THE PROPERTY DEVELOPMENT REVIEW
What are the fundamentals investors are looking for prior to deploying capital in 2024 & which asset classes do you anticipate will drive transaction activity. The fundamentals for investors are cash flow and capital growth and we don’t see these fundamentals shifting in 2024. We see the sectors of growth being residential (build to sell, build to rent/multi-family and social housing), hotels & student accommodation with net overseas migration returning to pre- COVID levels and international students nearing 1,000,000. Alternative asset classes will continue to be favoured including health & medical, education with the emerging asset classes of land lease communities and self-storage so we expect to see a greater volume of transactions across these markets. And then from a developer’s perspective, what opportunities exist in your market & how should they be positioning themselves to capitalise on these opportunities. This is an interesting question which derives a number of responses to. Firstly, we see value and extended settlements as two opportunities for developers. The first is derived through a market need to divest as development site landowners seek to reallocate their capital into ‘cash flow’ generating investments. With the Victorian State Government implementing tax changes on unimproved residential land that has been undeveloped for more than five years which will commence at the beginning of 2025, we foresee an opportunity here for developers to acquire these holdings on favourable terms. As some developers need to reweight their portfolios, this will provide opportunities for active groups to acquire these sites for a more immediate pipeline. Adaptive re-use of existing commercial office buildings for residential development will also be a focus as developers can effectively save on construction costs. For settlements, owners are more open to considering longer settlement periods of 12 months – 2 years than historical markets with developers offering greater deposit payment and/ or a higher price to compensate for this time. This extended time assists developers to off-set planning & pre-sales risk. Based on your discussions with vendors / potential vendors, how are they observing market dynamics in your region & to what extent do you expect an increased volume of properties coming to market over the course of the year ahead. Vendors are always curious for information around market sentiment and outlook and “when is the right time to sell”. Selling really is a factor of vendor circumstance and gets back to the question of “why do you want to sell?”. Many of our vendors are selling due to generational changes in the control of assets, a reallocation of capital into better performing assets, reweighting portfolios, increasing land tax, tenant vacancy etc. Most of our vendors are aware that cost of debt increases, and construction cost escalation have provided challenges to developers over the past 18 months but optimistic that 2024 will bring stability on both fronts. With this, we anticipate an increased volume of properties
coming to market in 2024 as vendors feel a greater level of confidence in achieving their desired price outcomes. It’s widely forecast that interest rates have peaked or are near their peak - what impact will this rate stabilisation have on the commercial property sector. First and foremost, economists are aligned that interest rates have peaked, and we are now in a stable environment. The RBA have been clear with their position of bringing inflation in line with their 2-3% goal and providing the downward trend for inflation continues there is an expectation that interest rates will be reduced at some point in 2024. Whether this is one (ANZ and NAB predictions), two (Westpac) or three cuts (CBA), we will leave this up to the economists to project, but with stability and projections of cuts we anticipate this will bring confidence to the market for both vendors and buyers in their decision making. In terms of cap-rates, where do you anticipate these will land in 2024 relative to 2023. There is an obvious nexus between the cost of capital and cap rates with the added layer of market fundamentals & asset performance. We anticipate a stablisation in cap rates until such time as the RBA determines to cut interest rates. Whilst there is much speculation as to when this will occur, when it does occur, history tells us that market confidence will heighten contributing to a greater number of participants and therefore cap rates will inevitably start to tighten. One of the defining themes over recent years has been the influx of private capital targeted into commercial real estate assets - how have you observed this thematic & what’s driving this investment relative to investment in other asset classes. Private capital has become the preferred ‘lender of choice’ for many investors and developers as the major banks increase their hurdles for borrowers. Whilst the costs are traditionally higher, the convenience to access funding is the drawcard for borrowers not to mention the greater level of choice of lenders. We are also seeing the emergence of Superannuation Funds stepping up their private lending with Australian Super and CBUS wanting to increase their exposure to rival the major banks. In additional, global pension funds such as GIC, CPPIB, Ivanhoe Cambridge, ADIA and ADIC along with Private Equity groups Blackstone, Brookfield and KKR are all eying off Australia’s real estate sector in 2024. In closing, are there any other investment trends or market themes that you’re analysing that are likely to have a material impact on values in 2024. One of the sleeping giants of change in Victoria’s property sector will be the State Government’s sweeping change to stamp duty which will come into place from the 1st July this year. This change will enable the delay of this once upfront payment to be apportioned over a ten (10) year period. We expect this change to be a positive driver of increased transaction volumes, with some level of price escalation as buyers ‘overlook’ the total payment contribution. You combine this with projected interest rate cuts and Victoria’s property market in 2024 will start to engender strength & prosperity quite fittingly in the ‘Year of the Dragon’.
February /March 2024 – 49
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