Apartment price pressures build

Source: Business News

DEVELOPERS are lifting prices to keep pace with surging input costs as Perth’s apartment market responds to the inflationary global environment.

While demand for new apartments is high, skyrocketing construction prices have rendered some projects unviable, with several proponents deciding not to proceed.

Urbis property economics and market research director David Cresp told Business News the multi-residential build space was experiencing unprecedented cost hikes, and Western Australia was hit hardest.

“We’re seeing more construction price pressure than anywhere else in the country,” he said.

Mr Cresp said build costs had lifted by up to 40 per cent in the past 12 to 18 months, but sales values hadn’t increased by anything near that level.

“People selling today are still competing against projects that have been completed over the last couple of years [but] that completed stock is now starting to sell out,” he said.

“There’s a lot less completed stock out there and the new supply is going to have to come from the apartments that are either under construction now or are going to go under construction.

“That’s going to put significant price pressure on the new apartments and the prices are going to have to lift … to reflect that increase in construction costs.”

In some cases, developers have gone back to buyers seeking higher sales prices, and in many others the prices of apartments have risen for unsold stock.

Property Council of Australia figures for January show that 35 per cent of WA apartment projects with development approval were put on hold, equating to about 4,300 units.

The industry body now believes that figure has climbed to 50 per cent, or more than 6,000 apartments that have been approved but not progressed.

“Since January, there’s been no material relief to labour or supply shortages,” Property Council of Australia WA executive director Sandra Brewer told Business News.

“The key constraint … is the lack of predictability around the materials price inflation, and the workforce availability.

“When contractors and builders factor risk into their cost, they’re adding that margin to cover risk; the end impact is that the total cost becomes too high, and the feasibility doesn’t stack up.”

Developers are adapting by working with builders on new methods of staging projects and with financiers on alternative means of funding.

A move away from traditional bank finance to non-bank lending was among the approaches developers were taking, Ms Brewer said.

According to Finbar Group managing director Darren Pateman, the period between hitting presales targets and breaking ground on a development presents the highest risk.

“At that point, you can’t achieve anything more in sales; you’ve sold as much as you can [and] the revenue is fixed,” Mr Pateman said.

“But your building costs … continue to increase so margins get shrunk, and that’s why projects end up being cancelled, because there’s nothing left in it.”

Finbar Group currently has $754 million of apartments under construction in WA, placing it at the top of the Data & Insights list of built-form developers.

The ASX-listed developer contracts Hanssen to build all its projects and often works in joint venture partnerships to deliver its developments.

Mr Pateman said the company had the capability to move away from a heavy reliance on presales in uncertain economic conditions.

“We surround ourselves with strong partners that can also cut a cheque,” he said.

“In a tough market we can go ‘Look, we can certainly sell this stuff if it’s finished, but we’re not going to pre-sell it’.”

Mr Pateman said Finbar Group was prepared to stump-up more cash up front to get projects off the ground than it would in a low inflationary environment where presales could be more lucrative.

“That’s what’s kept us in business during the tough times,” he said.

However, off-the-plan sales have been a significant part of the picture for Finbar in recent years.

The group recorded its strongest year of apartments sales since 2015 in the 12 months to June 30 2022, with $292.7 million in 443 sales across its projects in Perth, South Perth, Rivervale, East Perth, Applecross and Dianella.

Of the 443 sales, 117 were for completed stock, representing $65.7 million, and 327 units sold for a total $227.8 million as the project was either under construction or within six months of the build.

This contributed to a predicted $11 million profit bump for Finbar, 15 per cent up on the prior corresponding period.

As it issued its sales update, Finbar Group said its projects had “seen increased costs and slower construction progress, albeit at lower rates than industry peers.”

The company added it would be able to mitigate any future impacts on margins by an increase in sales prices.

As Mr Pateman explained, buyers had accepted boosts in sales prices.

“I think people are expecting to pay more for property, [it’s] no different to paying [more] for toothpaste,” he said.

“It’s certainly helping offset some of those rising construction costs.”

