[+] Planets Align for Build-to-Sell to Bounce Back

Built-to-rent was almost the only game in town in 2023 as large-scale build-to-sell projects fell by the wayside with construction costs and interest rate rises biting hard. But there could be a reassessment in 2024 as the demand for housing intensifies on the back of increased immigration balancing out the net negative numbers Australia experienced during the pandemic. Head of sales and marketing at Melbourne’s Sunkin Property Group Scott Jessop says that the time is right to refocus on large-scale build-to-sell projects. “Last year definitely was a ‘wait and see’ scenario with high interest rates and feasibilities adjusting,” Jessop says. “We will now start to see some developers looking away from built-to-rent this year and start planning for the opportunities again with build-to-sell strategies, especially if we can start to see a bit of an uptick happening with apartment values [and in a] reducing interest rate environment.” Build-to-rent versus build-to-sell It makes sense that build-to-rent made headway in 2023, Altus Group president of cost and project management, Asia Pacific, Niall McSweeney says. “These projects have gained prominence due to their ability to mitigate holding costs, secure, robust financial backing and having a single interface with the end user,” he says. “This financial stability is crucial in an environment of high interest rates, as it reduces reliance on loans, offering developers a more secure financial footing to navigate fluctuating costs.” ▲ Sunkin’s Highett Common masterplan will comprise 14 residential buildings ranging from two to seven storeys and offer 1048 homes. However, build-to-rent may struggle this year. “The ongoing escalation in construction costs and associated expenses presents a significant hurdle for the build-to-rent model,” McSweeney says. “This continuous increase in costs not only impacts profitability but also tests the financial viability of these initiatives. “Additionally, build-to-rent projects might encounter specific challenges related to regulatory issues, such as GST compliance or other regulatory hurdles.” Sunkin’s Jessop suggests that adding to construction costs and interest rates is a lack of foreign investment for large-scale build-to-sell projects, moving developers towards single-owned build-to-rent projects. But in Melbourne particularly, this could change as apartment values become the key issue. “It looks like some build-to-rent projects have started reducing asking rents now,” Jessop says. “Once we get to 10 to 20 new build-to-rent projects coming online in metro Melbourne we may start to see some struggles getting their building occupancies above 50 per cent without significant rental price reductions as the asking prices are well above the rest of the market.” ▲ The Clarke Hopkins Clarke-designed Highett Common comprises a range of home typologies and amenities, including a library and pool. “Then there’s this myth that build-to-rent has so many more services and amenities— any good project now is integrating services and has amenities—so it’s like for like. “They may not have a flexibility or longer term rental agreements, and may be at the risk of individual investors putting up rents— although we’ve seen caps on that— and I can’t see the majority of renters wanting to pay potentially 30 per cent above general rental market, especially with interest rates where they are.” Opportunities for build-to-sell According to McSweeney, there are still opportunities for build-to-sell projects in specific areas and at specific price points. “Signs indicating a potential resurgence of build-to-sell projects are notably in areas with significant desirability factors,” he says. “Typically, in areas boasting economic engines and vital social infrastructure such as hospitals or universities, a trend emerges where various real estate developments, including build-to-sell projects, thrive.” But Plus Architecture Perth director Will Schofield says that there are still major constraints on build-to-sell projects. “Build-to-sell is incredibly difficult to achieve because of cost of the construction and the value at which you can sell apartments, and the gap between that compounded by financing issues, builders going bust and perceived security for buyers, with some advocacy groups dissuading people from buying off-the-plan. ▲ Sydney-based fund manager EG’s Perth dual-tower project will offer a mix of build-to-sell and build-to-rent apartments. Image: Cameron Chisholm Nichol “[What we want to see, however,] is not build-to-rent versus build-to-sell, we want them working together and joined up in the right locations along transport corridors, schools and infrastructure, so they are providing a spectrum of build-to-rent, social and affordable to middle income to luxury.” McSweeney also says that with the noticeable lack of affordable or low-cost housing in both models, which extends across build-to-rent as well as build-to-sell, an opportunity presents itself. “This gap in the market, particularly in the lower-priced segments, stands out conspicuously amidst the proliferation of upscale and mid-range developments,” he says. “The absence of affordable units and the shortfall in government-backed public housing programs suggest an unmet demand in the housing market, indicating a potential resurgence or need for build-to-sell projects to address this specific segment.” Luring foreign investment Major stamp duty changes in 2017 strangled foreign investment in large-scale off-the-plan apartments in Victoria, Jessop says, and it has never truly recovered. “Since that time, we have gone from delivering 10,000 to 15,000 apartments a year, to 2000 to 3000 per year,” Jessop says. ▲ Plus Architecture has been working on more affordable build-to-rent projects, including Unison Housing’s 260 Bell Street project in Melbourne. “We practically turned off all foreign investment from purchasers, particularly for off-the-plan, because of taxes and levies. “[Foreign investment] is the biggest issue in the landscape, combined with planning issues and construction costs, that’s why we have no supply and why we’re in this housing crisis.” Dampening foreign investment has particularly impacted large-scale build-to-sell projects, he says, which are needed more than ever. Under new rules announced in December, 2023, the federal government cut application fees for foreign investment. However, it was a mixed bag as this only applied to build-to-rent projects intended to support the delivery of more homes across Australia, and it simultaneously announced a tripling of foreign investment fees for the purchase of established homes and a doubling of vacancy fees for all foreign‑owned homes purchased since May 9, 2017. ▲ Some have managed to attract international investment, including the Gurner-Qualitas Melbourne Square build-to-rent project with Malaysian developer OSK. So Australia remains a potentially less amenable environment for foreign investment that would support large-scale residential development, especially of the build-to-sell variety. Added to this, the construction woes in the Australian market are being considered by overseas investors, Schofield says. “What is challenging in WA is that the news is focused on builders going broke or into administration or walking off sites due to disputes, so if you’re an astute foreign investor you’re mindful of that. “There are a whole host of reasons there may not be foreign investment in off-the-plan projects.” Getting back to scale The major theme, however, has been the lack of truly large-scale projects on offer. “For significant supply to get anywhere near housing targets, we need to get back to projects of scale—800 to 1000 unit or more projects. Achieving those targets it’s pretty laughable under the current arrangements,” Jessop says. “Demand for new projects is around all of the basics, at Highett Common [ its $500-million Bayside masterplan ] we had some amazing success last year and sold a full stage out, it’s NetZero targeted, near a train station and supermarket ... that’s where the demand is. ▲ Build-to-rent as well as build-to-sell projects such as Plus Architecture's Walgu Park development are being integrated into mixed-use plans to ensure feasibility. “We need to continue incentivising off-the-plan sales to rebuild our pipeline and not just for owner-occupiers, it needs to also incentivise local and some foreign investment specifically for off-the-plan projects. “This will drive large scale private investment again, create jobs and generate critical income for the state at the same time.” McSweeney says that diversifying ownership will exert a profound impact on the housing landscape. “This transition signifies a changing mindset among demographics, favouring lifestyle choices, like location, over traditional property ownership. “This diversification alleviates some pressure on the housing market, which has been strained due to insufficient supply. “It also contributes to reshaping cities by offering diverse housing options, which not only cater to different demographics but also enhance the livability of urban spaces.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. 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[+] Planets Align for Build-to-Sell to Bounce Back

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