Ten minutes with…Glenn Hitch
SWITCH CONCEPTS OFFERS AN ALTERNATIVE TO PROPERTY BUYING IN AUSTRALIA
Glenn Hitch, Founder and CEO of Switch Concepts, is originally from Perth but it was during his 11 years in Hong Kong that he started his property investing career. Rather than simply buying real estate and waiting for the market to move, he made the transition from property investor to developer so he could build in margin — a move that came naturally because his father was a builder. For investors wary of navigating the often complicated process of investing in Australia, Switch Concepts offers an alternative. LOFT caught up with Glenn to find out more.
What’s the big idea?
Switch Concepts is a boutique developer in Australia, operating since 2008. Our concept benefits both the purchaser and us because it gives 40% of our profit back to the investor who buys off plan. So they get equity built in from day one. Overseas buyers are only permitted to buy brand new property in Australia and this is a route in with minimal risk.
Sounds great for the buyer, but how does that benefit the developer?
The Australian market is highly regulated. We need at least 30% presales before the bank will give us the money to start building. Our concept achieves those pre-sales quickly and construction can commence straight way. At our price point, many of our domestic buyers are first homeowners who want to see it, touch it, feel it and move in next week! They won’t wait for off plan, so we are happy to sell 30% in advance, off-plan, at a discount, and the other 70% later at a higher price.
How can buyers predict your profit and hence their discount?
Some developers buy the land then build something they hope will get their money back. At Switch Concepts we use an independent valuer to determine the end value that is achievable for the project, based on recent sales of similar properties in the area. For a development to be feasible, there needs to be at least a 20% profit margin on base costs, so if base costs are A$400,000 per unit then the valuation needs to be A$480,000 or higher for the project to move forward. 40% of the development profit margin will be disclosed upfront as a dollar value, which is the amount of rebate being offered. Therefore there has to be at least 8%-9% in-built equity for the purchaser. Effectively this is a qualified way of offering a discount.
What sort of property?
We build developments of between eight and 40 townhouses and one- to three-bedroom apartments (called “units” in Australia), at the medium to lower ends of the market. Prices are A$320K to A$600K. We specialise in in-fill sites, replacing existing property with new, higher density buildings. This is what the Australian government wants now, so they have been busy rezoning areas for higher density.
The Australian market is trending towards units because land is expensive to develop. Putting houses on a greenfield site, I would have to put in roads, sewers, the electrical work… These sites are really quite expensive and you couldn’t do that for A$350,000 each house. So there’s an affordability issue, but also lifestyle as people are getting used to living in a bigger city. This development in Perth is 400 metres from the train station into the city.
What can investors expect as returns?
With their 40% rebate on profits that the bank calculates at over 20%, investors are already gaining approximately an 8 or 9% equity saving. Although 33 apartments isn’t a huge development, if they were all being sold as soon as they were finished that would be a lot of competition. So we offer a 6% rental guarantee for two years, and will organise the rental too. That gives owners the option of letting the market settle down before selling. Right now 6% is a little above average. For capital returns, the market in Perth is a bit flat at the moment but remember that buyers already have equity from the start because of our model.
And the risks?
The only risk is the market swinging up or down. Australia is heavily regulated and there are no stage payments, just a 20% deposit that we as developers cannot touch. It stays in a trust fund held by the sales agent and if we are in default as developers the buyer would get it all back. However, after paying the deposit the buyer is contractually bound into the decision and if they don’t complete they could lose their deposit. Each project takes 12 to 18 months after which investors pay the remaining 80%, less the rebate on the profit. Most buyers can get an 80% loan anyway, so if they’ve put in 20% and then get a rebate of 8% of the purchase price, then effectively they’re only really in it for 12% of the purchase price.