It’ll Take Gymnastics to Deliver in this Market, Sydney Warned

New pressures are facing a Sydney sector struggling to tackle the housing crisis. NSW zoning reforms and planning initiatives mean approvals are clearing the barrel, but new blockages are emerging when translating those into builds or sales. Acquisition and build costs are evolving, with greater divergence between products suitable and feasible for blue-collar growth zones or blue-ribbon downsizer hubs. Charter Keck Cramer executive director Richard Temlett told attendees at The Urban Developer Residential Developer Summit, held on Thursday May 7, that the industry was staring down “rising interest rates, building costs, cost of delivery crisis, housing crisis, war overseas, changes to taxes and the Federal Budget announced next week”. “What I’ve found is that these different changes actually impact different segments of the market quite differently… so it’s really important to always tie things back to both the risks and the opportunities,” Temlett said. Risk mitigation was emerging as a key theme, both for developers, and for international capital markets who see Sydney as a safe haven during uncertainty. While a downturn may be on the way, aligning property market and development cycles on a 7-10 year timeframe would be important for the success of developers’ pipelines. A demographic evolution would also influence housing fixes , Temlett said. The shift in the CGT and negative gearing reform debate between the 2019 election and the 2026-27 budget demonstrated that “we’ve got a very upset and angry millennial and Gen Z voting base now”. “They do not have the same opportunities as their parents have had. “Over the next decade, we’re going to get a lot more decisions at both the federal and state level designed to actually unlock the housing market..and you can already see that happening in the planning space, which is a good start”. Planning reforms can’t solve construction costs While the government introduced a construction reform bill this week , concerns over the cost of delivery crisis were borne out by comments from developers experiencing on-the-ground pressures, even before the impacts of the Iran war are fully manifested. Temlett said that rates of $22,000 to $25,000 were the floor for launching apartments in western Sydney, and that values below that risked margins falling below the 16 to 18 per cent sweet spot. Plenty of approvals are going through, thanks to planning reforms , “but the reality is, with where building costs are at right now, with where buyer capacity is right now, it’s highly unlikely that some of those projects are going to be activated in the short term,” Temlett said. Mitchell Brandtman partner Tass Assarapin told attendees that construction costs are “a real wide, fluid situation right now. It is literally changing on a day-by-day basis”. “It’s really a time when management of the costs is even more important. ▲ Close communication with builders and carefully-designed contracts will be essential to manage costs, Mitchell Brandtman partner Tass Assarapin said. “Whilst, at the same time there are increases, could there be material suppliers that are just taking the piss? Are there some that are just outright gouging?” A project-by-project granular analysis needs to be undertaken, with subdivisions particularly vulnerable to the price of diesel and rise and fall clauses, for example. But continuing uncertainty will make it difficult to understand impacts with precision. “Collaboration is key to make sure that everyone’s on the same page, when talking about a tight program with a minimal float,” Assarapin said. Metro Property Group chief executive Luke Hartman said that house and land products were targeting $1.2 million in Sydney, compared to $800,000 in Melbourne. Hartman said it was surprising that “South Australia is now heading towards that $900,000 mark, so more expensive than Melbourne, which is ridiculous”. ▲ Serviceability is holding back supply and pushing up costs for greenfield Sydney sites, Metro Property Group chief executive Luke Hartman said. “And Queensland is well and truly over that million dollar mark for equivalent packages in equivalent locations,” Hartman said. Apartments are also hard to stack up, although some developers are applying a secret sauce to find feasibility. Capio Property chief executive Mark Bainey said that his 118-unit project in Carlingford is 75 per cent sold while still achieving uplift (and potentially pursuing further yield). According to Bainey, Capio is delivering apartments at under $14,500 per square metre. “A lot of it comes down to what you pay for the land…you need those uplifts to make these jobs stack at the moment. And also having good trade relationships is important; looking after your head contractor and really driving the sales,” Bainey said. FYVE head of strategy and acquisitions Aris Dimos said that he had “just finished a project in Gosford, which is interesting because we deliver at $470,000 per box—don’t ask me how—and we’re selling to first home buyers at $650,000 or $750,000 per unit”. FYVE is about to begin construction on a project “that will be probably $14,000 per square metre,” Dimos said. ▲ FYVE’s Niche at Miranda will soon get under way with a target cost of $14,000 per square metre. “We’re lucky that we’ve got delivery capability. And you’ve got to do some gymnastics to be able to deliver in those sorts of markets, to be able to bring stock on at the price you need to to get sales away.” Acquisition is also emerging as a key challenge, with planning reforms and tales of supersites pushing vendor expectations upwards. “You’ve got landowners that have got this massive windfall, and they’re trying to capture as much of it as possible down to the last cent,” Bainey said. Supersites are not necessarily being marketed by “sophisticated parties who are developers or asset managers or fund managers. They’re all mostly mums and dads in the LMR zone.” Product strategy in sharp focus Laver Residential partner Denis Vertzayias said that “the biggest risk isn’t just whether you can deliver the project, it’s whether the market will actually absorb it the way that you expected it to”. “We don’t want to just blame the market and confuse slower sales with weaker demand, because we still see buyers every day,” Vertzayias said. “Most underperforming projects are showing a very similar pattern. There is a disconnection between the buyer, the product, and the price…. for us, the buyer defines the project, not the other way around. “Some people often talk about the market as if it’s one pool of demand. In reality, it’s very fragmented, and those fragments have become very different.” ▲ Laver’s projects include Conquest’s $106-million, 150-home proposal at 100 Edinburgh Road at Castlecrag. Buyer demographics can influence all aspects of the project, Vertzayias said. Downsizers tend to transact close to a project’s completion, whereas one downsizer-focused Laver project required 50 per cent presale commitment from its funder. Temlett said data and conversations showed there was more depth to the high-end market than might be expected. Lendlease was achieving values at $150,000 per square metre, and Mirvac $70,000, for high-end projects in the inner city, with 95 per cent of buyers local rather than international. Bridgestone founder Grace Wu said that high values can be underpinned by a good location, but that “location can never repeat again”. “I don’t think that every developer will be sitting here having the same location as Mirvac. So that’s why we need to deliver product differentiation.” ▲ Bainey said the delivery costs of townhouses and apartments are similar. Understanding location and community can help deliver the right product. Bainey said that “one thing I particularly do before I buy a site is go to the local shopping centre, sit in the food court, and look at who’s there”. “That gives you an indication of who your buyers will be.” “We did 16 townhouses in Lane Cove in a project called Treetops, and every single one of them had a lift in it, and they flew. We sold them in three weeks. According to Bainey, downsizers are hungry for infill townhouses, “and they are particularly driven by quality of finish”. “And, sounds silly, but by something like a lift.”

It’ll Take Gymnastics to Deliver in this Market, Sydney Warned

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