BY JAMIE KAY | MONDAY, 17 JUNE 2024
The National Housing Accord has opened opportunities for developers and financiers – specifically non-bank lenders, given regulatory constraints that remain in place for the big four banks in the residential sector.
The thesis around medium and high-density residential property is strong as most State governments look to fast-track apartment and mixed-use projects in inner and middle ring suburbs to reach dwelling targets.
In August last year, National Cabinet agreed to a national target to build 1.2 million dwellings over five years, from 1 July 2024. This is an additional 200,000 dwellings above the original National Housing Accord target. But this doesn’t come without significant challenges. Excluding greenfield markets as a provider of dwellings, we have seen continued construction cost escalation via the normalisation of the cash rate and above average input costs in the build-to-sell
apartment sector.
There is an unevenness between what can be built and what people can afford to pay. Presale revenues in Melbourne commence
from around $13,000 per square metre (compared to around $10,000 psm. before the pandemic). The presale rate is now around $17,000 psm. in Brisbane and around $25,000 psm in Sydney, on average (the rate does not include a car space). The mainland capital city presale average is around $15,000 psm. In terms of build-to-sell apartments, completions sit well below trend – there is a deepening imbalance between the demand and supply in East Coast capital city markets.
Outside of Sydney and Melbourne, we are seeing strong owneroccupier demand in the Brisbane, Gold Coast and Perth markets that have been traditionally investor-led.
People are moving interstate for cost-of-living and lifestyle reasons – more owner-occupier buildings with larger units, with closer proximity
to the river or ocean with favorable amenities. The Canberra apartment market is holding up relatively well as the Australian Capital Territory government continues to support developments in the city’s various centres. Due to a proliferation of red tape and labour supply, the timing for projects to be completed has extended to around 4 years in some capital city markets.
A Wingate survey found that a lack of certainty about planning outcomes was halting the acquisition and development of sites for new housing. Of the developers, private lenders and wholesale investors surveyed, almost a third said securing planning approvals was a key development impediment, while over a third said the availability and cost of labour and trades was still a major issue. Almost 50 percent of respondents said they had no plans to acquire a site despite many seeing good growth opportunities in density development, especially in Victoria. In part, these challenges lead to under-supply in the middle ring suburbs – what we call the ‘missing middle’. The challenge is delivering dwelling supply in the middle ring suburbs – especially in Melbourne: townhouse products for families?
In addition to the missing middle, the opportunity also presents for the delivery of medium-density dwellings in greenfield corridors. If you have approved greenfield land, it is very valuable and, given future policy directions around greenfield land, Wingate expect above trend growth in retail land prices. As a result, there will be more ‘price-pointed’ small lot townhouse products.
However, finding builders remains a challenge, as many continue to struggle to get finance – some have been caught-out by cost escalations in the post-pandemic environment. Thankfully, much of the rumour and speculation around volume builder viability has ceased. More may fail, but plenty will weather the storm. Melbourne appears underweight in terms of townhouse product in comparison to other states.
In another positive development for the residential market, Wingate are seeing strong demand for boutique owner-occupier apartments in the more affluent suburbs of Melbourne and Sydney. This is being driven by the downsizing of baby boomers from their larger primary residences in the same area. Higher-priced, premium products for owner-occupiers are generally getting stronger pre-sales.
In other parts of this boutique market, developers are tending not entering into pre-sale agreements as they are getting better prices for completed products at the conclusion of the project. The build-to-rent (BTR) as an asset class in Australia remains one of the most underrepresented in institutional investment.