THE PROPERTY DEVELOPMENT REVIEW
over recent years - how have you observed this trend & is there an opportunity for developers to pursue BTR projects from a residential land perspective? The build-to-rent (BTR) sector has experienced significant growth particularly on the East Coast of Australia which has been the primary focus for much of the overseas capital is driving the sector. BTR has and will continue to disrupt the traditional Build to Sell (BtS) sector. Locally, a number of traditional BTS developers have now begun to realign their business models to support BtR style projects; which requires a very different capital structure to the ones they have been used to. The development economics for most apartment projects (outside premium suburbs) are still extremely challenging as construction cost escalation has continued to outpace growth in apartment values. This has caused some developers to pivot plans for secondary sites to offer Social and Affordable housing in order to target Housing Australia Future Fund (HAFF) and National Housing Accord Facility (NHAF) incentives from the federal Government to try and fill the bridge the funding gap. Looking forwards, the overseas capital driving BTR activity on the East Coast will eventually find its way West; however, this could still be 2-3 years away whilst existing BTR pipeline projects are delivered. For now, developers will continue to weigh up their options and continue to monitor construction cost vs price balance. Similarly, land-lease communities are another asset class through which significant capital has been deployed recently, particularly from large-scale residential development groups - how have you observed this evolution and do you anticipate further growth in these sorts of deals? The evolution of land-lease communities has been notable, with significant capital being deployed by large-scale residential development groups. These communities offer a viable solution to the growing need for affordable housing, providing residents with an attractive option for homeownership without the high costs associated with land purchase. Developers have recognised the potential for stable, long-term returns and lower entry barriers, making land-lease communities an increasingly appealing investment. The appeal is further bolstered by demographic trends, particularly among downsizing retirees seeking affordable and low maintenance living options. Given these factors, I anticipate further growth in land-lease community deals. The combination of strong demand, attractive investment returns, and the ability to address housing affordability issues positions this asset class for continued expansion. Developers are likely to continue exploring and investing in these communities as a strategic component of their portfolios. It is important to note that land-lease community development requires a different skill set to traditional residential development as it involves ongoing management and operations for a long period of time. As a result developers are very invested in the quality of the community created. 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 next six or so months?
Many owners are now becoming bullish with prices, concerned they might leave some money on the table if they sell too early. Having likely held out for some time waiting for the market to improve, they see that time has finally arrived. As a result, buyers are likely to have to pay more than they’d prefer, as the market is expected to continue its upward trajectory for the rest of the year at a minimum. This bullish sentiment among vendors is driven by strong market dynamics, including high demand and low supply, which are pushing prices up. Consequently, I expect an increased volume of properties coming to market over the next six months. Vendors who have been waiting for optimal conditions are now more motivated to sell, anticipating favourable prices. This trend is likely to bring more properties into the market, offering buyers a broader selection, albeit at higher prices due to the prevailing market conditions. One of the defining themes over recent years has been the influx of private capital & foreign capital targeted toward commercial real estate assets - how have you observed this thematic & what’s driving this investment with reference to the residential land market? Interest in residential land is broad, encompassing the usual local developers as well as a resurgence of Asian investors who are back in the market after a long absence. Additionally, investment from eastern states in house and land packages has been significant. This influx of private and foreign capital is driven by several key factors. Firstly, residential land offers strong returns due to ongoing high demand and limited supply, making it an attractive investment. Foreign investors, particularly from Asia, are drawn to the stability and growth potential of the Australian market. The recent return of these investors highlights their confidence in the market’s resilience and long-term prospects. Moreover, investment houses from eastern states are actively pursuing opportunities in the residential land market, seeking to capitalise on favourable market conditions and diversify their portfolios. This diverse interest underscores the robust appeal of residential land as a secure and profitable asset class, driving continued investment and development in this sector. 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? Looking ahead to 2024, it appears that the prevailing trend of rampant demand in the real estate market is set to persist for the foreseeable future. This sustained demand is being driven by a combination of factors, including the resumption of pre-sales for the first time in approximately a decade. However, developers are exhibiting reluctance, fearing they may undervalue their properties in a rapidly appreciating market. The market remains heavily influenced by the ongoing popularity of house and land packages, bolstered by immigration trends and strong demand from local owner- occupiers. The prevailing sentiment suggests that virtually any property brought to market will find eager buyers, highlighting the enduring strength of the residential real estate sector. As we navigate through 2024, it will be crucial for investors and developers to remain vigilant and adaptable in response to evolving market dynamics, ensuring they can capitalize on emerging opportunities while mitigating potential risks.
June / July 2024 – 121
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