But every challenge has its opportunities. Richard Temlett, associate director of property consultancy Charter Keck Cramer, explains that in some markets apartment prices may be increased to cover rising construction and financing costs.
Sydney developer Coronation Property seized the opportunity this week, buying a large site in southern Sydney from Chinese developer Greenland and its partner, Golden Horse, at a price – $315 million – that allows sellers to come out with a profit.
Coronation is likely to develop apartments to be built on the site, a move which Guillaume Volz, national director of the Colliers agency, says reflects increased interest in the development of Sydney’s BTR sector, spurred by sharp rises in rents over the past of the last 12 years. month.
For me, the opportunity, if it can be seized, is the chance to address the chronic shortage of social and affordable housing. More of that later.
A month ago in this column, Michael Corcoran, director of non-bank lender Solido and former national chairman of the Urban Development Institute of Australia, warned that the housing industry could face “the biggest squeeze in the credit for construction financing in a decade”.
Another financier, MA Asset Management managing director Drew Bowie, also expects the number of retired projects to increase in the near term and only return when market sentiment improves.
“Project funders must adopt significant increases in the base rate of funding [cash rate or BBSY]increases in construction costs and late fees caused by supply chain and weather disruptions, write-downs assumed to offset any capital growth over the past 12-24 months and reduction in LVRs [loan-to-valuation ratios] due to a lower appetite for risk,” he says.
“Given the negative sentiment, it’s also likely there will be less availability of equity investors that developers can tap into to fill the void.”
Developers ‘afraid to push prices’
Charts today, from Charter Keck Cramer, show new apartment launches – a more current measure than development approvals and a ‘good indicator of developer sentiment’ – are below the 10-year average at Brisbane, Melbourne and Sydney.
Temlett says several apartment projects started or pre-sold with pre-COVID revenue are no longer feasible due to post-COVID construction costs. At the same time, many other projects with development approval are not proceeding because developers are “afraid to push prices given current market conditions.”
A similar survey in Perth by the Property Council in January questioned 21 leading apartment developers and found that 35% of their development-approved apartments and $2.2 billion of proposals not yet approved by development were pending “due to escalating prices eliminating margins and rendering currently unfeasible projects”.
Some developers pushed the prices. My Financial analysis his colleague Michael Bleby reports that Melbourne developer Kokoda Property is pushing ahead with its twin-tower Malvern Collective project despite the collapse of the original builder and consequent cost increase of 12%, as increased demand for empty nests had allowed a 5 percent to 6 percent price increase.
Nonetheless, says Temlett, the charts point to “severely undersupplied apartment markets” that “are likely to become even more undersupplied.”
Indeed, current housing shortages will soon become more acute – as experts have long warned.
Last June, in the Jobs and homes report to the Property Council, consultant Urbis announced a “serious crisis” in the Brisbane, Melbourne, Perth and Sydney apartment markets, with the supply of apartments in 2024 at just 20% of the 2018 level accompanied by the loss of 30,000 construction works.
The federal government’s National Housing Finance and Investment Corporation – soon to be transformed into Housing Australia – has predicted a shortage of flats over the next two to three years in its flagship Housing State of the Nation report published in February.
The company’s head of research, Hugh Hartigan, said: “This shortfall could be exacerbated given growing construction cost pressures and rising interest rates which are impacting the feasibility of the project. for that particular segment.
“If the supply outlook deteriorates, particularly for flats, this would suggest an even bigger housing gap in relation to Australia’s resuming population growth and the expected 1.7 million new households expected to form. over the next decade.”
Temlett says ‘as the mismatch between supply and demand continues to widen, prices will be forced to rise’ with plans for downsizing and investors likely to be best positioned to benefit from it.
“I’m actually positive on the apartment markets and I don’t think everything is pessimistic about the apartment markets in Sydney, Melbourne and Brisbane,” he says.
Let’s hope that the slowdown in construction work coupled with the sharp increase in the cost of renting also stimulates a renewed interest in social and affordable housing.
The give me shelter report, published last week by Housing All Australians and consultant SGS Economics & The planning demonstrates the great financial benefits – in health and crime prevention savings coupled with added value through improved employment and education – of a significant investment in social and affordable housing.
It also raises the possibility of funding such housing through subsidized tax credits or attractive grant programs for infrastructure-type institutional investments.
Let us seize the present opportunity to put this structure in place.