Mr Pateman said the industry was coming off a low sales base, with the property market trending downward in the years following 2015.

“We were still making money, but it’s been hard work, sales were hard to come by [but] construction was easy.

“Now, sales are easier to come by and construction is by far the most complicated part of our business.”

Tough calls

Sirona Urban’s recent move to pull the pin on its $165 million South Perth apartment project 28 Lyall reflected the volatile nature of the market during the past 18 months.

As the company made the call, Sirona Urban managing director Matthew McNeilly chalked the decision down to surging build costs, delays and a shortage of tradespeople.

After more than seven years at the site, the developer returned deposits to buyers.

“It is rare that these sorts of cost increases retreat just as quickly, so we don’t expect that delaying the project will provide a different result in the short to mid term,” Mr McNeilly said at the time.

“This isn’t the easy option, yet it is the right one for our purchasers.”

Celsius Property Group managing director Richard Pappas reached a crossroads with the company’s $60 million Elysian apartment project in Subiaco earlier this year.

He said build costs for the development were 40 per cent higher than anticipated, so he had to go back to buyers to seek more money.

“We went back to original purchasers and gave them a choice of either continuing on but at a slightly higher price or not proceeding,” Mr Pappas said.

“We’ve done most of the heavy lifting by escalating the [cost of the] unsold apartments, not the ones that were already sold.”

For the presold Subiaco apartments, Celsius raised its prices by 10 per cent and between 12 and 24 per cent for the unsold stock.

“[There’s] no question, it is a lot harder to get an apartment development out of the ground in the current environment because we’ve seen construction costs escalate at a rate that is quite a lot higher,” he said.

As Urbis’s Mr Cresp explained, current market conditions meant apartment development was simply not viable in outlying areas.

“You are having to sell apartments at close to $10,000 a square metre for them to be viable,” he said.

This equation has drawn developers to focus on areas with higher-end yields, such as Perth’s western suburbs.

Blackburne has three projects under construction valued at $678 million, all in the western suburbs.

The property group’s founder and executive chairman, Paul Blackburne, told Business News he factored inflation into the sales prices at the company’s $350 million Peppermint Grove development.

“We put the prices up, which meant the project was still viable to proceed with … if we hadn’t have done that it wouldn’t have been,” Mr Blackburne said.

The group raised prices part way through the sales campaign at The Grove, so early buyers benefited.

“People [were] buying at market value for the last half and the first buyers then made $100,000 to $200,000,” he said.

Mr Blackburne added a price increase of about 15 per cent should cover the increase in build costs.

“Build prices are up 30 per cent, [but] your build price is only half your cost, so if you raise the price 15 per cent that compensates for that,” he said.

Blackburne is on track to complete its $300 million One Subiaco project by the end of the year and will announce two additional western suburbs projects in coming weeks.

The group also recently signed a $300 million deal with AMP Capital to develop the Karrinyup West apartment project, worth an estimated $390 million.

Mr Blackburne said he would stick to his model of running one major project each year, but acknowledged it was tempting to exceed that given the significant level of demand for high-end apartments.

He said rising interest rates did not affect most of his market as it predominantly comprised baby boomers selling out of their family homes.

Key markets

Edge Visionary Living managing director Gavin Hawkins is progressing projects in Applecross, Scarborough, Cottesloe, Nedlands and Fremantle.

The developer delivered an $84 million apartment tower in Joondalup in 2020, a market that would arguably be more difficult to navigate now.

“Market conditions are having a significant impact on the type and location of apartment projects that are currently being supplied,” Mr Hawkins told Business News.

Mr Hawkins said he continued to see substantial demand from the retiree market, in which people were looking to capitalise on the growth experienced in recent years.

“With a continued strong property outlook for WA, owners are increasingly feeling like now is the time to lock in an apartment with a view to selling the house in two years and pocket the excess equity they have built up,” he said.

Edge Visionary Living is expected to lodge development applications for a further two projects this month, including a $70 million apartment project in Crawley.

He said the demand for off-the-plan apartments had been incredibly strong in the past two years.

