When attaining development finance, a key but often underestimated consideration for developers is accounting for Development Contributions (DCs). These costs are confirmed by a local council after lodging for Resource Consent. Getting a handle on what these costs will be prior to lodging for resource consent is key to understanding the profitability of your property project.
Furthermore, for land bankers, understanding future DC policy may significantly change your strategy as to how and when you lodge for consent. Below is a breakdown of Development Contributions from the property development perspective.
DCs are levies imposed by councils on a developer and are raised as a contribution toward the cost required to upgrade and maintain infrastructure within a designated area. The size of these costs can vary according to the infrastructure requirements of the area, as well as the type and size of the proposed development being carried out (measured by the increased number of residential dwellings or Household Unit Equivalents — HUEs).
In Auckland, developers looking to complete a subdivision typically incur DC costs of between $27,000 – $33,000 per lot, depending on location and infrastructure demands in the area. This is in addition to paying for private infrastructure works within their subdivision which are funded by the developer and is commonplace in any resource consent.
In contrast, Levin, governed by the Horowhenua District Council, has no DCs. Instead, all infrastructure costs are effectively subsidised by ratepayers, a strategy which was adopted to incentivise development in the area.
The purpose of DCs is to recover from developers a fair, equitable, and proportionate part of the total cost of capital expenditure necessary to service growth over the long term. So, the standard approach whereby councils’ charge DCs (as a percentage of total cost) isn’t altogether wrong. But how this is implemented can have a drastic impact on the supply of new sections.
Simply increasing DCs to a level that fully recovers costs could have serious consequences for home buyers. This is because developers can simply add it onto their section price, pushing house prices further out of reach.
Councils generally bank on the developer being willing to wear the cost or pass it on to the landowner or the house buyer. But economists have argued with house prices at maximum affordability levels, so developers won’t be able to keep passing these costs on to buyers. Instead, they will be building the cost of DCs into their feasibility studies, causing them to pay less for developable land to maintain their margins. This will result in lower profits for the existing landowners, rather than increased house prices for the final buyers.
For developers buying bare land, increases to DC levies pose a significant risk. For example, between 2016 to 2017 and 2019 to 2020, development contributions for Rotokauri catchment in Hamilton increased from approximately $30,000 for a standard resident lot, to $70,000—a 130% increase. To put that into context, a small twenty-lot subdivision that would incur DCs of $600,000 in 2016, would cost $1,400,000 today. It is easy to see how this can quickly make any development unfeasible.
In addition, remember that DCs can rise over the course of a four- or five-year project. For land bankers, understanding current and future policy is key. At ASAP, we accelerated a joint venture development in Hamilton to lock in lower DC’s that were about to be raised by the local council. This made sense, as we were intending on starting works on the subdivision within the five-year time restriction often imposed on resource consents.
For developers buying unconsented land, our message is clear: build in appropriate allowance for DCs. In addition, always allow for unforeseen increases in cost that may arise due to council changing the DC policy.
Reach out to the experts at ASAP Finance today. We’re the leading non-bank lender in Auckland, offering investors access to a property finance company’s financial services with experienced developers on the team.
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