Apartment shortage looms

Source: Business News

Rapidly rising construction costs and uncertainty over interest rates have led to zero new apartment projects being launched to the Perth market for the first time in at least eight years.

Urbis’ recent Apartment Essentials report shows that for the first time since the data was recorded in 2014, no projects were formally launched to the market in the three months to September 30.

While some developers have put out expressions of interest and started initial advertising campaigns, no new projects of 25 apartments or more have launched and taken sales contracts in that period, Urbis says. 

Since the research group started compiling the data eight years ago, an average of 651 apartments and seven new developments have been launched each quarter in Perth.

Urbis director David Cresp said the lack of project launches meant less apartments were at presale stage, which would ultimately exacerbate the city’s housing shortage.

“The fact that so few apartments are currently being launched will mean far fewer completions in three years, when we expect that Perth will be seeing strong population growth,” he said.

“This will only add to the housing shortage issues that we are currently seeing.”

The data also shows that apartment sales are at their lowest since the second quarter of 2020, due to a lack of availability of stock and consumer uncertainty over interest rates.

Urbis recorded 192 apartments sold in the third quarter of 2022, compared with 316 the previous quarter and a recent peak of 487 in the fourth quarter of 2021.

Mr Cresp said there was still demand for apartments, but developers were struggling to make developments stack up in many areas of Perth.

“Construction costs have increased far more quickly than sales prices,” he said.

“Costs have jumped significantly over the last 18 months and are continuing to escalate. A lot of people are waiting until next year to get more stability in building costs.

“There is also a bit of uncertainty in the general residential market with interest rates going up and an expectation that interest rates will stabilise next year [means] there will be a bit more certainly from the buyer side.”

He added that as stock declines and almost 70 per cent of apartments under construction are sold, developers in Perth would face less competition in coming years.

“When construction costs settle and supply slows, we expect new apartments to start selling at a price that makes development viable again,” he added.

Market activity

High construction costs have meant apartment developments in areas with high median house prices are viable, while those in more affordable suburbs are not.

BlackburneEdge Visionary Living and Finbar Group‘s recent projects in Subiaco, Peppermint Grove, South Perth, and Applecross reflect this reality.

Mount Pleasant developer Norup + Wilson is currently building a luxury retirement apartment complex in Applecross comprising of 80 dwellings and complete a nearby apartment complex in 2020.

Norup + Wilson director Dave Wilson said planning uncertainty and legislation that disadvantaged the apartment sector, including stamp duty, impacted developers confidence on top of rising interest rates and construction costs.

“There is still a demand for moderately sized, good quality apartment developments in the right areas.

“However, we don’t expect construction costs to drop below their current levels nor do we expect the planning framework to change overnight.

“As a result, we don’t believe that there will be too many apartment projects launched over the next two quarters.”

Blackburne expects to start construction on its $390 million Karrinyup West Village development next year, with the project in the expressions of interest phase.

In July, Mr Blackburne told Business News that navigating issues around construction cost hikes, labour shortages and supply chain disruptions required long-term planning.

“It has certainly been a complex challenge, but we’ve been able to keep all our projects moving and on budget,” he said.

Some developers this year have had to go back to buyers and ask for more money to make their projects viable, as build costs spiked by up to 40 per cent.

Celsius Property Group’s Richard Pappas faced this predicament with his $60 million Elysian project, going back to existing buyers and raising prices by 10 per cent.

For new buyers, prices for the project were raised by between 12 and 24 per cent.

“[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,” Mr Pappas told Business News in August.

The Urbis report said apartment completions in 2022 were expected to be at their lowest in several years, at 1,135.

This compares to 1,249 in 2021 and 2,887 in 2017.