This is backed by Urbis data, which shows that the volume of presold apartments lifted from 25 per cent in 2021 to 36 per cent this year.

Coupled with the number of apartments sold while under construction, which lifted from 25 per cent to 26 per cent, this shows the focus is shifting to unbuilt stock.

Mr Blackburne said Perth faced an apartment shortage, given the low number of apartment projects under construction.

Damian Collins, who runs Westbridge Urban, the development arm of Westbridge Funds Management, echoed this sentiment.

“There will be an apartment shortage in two years’ time because there simply won’t be enough medium- to large-scale projects built in Perth,” Mr Collins told Business News.

“These projects will come online when the market adjusts, but right now many will simply sit in the drawer.”

Mr Collins said the townhouse and villa market was in better shape with the trade pool coming predominantly from the home building industry, which was starting to ease.


The build-to-rent space has gained significant momentum this year as developers seek different means of bringing projects to fruition.

The apartment component of Australian Development Capital’s $800 million Perth Girls School project is largely underpinned by this model, with 500 of its 742 proposed apartments being BTR.

ADC_ executive director Rod Hamersley explained that this model provided a way to accelerate the project, as well as adding to housing diversity.

“If we were going to go down a traditional method of presales and build, it would have to be done over a number of different stages, and that became a bit unfeasible when you look at the site and how it’s put together,” Mr Hamersley said.

“The operators in that [BTR] space are well backed, financially, from the institutions and super funds … they come with a lot of collateral.”

Mr Hamersley, who is currently developing a 46-apartment project in North Fremantle, said his group was drawn to difficult sites.

“We have never shied away from looking at challenging propositions in terms of sites, whether it’s the heritage or remediation aspects,” he said.

“We are not building these things, selling them and then walking away [with] a cookie cutter approach to our model. Each opportunity is bespoke.”

DevelopmentWA approved the Perth Girls School development in June this year and construction is expected to start next year.

ADC_ worked with Melbourne-based affordable housing provider Assemble during the planning process for the BTR apartments but is in the process of seeking other potential BTR operators to work with.

“We went on the path of Assemble over the last nine months and they’re still there wanting to be part of the project, but the commercial aspects have changed in recent times, so we are talking to other groups,” Mr Hamersley said.

“The product remains our ambition in terms of the build-to-rent and the scale.”


Some in the industry argue that WA’s policies in terms of protecting buyers against defects in apartment buildings could deter some people from entering the market.

If a builder goes into liquidation, dies or the company winds up after the state government’s six-year statutory warranty period, buyers are not compensated for any structural defects that might occur.

This does not apply for houses, with developments up to four storeys covered under the government’s indemnity insurance scheme.

Celsius’s Mr Pappas has taken the rare step as a developer of calling for this scheme to be applied to projects above this height.

“All we are trying to do is afford the consumer the same protection that they would if they chose a house or a villa or a townhouse,” he said.

“Defects exist in all forms of construction and in most cases the builder is still around to rectify these defects.”

A spokesperson for the state commerce minister told Business News earlier this year that the Department of Mines, Industry and Safety Regulation was reviewing regulations across parts of the building process.

Australian Apartment Advocacy founder Samantha Reece is continuing her calls for resident protection in situations where the builder goes bust.

Ms Reece said a 1.5 per cent levy for apartment buyers to contribute towards an insurance pool to fix defects that occurred beyond the statutory warranty period would help derisk the sector.

Her group recently surveyed 1,100 apartment owners, 21 per cent of which were based in WA, and found that about 30 per cent of them had their builder go bankrupt or ‘phoenix’ the company.

“Our data says 80 per cent of apartment owners would pay a levy of 1.5 per cent to have this insurance pool and 94 per cent would prefer an apartment with insurance over one that did not,” Ms Reece said.

“This approach is proactive and is essential if we want to convey to all apartment owners that their purchase is safe and protected; ultimately it’s all about consumer confidence.”

She said the recent collapse of JaxonPindanPsaros, Diploma and Probuild had affected more than 3,500 residents across 32 buildings in WA, with some facing defect repairs in the millions.