Apartment developers chart a market reset

Source: Business News

Apartment developers chart a market reset
Darren Pateman says Finbar Group and its partners are chipping in more equity into apartment projects. Photo: Matt Jelonek

APARTMENT developers are finding ways to bring projects to the market but inflationary pressures continue to hamper the sector’s growth.

High construction costs, a shortage of skilled trades, and buyer uncertainty brought about by successive interest rate rises, have all resulted in a slowing of apartment delivery in the past 12 months.

Urbis research shows that just two apartment projects, comprising 143 units, have started construction in Perth this year, compared with 13 projects, with 1,032 units, in 2022.

These figures marked a decrease from 24 apartment projects under construction in 2021 and 19 the year before, representing 1,942 and 1,611 dwellings respectively.

As Urbis director property economics and market research David Cresp pointed out, input costs, labour shortages and regulatory shifts have led to this drop.

He said national building code revisions and an increased push for higher-quality design were generally positive changes, but added costs to developments.

“Those sort of influences on top of the builder construction costs are really having a big impact, the feasibility for developers for apartments is just really challenging,” Mr Cresp told Business News.

“We’ve also got an environment that not only has the building cost increases [but] a limited number of builders who are really wanting to engage with developers on an apartment building.”

Mr Cresp said successive interest rate rises had deterred apartment buyers, particularly for off-the-plan purchases.

This year, 31 per cent of apartment sales have been off-the-plan, as opposed to 34 per cent last year.

That differs from 26 per cent in 2021 and 30 per cent the year prior.

This time last year, there were an estimated 6,000 Perth apartments with development approvals that were placed on hold, according to the Property Council.

This equated to 50 per cent of apartment projects at the time.

Property Council of Australia WA Division executive director Sandra Brewer said while the group had not crunched the numbers, the situation had deteriorated further during 2023.

“[This] is deeply concerning to everyone involved in the industry, and for WA’s outlook for housing supply,” she told Business News.

“I think for the first time, in a long time, we’re going to see very low forecasts going forward of dwelling commencements and completions in the next couple of years.

“With growing migration, that is concerning, because the likely result is increasing house prices [and] deteriorating affordability.”

The extent of the supply issue in apartments was highlighted in a recent CBRE study, which showed a significant mismatch between apartment supply and demand nationally.

In Perth’s CBD alone, the real estate group expects a shortfall of 410 apartments by 2024, and a further tightening of rental vacancy rates by about 0.2 per cent over the next two years.

This is expected to further amplify the state’s housing shortage, but drive growth in rental yields.

On the ground

For developers, this under supply in an environment where there is already a housing shortage points to a strong demand for apartments.

Finbar Group is among the developers continuing to roll out projects despite challenging conditions.

The ASX-listed company has $680 million of projects under construction, including South Perth’s Civic Heart, which has blown out to $428 million.

As the project was launched in late 2020, its end value was estimated at $408 million.

Finbar Group managing director Darren Pateman said sales had slowed on Civic Heart, due for completion in mid-2024 but that had worked in the company’s favour.

“We have still got half of Civic Heart to sell, but we are doing that on purpose,” he told Business News.

“We are moving the price up to protect margin, because building costs have been [increasing], and when we’ve got a finished product, when people can stand on level 30 and look at the view, we will get a better price.

“Really, it’s our equity and profit at risk with these projects.”

As Mr Cresp explained, apartment projects were attracting higher prices to offset rising inputs.

“Developments that used to be able to sell for an average of $10,000 a square metre are now needing $13,000 per square metre to make them work,” he said.

“To make an apartment building stack up today, you have to get record prices.

Edge Visionary Living’s Crawley project Broadway on the Bay is set to launch this month. Image: Edge Visionary Living

“In more premium areas, we’ve already seen median house prices increase significantly, and we’re a long way behind where the eastern states are in housing prices, so there is capacity for the market to pay more.”

Speaking at a recent Property Council event, PRD Real Estate Perth chief executive Angus Murray said developers launching projects now were at an advantage over those launching two years ago.

“[Those developers] can launch at today’s price rather than having the best half of their stock sold at yesterday’s price,” he said.

“We saw the developers all lift their prices six months ago, and what we’re now seeing is increased sales volumes at the higher prices, which is really quite encouraging.”

The difficulty in making apartment projects stack up in the current environment was highlighted earlier this year when Parcel Property wound up its apartment arm.

At the time, the ABN group company said the decision was “essential to ensure the long-term success of Parcel Property”, which will just focus on its land projects.

Mr Pateman said as soon as buyers got some certainty around interest rates, apartment sales would ramp up.

“There are very high enquiry levels, but people just aren’t making decisions until they get some interest rate stability,” he said.

“That’s when we think the activation will start, and quite rapidly, because enquiry levels haven’t changed.”

Finbar Group also has the $106 million Rivervale project The Point, and $146 million Applecross project Aurora under construction.

Its next major project in line for builder partner Hanssen to start building is 331-apartment project Garden Towers in East Perth.

Mr Pateman said Finbar had adapted its business model in recent years, by chipping in more equity into projects and relying less on presales.

