Sheds to Beds: What Developers are Betting On in 2026

Australia’s development market is shifting in 2026, with momentum moving beyond New South Wales and Victoria into smaller capitals and regional markets. Feasibility, not demand, is shaping what gets built. KPMG’s 2026 Residential Property Market Outlook shows Perth, Brisbane and Adelaide leading Sydney and Melbourne on established residential price growth over the year ahead. Cohen Handler’s Australian Property Market Outlook 2026, drawing on Cotality data, shows regional markets also outpaced combined capital cities through 2025. The data points to stronger demand in existing housing outside the major east coast capitals. It does not point to an easier path for new projects, where construction costs, pricing limits and delivery risk continue to narrow what can proceed. For much of the past cycle, development capital focused on what became shorthand as sheds and beds, covering logistics and industrial assets alongside housing, where income proved most reliable and risk easiest to price. Ray White head of research Vanessa Rader says sheds and beds still anchor capital decisions in 2026, but the opportunity set has widened. “Anything in living sectors is attractive if it can stack up,” Rader says. “Believe it or not, everything is looking more attractive in 2026—retail is showing a resurgence, industrial remains attractive to buyers and office is showing signs of improvement, so if you can buy at the right price, this is also attractive.” More options, same filters A key test for 2026 is whether sheds and beds still define the market. “Yes, this broadly is still correct but I’ll now be throwing retail in the mix with the top asset classes buyers are considering,” Rader says. Population and housing data from KPMG and Cotality show demand strengthening in smaller capitals and regional markets, supported by population growth and relative affordability. Sydney and Melbourne remain deep markets, though higher construction costs, pricing limits and delivery risk continue to restrict feasibility for new supply. Rader says the areas falling away are equally clear. “Perhaps secondary office, which has not been in favour continues to be out of favour,” she says. “[Also] out of favour will be development sites which just have unreasonable DAs, assets which need to be reconfigured via planning, may result in significant price adjustments so buyers are way more cautious of these.” Living sectors remain central Living sectors remain at the core of development activity, though feasibility continues to decide which projects proceed. “This is a hard one as development sites are still difficult to get stack up,” Rader says. Instead of new projects, transaction activity has continued in operating residential assets, where income and performance are already visible. Asked which living sub-sector looks most investable heading into 2026, Rader is direct. “If I had to pick I’d say student housing,” she says. “We have seen quite a few big student housing transactions and even aged-care facility portfolios.” Other residential formats remain under review. Build-to-rent continues to attract policy focus and industry interest, though timing remains uncertain. “Build-to-rent is still very immature in Australia,” she says. A lender’s view on what clears From a financing perspective, the geographic shift is visible but uneven. MA Financial Group managing director of real estate credit Cathy Houston says NSW and South-East Queensland continue to dominate lending volumes, even as activity increases elsewhere. “We are seeing some activity in Adelaide and in Perth,” Houston says. “But I still expect that the majority of the development transactions that we do will be in NSW and Queensland, particularly South-East Queensland.” She cautions against reading the data as a broad move away from the east coast. “Those markets aren’t as deep as NSW or South-East Queensland. We are doing transactions there and seeing more activity, but we’re being cautious.” Demand exists across multiple markets, while delivery remains the binding constraint. “Construction costs are still high and there’s almost a ceiling on how much apartment prices can go for because of affordability,” Houston says. Project structure also shapes which schemes progress. “We’re still seeing projects with builder-developers getting off the ground quicker than ones where there’s a developer and a separate builder,” she says. Houston also points to slower absorption at the luxury end in parts of NSW. “There’s a bit of steam that’s come off the luxury market in New South Wales,” she says. “Some of the luxury projects have completed and they’re in the market, they’re not necessarily selling as quickly as what people expected to.” Government policy settings are beginning to support deal flow where projects already align with planning reforms. “I think the government projects in terms of the low to medium rise, the TODs, the presale guarantees on the new supplies government’s offering on the off-the-plan residential sales are all going to help to get projects off the ground,” she says. Office conditions have stabilised, though improvement remains asset-specific. “Yes, we continue to see improved demand in the prime end of the market and vacancies have improved slowly,” Rader says. “Secondary assets will continue to struggle.” Retail activity has returned selectively, with location and catchment strength proving decisive. “Developing retail in new population growth hotspots will be important particularly for smaller neighbourhood, sub-regional product,” Rader says. “For the larger assets we are seeing investors transact and quality results have been achieved.” Hotels are also drawing renewed interest, particularly in established CBD locations. “We continue to see high occupancy rates for our hotels in CBD locations across the country suggesting new development may be attractive,” Rader says. “[Average daily room rates] continue to increase and Australia is seeing a high volume of domestic and foreign visitors.” Longer-dated demand drivers are also shaping sentiment in specific markets. The Australian Submarine Agency has allocated about $6 billion nationally over the forward estimates to submarine industry and workforce development, including at least $2 billion for infrastructure in South Australia. Defence planning documents also confirm ongoing naval and shipbuilding upgrades in Western Australia. These investments support longer-term employment and industrial demand in Adelaide and Perth, even as financing conditions remain selective. What stops deals in 2026 Constraints remain consistent across sectors. “This is a hard one,” Rader says. “But the cost of construction and availability of labour is a big issue.” Houston says higher values no longer offset inefficiencies in delivery or pricing. “Developers can’t just rely on values increasing to cover construction costs,” she says. Project structure and construction methodology also influence outcomes. &ldquo;We&rsquo;re still seeing projects with builder developers getting off the ground quicker than ones where there&rsquo;s a developer and a separate builder,&rdquo; Houston says. --> Interest in modular and prefab construction continues to build as a response to labour shortages, cost pressure and long delivery timeframes, though execution risk remains a consideration. “What we’re watching quite closely is all the modular and prefab projects and just seeing how they’re tracking and what’s happening there, and trying to understand how that’s going to play out in terms of making projects quicker and more efficient,” Houston says.

Sheds to Beds: What Developers are Betting On in 2026

2026 Developer Outlook Lunch | Sydney

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