysis showing the impact on profit (holding recommended land acquisition cost static) for the following cases:
10% increase in construction costs
10% reduction in rents
25% increase in the overall incentive amount
Works explaining the limitations of the recommendation put forward in the IC Paper