Build-to-rent is coming … and will be here to stay. The market will be challenging next year, but for those who continue with projects, there will be increased demand from 2021 onwards. Pre-sales continue to lag, yet site prices remain high.

These are just some of the insights shared in a recent Developer Lunch, hosted by Qualitas in Sydney. The discussion among mid-to-large developers suggested there are challenges ahead in 2020, but the long-term outlook remains positive overall.

Below is a snapshot of what’s on the minds of developers, and the outlook for the year ahead.

Land Prices / Development Sites

  • Site acquisitions are difficult in residential. There’s no such thing as a bargain anymore, and developers must work hard to find a suitable site. Although the market among end-purchasers has cooled, vendor expectations have not followed. Many vendors are happy to sit on their hands and wait for the next cycle, rather than rush a sale.
  • Small boutique apartments sites are performing the strongest. Many developers are using the strategy to ride out the cycle, with the exception of the very large developers whose business models rely on delivering large projects.

Construction

  • Building approvals have slowed significantly, particularly in the residential space. Builders are in for a tough time and jobs will likely be lost (a sentiment echoed by recent economic indicators). It is a developer’s market in this regard as contractors will have to be competitive to win work and keep their trades.
  • The market is expected to continue to slow throughout 2020 and then pick up again in 2021.
  • The residential crane index is clearly declining, even as commercial cranes are increasing. This reflects a divergence in the market between residential and commercial property prices and activity.

Pre-sales & Buyer Demand

  • In the middle to outer ring suburbs of Sydney pre-sales are still lagging. In the north west, developers have found that furnishing apartments has resulted in sales, otherwise generally sales in that corridor are very slow. They have less flexibility in the outer ring areas to tinker with pricing in order to generate a sale, and so the only option is to wait for the market to pick up or interest rates to drop again – which is considered likely.
  • The experience in the inner ring suburbs of Sydney has been different. Sales have noticeably picked up over the last three months, particularly for completed projects where buyers can touch and feel the product. The election result and subsequent interest rate drops have spurred this momentum.
  • It remains to be seen whether this is a temporary injection of adrenaline to the market or whether things will gradually pick up from here. Most attendees agreed that the next year will be challenging, but 2021 will see a surge of new stock come back to market and the demand will be there to meet it.
  • Queensland is seen to be well positioned in the cycle at the moment compared to NSW and VIC.

Builder quality

  • The various defect issues that have been widely publicised have changed the relationship between buyer and builder. Buyers are more cautious and builders have been brought to a more client facing role.
  • Purchasers are much more knowledgeable about what to look out for than they used to be.
  • In a rising market, some sub-par developers/builders got away with building poor product. These groups are now closing down, as the market sees a flight to quality.

Build-to-rent

  • There was clear agreement among participants that BTR is coming and will become a permanent fixture of the market.
  • Australia’s BTR market is expected to be modelled off of the UK rather than the US.
  • The GST treatment of such developments is not expected to change. It’s more likely that land tax will be addressed, which is the biggest impediment to feasibility.
  • BTR yields should be compared to commercial yields, as they are less risky. Australian valuers are still getting their heads around how to value this new asset class.
  • Projects commencing in Melbourne because land prices make more sense. Sydney is difficult because of the high cost of land.
  • Key to getting BTR right is the apartment mix, including more 1 beds and studios. People are more likely to pay less rent for a smaller room and utilise the large amount of common facilities that are on offer. As the developer is ultimately the owner, they also need to focus on durability in choosing materials.

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