introduction
Governor Philip started the national craze for waterfront development when he anchored in Sydney harbour and unloaded the chained ancestors of todays development community. Philip also made the first value judgment about good (Sydney Harbour) and not so good waterfront (Botany Bay) thus launching Australia's valuation profession whose goal became measuring the difference.
Waterfronts exemplify the old property platitude that value is related to location. Ideas like "sense of place", "ambiance", and "character" are difficult to measure in DCF or IRR terms yet undeniably fire the imagination of most developers. Occupants of waterfront property, especially the residential kind, are similarly affected. Expenditure for the sake of location defies credulity as well as principles taught in valuation class.
A recent survey of 70 projects in Australia, North America and Europe indicated value differentials in the order of 50% - 300%, for residential waterfront and non waterfront lots within the same estate. Apartment values had value differentials of 50% - 100%. Performance figures like these have propelled generations of landlubber developers into visionary waterfront projects. Few completed the initial voyage with bank accounts intact.
The mixed economic results of waterfront developments, particularly those with commercial components, usually arises from poor understanding of the fundamental complexity (and expense) invoked by waterbased schemes. It is further compounded by the misapprehension that all property values are favourably influenced by proximity to water.
Projects and problems vary widely so it can be misleading to make absolute statements about the way things should be done. Nevertheless, reviewing some generic issues may illustrate the potential for financial and legal miscalculation when evaluating these projects.
shoreline containment
Waterfronts expose developers to construction problems rarely encountered in conventional projects. Applying the notion that "form follows function" is especially relevant because engineering and infrastructure constraints are invariably critical factors in the feasibility equation.
Imagine that your favourite developers have "optioned" a waterfront site. They commission a concept plan containing a marine component which has boats tied along a seawall. What are the options to maximise value if "form is to follow function"?
Boat owners would appreciate at least one metre of water under the keel at low water, and if the keel is two metres deep, and if the tidal range is two metres, and if the storm surge allowance is two metres ......then the sea wall needs to be seven metres tall. Vertical sea walls of this dimension can cost between $1000 to $10 000 per lineal metre depending on the size and proximity of buildings to the waters edge.
Cost too much? What about a natural slope? Natural slopes at the waters edge are usually stable at gradient ratios of between 6:1 and 10:1 depending on soil conditions. Allowing for the seven metre vertical dimension described above, boats could tie up to a jetty 70 metres from shore. Not enough water area to spare? No problem! You could excavate your land to allow for lack of water area........ but then what would you build on?
Intermediate solutions such as sloping rock walls and combination short pile / natural slope solutions might work at $500 - $1500 per lineal metre. Don't forget to make provision for other costs which might apply such as perimeter wave protection structures, periodic dredging, maintenance and reserves for depreciation.
Maybe our developers could dump their "option" and acquire another site getting involved in the current "institutional" vogue of rehabilitating old docks in inner city harbours and turning them into (no land) building platforms: however, costs can run $1000 per square metre and upward.
Its not surprising that financial feasibility for a developments' marine component often looks dodgy. The floating pontoons to which boats are tied may be the only elements which make sense.
Optimism is a necessary attribute in business so let's assume our visionary developers have an obscenely large line of credit and an irrepressible desire to press ahead with their high priced, exclusive, waterfront development. OK, but who said the waterfront was "theirs" and "exclusive"?
tenure, jurisdiction and public access
Conventions surrounding the right of ownership of waterfront land, water, the waters edge and land under water vary greatly around Australia. This is a boon to the consulting industry and invariably a problem for everyone else. Generally, the sea, the seashore, rivers, riverbeds and sea beds belong to the Crown but not always.
Lets say our developers buy a cow paddock next to a river and excavate a canal system to create a water oriented subdivision. They may still own the canal bed after inundation.... then again title might pass to the crown with right of use only possible through a seabed/ riverbed lease.... or through a license. It depends on the State, locational circumstances and more often than not on "political" rather than "legal" interpretations of the convention which will apply when development permission is granted.
Tenure variance concerning "water" gives rise to interesting jurisdictional outcomes. It is not unusual for a waterfront estates in some States to have private ownership of building lots with seawalls also privately owned .....or owned as community property of the estate.....or owned by the Crown but leased back to the estate along with the canal bottom.... or retained by the Crown. Dredging and maintenance of the canal might be the responsibility of the individual lot owners....or of the estate association...or of the Crown.... or of the local council who might pay for it out of general revenues .....or out of incremental rates levied against the individual lot owners. Complex? Maybe but we haven't finished yet.
In most instances the water itself doesn't belong to anyone. Legally it just sort of flows in and around everything and sort of belongs to "We the People". This means that if "we" float in on the tide outside someones fancy waterfront mansion playing Metallica on our canoe tape deck we're probably not trespassing. If the tide ebbs and our canoe becomes stuck in the mud, maybe we are trespassing.