“Finbar and our partners have put a lot of equity into these projects, so the gearing is quite a bit lower than it would typically be,” he said.

“In a normalised market, about 60 per cent of the project would be 100 per cent of the debt, and we’d be going to one of the major banks to fund roughly 70 per cent of the development cost.”

Erben managing director Luke Reinecke said the South Perth developer decided to delay the launch of its $80 million Florin development in Jolimont, to avoid getting caught out by escalating build costs.

“When we saw the costs were really running, we … decided to hold off in launching it,” he said.

“We went down the path of locking in the construction costs and the contract before we even took it to market, so we had certainty on construction pricing before we launched that project.”

Erben also has a $145 million Mount Pleasant apartment development, Cirque Duet, under construction, and plans to launch its Port Coogee development later this year.

Mr Reinecke said developers needed to collaborate with builders at an earlier stage than in the past and be more willing to take on risk.

“The approach to getting to contract has changed,” he explained.

“The process we went through with Cirque Duet is a good example of that, where we worked with Icon Constructions for more than 12 months getting it to a point where the risk was sufficiently mitigated, and we could feasibly make the project work from a construction pricing perspective.

“That process [with a builder] up front has become a lot more intensive and a lot longer, and that comes down to sharing risk and trying to mitigate market risks in a collaborative manner.”

Edge Visionary Living, which expects to bring four projects to construction in the final quarter of this year, is part way through building a three-stage apartment project in Applecross, Riviere Residences.

Edge Visionary Living managing director Gavin Hawkins told Business News the company had shifted its strategy in recent years to build its own resources in construction.

Gavin Hawkins says Edge Visionary Living expects to bring four projects to construction this year. Photo: David Henry

“In the last couple of years, we have recruited five ex-tier one builders into our development team,” he said.

“That was a deliberate strategy, because our design is important, and the way we put [our projects] together is really important.

“[We have] a highly skilled team internally; most developers rely on some of that being external.”

Edge expects to bring its Crawley project Broadway on the Bay to construction later this year, along with Scarborough’s The Dunes, Fremantle’s Muse apartments and South Perth’s Lumiere.

Mr Hawkins said Built was lined up to construct the $120 million Lumiere project, but the builder pulled out of apartments.

Blackburne’s $380 million The Grove, on the border of Peppermint Grove, Cottesloe and Claremont, and its $75 million East Village in Karrinyup are both due for completion this summer.

Blackburne managing director Paul Blackburne told Business News accessing high-quality development sites was proving difficult.

“As we drive around the areas that we know people want to live, the are many parcels of land which are council owned, controlled by public authorities or managed by the state government,” he said.

“Unlocking those pieces of land will not only assist with providing more supply, but help to revitalise the local areas, encourage more investment and activate inner suburbs.

“DevelopmentWA is doing a great job, but the demand is still difficult to meet.”

Policy response

The state government’s extension of its off-the-plan stamp duty rebate for apartments was welcome news for developers but some say the government could do more.

The rebate, which includes a 100 per cent concession for apartments up to $650,000 and tapers to a 50 per cent rebate for apartments valued at $750,000, is available for buyers of apartments before they reach construction.

The scheme was extended at the recent state budget, after its initial rollout was well received.

Mr Pateman said the policy would be better utilised if it applied to apartments under construction, as well as those in the presales stage.

“It’s actually a disincentive to start [a project],” Mr Pateman said.

“As soon as you do that your sales volume shrinks, because your buyers are no longer benefiting from the rebate, so if that extended to under construction, that would make the difference, because that would actually motivate developers to turn the soil and get started.”

The foreign buyers surcharge remains a point of contention for developers, with many arguing it not only hampers apartment sales but results in less revenue gain for the government.

Mr Reinecke went as far to say the surcharge was a “crazy policy that should go”.

Ms Brewer called on treasury to conduct an analysis of the amount of money raised through the foreign buyers surcharge, to the amount lost in stamp duty on those transactions.

Treasurer and deputy premier Rita Saffioti said the biggest challenge we faced was rising interest rates, which were putting downward pressure on demand for new housing.

“Ultimately any reforms or new policies would be considered as part of normal budget processes but we’re committed to working with industry to make sure we are encouraging more housing development,” she said.

Mr Pateman said before the surcharge was introduced for foreign buyers in WA in 2019, about 20 per cent of apartments from Finbar’s projects were sold to overseas buyers.

“Now, we’re lucky to get a handful of foreign contracts,” he said.

The government’s $80 million infrastructure fund, announced in February, has helped fund utility connections for several apartment projects around Perth, including ADC_’s $40 million North Fremantle development.

As the funding was rolled out, ADC_ executive director Adam Zorzi said the funding was welcome, given the balancing act between construction costs and apartment prices.

One of the aims of the infrastructure fund was to promote developments in Metronet precincts but industry sources say it is very difficult to stack up projects in outlying areas in the current market.

“If the expectation is for there to be medium-to-high density in outlying areas, it won’t happen until prices lift,” Mr Pateman said.

“If the land was free in these areas, the feasibility wouldn’t stack up.

“You’ve got to have desirable postcodes with a view.”