Even the rich have renovation nightmares

Lachlan Murdoch’s Bellevue Hill pile. For the rich, investment in residential property often has little to do with re-sale potential. Many of the developments are highly personal and do little to increase a property’s value.

Several wealthy people are undertaking major renovations to their private residences but following their lead may not be profitable.

Experts warn that extravagant renovations to private homes can lead to poor investment outcomes, particularly with property worth less than $3 million.

Among those undertaking major works are Daniel Besen who is spending more than $20 million on a new Toorak mansion, at least twice as much as the site is worth. Besen is a property developer and member of the Besen family, which had an estimated net worth of $2.15 billion on this year’s BRW Rich 50 Families list.

His new home will have several unique features, including a private art gallery for his extensive art collection.

In nearby Kooyong, members of the Pratt family (worth $5.45 billion) plan to spend at least $10 million renovating, according to reports.

Raphael and Fiona Geminder who own Visy off-shoot Pact Group have acquired neighbouring properties and plan to build a large extension on the site, including a 12-car garage.

Lachlan Murdoch is another to buy neighbouring properties with plans to undertake a multimillion dollar renovation.

Murdoch is believed to have outbid actor Russell Crowe to secure Le Manoir in the exclusive Sydney suburb of Bellevue Hill in 2009. The property was acquired from the French government for $23 million.

A year later, the Murdochs bought the house next door and started planning a $12 million redevelopment, including a pool and pool house.

For the rich, investment in residential property often has little to do with re-sale potential. Many of the developments are highly personal and do little to increase a property’s value.

“At the high-end of the market, it’s a lucky dip,” the managing director of residential selling agency JP Dixon, Jonathan Dixon, says. “You can make a lot of money or loose a lot of money.”

Dixon advises all home owners planning extensive renovations to assess what buyers want.

“In this market, everyone has to be careful,” he says.

Dixon’s firm sells residential property in exclusive bay-side suburbs near Melbourne. He says the benefit the rich have is that they can often afford to sit out poor markets and wait for conditions to improve. He says it is more common for the owners of homes worth $2 million to overcapitalise.

Renovated period homes are not as attractive as they once were, according to Dixon. He says many buyers who plan to spend about $2 million are gravitating towards modern, low maintenance properties.

Mal James from James Buyer Advocates agrees that different rules apply for the top properties. He says it is common for big-ticket purchases, worth $8 million plus, to be bulldozed. “Above $7 million or $8 million, people will quite often just buy a property for the land,” James says.

Over-capitalisation in that market isn’t a major problem because those buyers have a capacity to withstand price fluctuations. “At $2 million to $3 million, it is a really big deal.” James says he knows of people who have spent about $500,000 on a $2 million house only to discover that its net value has fallen by $200,000 while work was being done.

Likewise, under-capitalisation can be a problem. He says a common mistake is to buy a $3 million block of land and build a $1 million house on it when $2 million to $3 million should have been spent. “If you get it wrong, you can take a pretty substantial haircut,” he says.

James recommends sticking to popular floor plans and neutral finishes in major renovations. Seeking advice is critical.

“You have to understand what you are doing,” he says. “If you are producing a home for your own emotional needs then there is nothing wrong with [investing heavily in a unique renovation] but it may not meet your financial needs down the track.”

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