THE PROPERTY DEVELOPMENT REVIEW
The year wasn’t without its challenges; namely a volatile interest rate environment, building cost pressures, supply chain issues to name a few, but there appears to be some relief in sight. What is your outlook for 2024? Unfortunately, there isn’t any clear relief in sight, and the outlook for 2024 is most likely a continuation of 2023, with the various challenges that the different sectors have faced this year likely to remain into the new year. The October inflation numbers coming out of the US and UK are positive and set us on the right path to stability, possibly even relief, however, it ultimately remains unclear where we are at in the interest rate cycle, and it is hard to see the RBA making any knee jerk reactions. We are starting to see more stability in the cost escalation of materials, but overall construction costs remain at unprecedented levels and continue to have an impact on land values. One of the current challenges in the construction industry, that is having a significant impact on costs and construction programs, is the cost and availability of sub- contractors. The State Government needs to continue to work on payment protection strategies for builders and sub- contractors to balance the risk, which will hopefully provide an ease on costs and timing. An underlying challenge outside of the well documented headwinds, is the equity returns that groups are now required to hit to satisfy capital investment. Equity IRR hurdles will have an impact on deal structures, with requirement for longer settlement periods and staged payment models. What’s more, one of the most unfortunate and unnecessary constraints on development projects continues to be the planning system in NSW. The time and cost implications incurred during the DA process, has a substantial impact on the feasibility of development projects. The State Government is working hard to solve this major issue and are hopefully able to make inroads into providing a more efficient and fairer pathway to attaining DA approvals. In summary, it is unlikely that land values increase in 2024, however, as investors, developers and funders recalibrate and reset strategies, we do anticipate more deal flow. Which asset classes do you anticipate leading the charge in 2024? It is anticipated that the residential/living sectors will continue to lead the charge in 2024. The residential development, build- to-rent/co-living, PBSA and aged care sectors will continue to be more resilient as the pressure from NSW’s population growth will drive demand. Investors will continue to redirect a weight of their capital into these sectors, providing a stable platform for development groups to unlock projects.
A considerable development transaction was the sale of 189 Kent Street, Sydney for approximately $200m. Conducted by CBRE, the property was sold with DA approval for the development of a luxury residential building, to Gurner. An interesting sale from a strategy perspective and one that hasn’t been seen in a core CBD location for some time, was the sale of 39 York Street, Sydney. Negotiated by JLL, the property was sold for $52.5m, to Invictus Developments, with the strategy of retrofitting the c-grade office building into a luxury hotel. One of the more in-demand properties that exchanged immediately following a 4-week sale campaign and subsequently settled 2 weeks later, was 42-48 O’Dea Avenue, Waterloo. The sale, conducted by Colliers, was one of the few unconditional BTR deals in Sydney in 2023. The property was bought by Altis/Aware Super for $121m. Defying market conditions, the sale of 14-16 Cottonwood Crescent, Macquarie Park, by Savills showed the appeal of a market with excellent retail, education, and transport amenity. The sale represented a GFA rate of $3,600+/sqm, which was substantial considering resent off-the-plan sales have been in the low-teens. Legacy Property were the vendors. Receivers/administrators took control of several quality development sites in 2023. A notable and swift transaction, given the scale and location of the project, was the sale of The Showground Collection in Castle Hill, by Knight Frank. Bought by Meriton for approximately $50m, the sale was one of several in Hill’s District, further supporting the positive impact of the Sydney Metro, Sydney’s most significant transport infrastructure project. Who were the most active buyer and seller groups in 2023? Was there a depth of offshore investment and from which countries did you see most investment flow? Residential builder developers were probably the most ‘in charge’ buyers in the development sector throughout 2023, particularly for larger scale residential projects. Well capitalized developers also played a major role in 2023, however, this was mostly concentrated towards boutique high-end residential projects. BTR/Co-living groups remained very active throughout the year and were able to unlock some interesting opportunities, but still struggled to enter the Sydney market as land prices and the cost of construction continue to be a significant barrier for entry. We saw minimal direct development deals from offshore groups, however, there was continued investment through debt and equity deals with established development groups. The main capital inflow came from Singapore, Japan, Hong Kong and the US.
November / December 2023 – 23
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