Let’s hope the downturn in construction work, coupled with the sharp increase in the cost of renting, also spur a renewed focus on social and affordable housing.
The beachfront Alegria apartment project on the Gold Coast, stalled despite presales, is a symbol of the rising crisis in the housing industry.
The Palm Beach project was caught by the collapse of builder Condev then stymied by new building prices that would have turned the success of its presales into a crippling loss for the developer.
The collapse of builder Condev has stymied some developments.
It is one of an increasing number of “shovel-ready” housing projects that are being abandoned in response to soaring construction costs, jumping interest rates, uncertain end values and a pullback in development finance.
The downturn in the pipeline foreshadows the end of the “profitless” housing construction boom within two years.
At that time, the demand for tradies will ease and – providing immigration restarts and the economy avoids recession – new rental housing will become even tighter than it is today.
But every challenge has its opportunities. Richard Temlett, associate director of property advisory practice Charter Keck Cramer, says that in some markets, the prices of apartments can be raised to cover the increased costs of construction and finance.
Sydney developer Coronation Property took such an opportunity this week, buying a large south Sydney site from Chinese developer Greenland and its partner, Golden Horse, at a price – $315 million – which allows the sellers to exit with a profit.
Coronation will probably develop some build-to-rent apartments on the site, a move that Guillaume Volz, a national director of agency Colliers, says reflects the increased development interest in Sydney’s BTR sector, spurred by the sharp rise in rents in the past 12 months.
For me, the opportunity, if it can be seized, is the chance to address the chronic shortage of social and affordable housing. More of that later.
A month ago, in this column, Michael Corcoran, a director of non-bank lender Solido and former national president of the Urban Development Institute of Australia, warned that the housing industry could be looking at “the biggest credit squeeze for construction finance in a decade”.
Another financier, MA Asset Management managing director Drew Bowie, similarly expects the number of projects being withdrawn to increase in the short term and not return until market sentiment improves.
“Project financiers are needing to adopt significant increases to the base rate of funding [cash rate or BBSY], increases to construction costs and delay allowances caused by supply chain and weather disruptions, assumed value declines to negate any capital growth over the last 12 to 24 months and a reduction of LVRs [loan-to-valuation ratios] as a consequence of lower risk appetite,” he says.
“Given the negative sentiment, there is also likely to be less availability of equity investors for developers to tap into to fill the void.”
Today’s charts, from Charter Keck Cramer, show that new apartment launches – a metric that is more current than development approvals and a “good proxy for developer sentiment” – are below the 10-year average in Brisbane, Melbourne and Sydney.
Temlett says several apartment projects launched, or pre-sold, on pre-COVID revenues are no longer feasible due to post-COVID construction costs. At the same time, numerous other projects that have development approval are not being launched because developers are “afraid to push prices given current market conditions”.
A similar survey in Perth by the Property Council in January polled 21 leading apartment developers and found that 35 per cent of their development-approved apartments, and $2.2 billion of proposals not yet development approved, were on hold “due to price escalation eliminating margins and making projects not currently feasible”.
Some developers have pushed prices. My Financial Review colleague Michael Bleby reports that Melbourne developer Kokoda Property is proceeding with its two-tower Malvern Collective project despite the collapse of the initial builder, and, in consequence, a 12 per cent cost increase, because the increased demand from empty nesters had allowed a 5 per cent to 6 per cent rise in prices.
An artist’s render of Kokoda’s $260 million Malvern Collective project in Melbourne’s eastern suburbs.
Nevetheless, Temlett says, the graphs point to “severely undersupplied apartment markets” which are “likely to become even more undersupplied”.
In effect, today’s accommodation shortages will soon become more acute – as experts have long warned.
Last June, in the Jobs and Homes report to the Property Council, consultant Urbis foreshadowed a “severe crunch” coming to the apartment markets of Brisbane, Melbourne, Perth and Sydney, with the 2024 apartment supply down to just 20 per cent of the 2018 level accompanied by the loss of 30,000 construction jobs.
The federal government’s National Housing Finance and Investment Corporation – soon to be upgraded into Housing Australia – predicted a shortfall of apartments over the next two to three years in its flagship State of the Nation’s Housing report released in February.
The corporation’s head of research, Hugh Hartigan, says: “This shortfall could be exacerbated given the increasing building cost pressures and rising interest rates impacting project feasibility for this particular segment.
“If the outlook for supply deteriorates, particularly for apartments, it would suggest an even greater shortfall of homes relative to Australia’s recovering population growth and the expected 1.7 million new households that are likely to form over the coming decade.”
Temlett says that “as the mismatch between supply and demand continues to build, prices will be forced to increase”, with projects aimed at downsizers and investors likely to be best placed to benefit.
“I am actually positive about the apartment markets and I don’t believe it’s all doom and gloom in the apartment markets across Sydney, Melbourne and Brisbane,” he says.
Hopefully, the downturn in construction work coupled with the sharp increase in the cost of renting also spurs a renewed focus on social and affordable housing.
The Give Me Shelter report, released last week by Housing All Australians and consultant SGS Economics & Planning, demonstrates the large financial benefits – in savings on health and crime prevention coupled with the value-adds through enhanced employment and education – of a big investment in social and affordable housing.
It also raises the possibility of funding such housing through subsidised tax credit or grant schemes attractive to infrastructure-style institutional investment.
Let’s seize the current opportunity to get that structure right.
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