Public access has long standing precedent both in the right to enjoy the national estate as well as the right to traverse its waters; however, it is inconsistently understood and applied. Concepts of waterfront access are now imbedded in the statutory planning doctrine of several States so its difficult to get approval for many types of waterfront development unless substantial provision is made for public access.
Land based public access is sometimes interpreted to mean continuous access along the waters edge, often paid for by project proponents. From a property point of view this raises issues about exclusivity and security which may influence perceptions of value.
The combination of tenure possibilities, their affect on collateralisation of development loans and the complex contingent liabilities associated with public access, are critical valuation and feasibility factors. We now begin to understand why many knowledgeable waterfront consultants own fast cars and wear Italian suits.
environment
Environmental impact procedures related to waterfront development are fundamental to the approvals process. Water based projects attract considerable attention from environmentalists, politicians and the public at large. Projects in naturalistic settings are a concern because of potential for habitat destruction. Urban waterfronts targeted for redevelopment are of concern because industrial contaminants may be disturbed by dredging and excavation.
Project development approval is obtained at State level and incorporates environmental clearance because State environmental agencies usually have the jurisdiction to make final determinations. However, many of Australia's coastal wetlands are subject to international treaties protecting the habitat of migratory birds. This invokes an overiding Federal interest in the approvals process.
Should the project require a Foreign Investment Review Board (FIRB) approval because of capital investment by foreign nationals , it is possible for the federal EPA to overturn a State development approval . This is because FIRB rules allow the Feds to make their own environmental determinations if foreign investment is made in a project adjacent to lands covered by its international treaty obligations.
Environmental review costs are essentially generated over four stages.
- Defining environmental characteristics of areas affected by proposed development.
- Assessing environmental impacts of development.
- Designing mitigation and management measures necessary to offset development impacts.
- Establishing monitoring programs to prove effectiveness of, and compliance with, management strategies.
The first three elements belong to the development approval process and may take several years to complete depending on project configuration and location. Monitoring programs may run for considertable periods, once again depending on development particulars.
Recent valuation literature, both nationally and internationally, has covered quite thoroughly risk, cost and time delay factors associated with environmental assessment The bottom line is that our developers can rely on the following certainties. Firstly, there will be uncertainty with respect to timing, costs and development outcomes. Secondly, waterfront projects will generate extremely rigorous reviews in a society which generally operates on the principle of ecologically sustainable development.
profitability of waterfront development
Are waterfront developments profitable? Answering this question, in part, relies on understanding that there are many types of waterfront project so different rules apply for each case. Here are some common development "types" and rules of thumb which might apply.
the marina
The critical variable in marina development is infrastructure related to dredging together with shoreline and perimeter containment. These factors far outweigh the cost of floating dock systems which are modular in design and can be easily and economically staged.
Most boat owners can barely afford the cost of owning and operating their craft so are hard pressed to make large berth rental payments. Marina development costs can be difficult to justify on a rental stream basis. Equity financing schemes such as membership based yacht clubs are an alternative. In a number of instances costs are recovered through the development of adjacent land holdings.
the mixed use marina development
This theory suggests that the shortfall in marina capitalisation is more than recovered by the "value added" aspect of placing land based development around a marina. Research supports the notion that residential values respond dynamically to integrated waterfront settings. On the other hand, office values tend to be driven by general market trends and retail uses may be adversely impacted by being on a waterfront.
the waterfront retail development
Destination and festival retailing schemes are common components of waterfront development. They rely on the idea that shoppers will be attracted to a waterfront "shopping experience". This concept may be valid if the location is intrinsically well located or is in an established tourism or shopping area. Otherwise, their results tend to be driven by the fact that they have partial catchments and are perceived by shoppers as weekend experiences if the weather is good. Spectacular financial failures have resulted from developers trying to attract shoppers by overcapitalising waterfront retail in order to overcome inherent locational deficiencies.
urban waterfront redevelopment
Industrial shipping practices have changed in recent years. Many coastal cities around Australia have large areas of well located, vacant waterfront land close to downtown. Numerous sites have been targeted by government in a drive to maximise the value of State assets and foster job creation. International experiences suggests that while large "latent" values exist, liberating those values can be a complex and costly exercise.
Principal costs usually relate to infrastructure deficiencies and removal of widespread low level industrial contamination from previous usage. "Contingent" site preparation costs can result in negative land values if not managed properly .
The scale of these land holdings is also a major feasibility consideration. Government can often drive down the price of its own land holdings by prematurely releasing too much land, thereby competing with itself in a "supply" rather than "demand" driven exercise.
parting thought
To do waterfront development or not to do waterfront development? Well, why not if it meets approriate environmental and community standards. Consider that many of the worlds' finest cities are urban celebrations of building and living in an intrinsically superb waterfront setting.
