THE PROPERTY DEVELOPMENT REVIEW
are under pressure to deploy this capital now that debt markets have stabilised. “The market now has greater clarity around where pricing sits, however, the unwinding of book values have further to unwind in order to meet current pricing. Transaction volumes have increased in Q2 2024 and as we progress into H2 2024, further momentum is expected to build as buyers sitting on the fence re-enter the market. “The current environment provides the opportunity for quality managers to showcase their capital management skills, which will assist in unlocking capital partnerships over the next 12 months” said Mr Hall. 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? Mr Curtis said “Private capital and foreign capital have long invested in Australian commercial real estate. In recent years, we have seen reasonable growth particularly into Alternative real estate sectors such as Retirement (including land lease), BTR, Student Accommodation and Healthcare. “Residential land investment is quite specialised and typically only a small number of well capitalised public REITS invest in this market at scale. One emerging sector in the residential landscape is Specialist Disability Accommodation. SDA is residential housing designed for people with functional impairment or very high support needs. SDA homes allow residents to live more independently and have accessible feature’s purpose built for the residents. This sector is growing in size and is becoming more of a focus for private capital and institutional managers.” Mr Hall said Private capital has become more active in the L&I market, however, the key theme from these buyers has been they are now playing in price brackets that have been historically dominated by institutional groups. “While private capital has been active at certain points in past cycles, particularly post-GFC, our view is that they will account for a higher share of deal activity going forward. This increased activity will stem from a shift in appetite from private investors who had historically invested in other commercial sectors but are now reweighing to L&I at a similar price point. “Offshore capital buying directly has increased in recent years; however, in most cases, when domestic groups acquire, they are often backed by offshore capital sources and includes Gateway Capital with Cadillac Fairview, Centennial with Brookfield and Pittwater Industrial with Washington State Investment Board. For this reason, they represent the dominant share of capital looking to be placed in the sector. Offshore capital is increasingly seeking more direct control over their investments, and a further shift in pooled wholesale funds to mandates and co-owner joint ventures is expected over the next 12 months” said Mr Hall. 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? Mr Curtis believes Valuations across the board remain very topical. “As previously discussed, uncertainty in relation to interest rates and limited transactional evidence mean that there is a spread between buyer and seller expectations across most sectors. The listed REIT market is trading at a reasonable discount to net asset backing (it varies by REIT, and not all REITs are trading at a discount), so this is an indication of current investor sentiment. “We will receive valuation evidence during the listed REIT reporting season which kicks off in August 2024. This will be an interesting point in time to reflect on the status of the market” said Mr Curtis.
“Notwithstanding this, challenges remain, and they include high construction and financing costs, which have affected the feasibility of select projects and resulted in repeated delays in a number of instances. “The strong rental growth being experienced across most major markets however is assisting in bridging the gap to make projects more feasible. Finding land in core markets is difficult given the lack of opportunities being offered to the market” said Mr Hall. 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? Mr Curtis said Land Lease is another emerging sector, although it does have some early adopters who have paved the way. This sector continues to attract capital, as it is seen as a less risky way to tap into the general undersupply of housing. For a developer, there is an ability to make a reasonable development profit through producing lots and manufactured homes for sale, and then collecting land lease payments from the buyer of the home. In some instances the home owner qualifies for government rental assistance, providing extra security to the operator. Mr Hall said in 2023, the MHE sector witnessed its strongest year in terms of investment volumes, with the largest sale on record (Serenitas) to occur across the Australian market. “The increase in investment activity underscores the land lease community model and also signals its long-term return potential. “Institutional investors are attracted to the business model, which presents opportunities for both strong development profits (20%+) and ensures a steady stream of rental income, while retaining ownership of the land. “The investment case is strengthened by shorter development periods for manufactured houses (compared to urban living product) and minimal post-completion capital expenditures, given that residents own their homes. “However, like others, this sector is heavily reliant upon planning processes and infrastructure development. “Developers who cannot obtain approvals or even predict the timing on an approval is forcing many to halt plans on land speculation/ development as the holding costs if delayed will significantly reduce project profitability” said Mr Hall. 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? According to Mr Curtis, as a general comment, current economic conditions mean that it is difficult to see a lot of activity in the commercial real estate market generally over the next 6 months. “Until we have some certainty on inflation and interest rates, it is difficult for buyers and sellers to agree on appropriate pricing. Most buyers remain cashed up but cautious, and most vendors are not yet under pressure to sell their assets. “Once the market feels comfortable that interest rates have peaked, and that we may be moving back towards an easing bias, buyers will feel more confident in their investing decisions and will become more active. Sellers will also feel more motivated as they will be relieved to have not sold at the bottom of the cycle. “There are of course some transactions still occurring, typically smaller assets in off market campaigns, as some vendors do require liquidity to fund redemptions or reduce gearing in the current market, but YTD transaction volumes are significantly down” said Mr Curtis. Mr Hall said “While institutional capital was very selective in 2023, the amount of dry powder on the sidelines is significant, and groups
June / July 2024 – 29
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