Living on the Edge: Finding Feasibility in a Fluid Market

With less than a third of approved apartments making it through to completion nationally, Australia is caught in a feasibilty crunch as the nation cries out for housing. Urbis partner David Cresp says that across the cities his company monitors (Sydney, Melbourne, Brisbane, Perth and the Gold Coast), just 26 per cent of the apartments that secured planning approval since the start of 2020 had started construction by the end of 2025. “This varies across the cities but is below 30 per cent in every city,” he says. “Making apartment development feasible in the current environment of rapidly rising construction costs has been challenging, and the current round of cost increases and uncertainty since oil price increases is making it even more challenging. “ Additionally, particularly in the Brisbane and Perth markets, securing a builder is becoming increasingly challenging due to capacity constraints in the market.” The feasibility crunch is a thing Charter Keck Cramer national executive director of research Richard Temlett defines the crunch as a confluence of circumstances where building costs, taxes and charges and negative land values in many areas mean the cost of new housing is much greater than the market is able to pay. “It started in Melbourne but actually now it applies to large parts of Sydney, especially the west of Sydney,” he says. “It’s less so in some of the other states just because prices have moved and people are still able to afford the higher price points, but the costs of delivery and now with the war in Iran building cost to increase even more, means that we’ve got a major feasibility crunch, particularly in apartments.” Temlett says while the crunch is not so dire with townhouse and house-and-land packages that typically come in at lower prices than apartments, non-residential developments are not immune. “When I speak to my colleagues in industrial or childcare or retail, even office, the costs of delivering new real estate means the revenues that need to be achieved to make it viable, for equity to come in and get the return that equity wants, means that a lot of it is not viable right now,” he says. “So we’re going to have a major supply crunch over the next few years unless we can bring down that cost of delivery.” Temlett says that one strategy—flipping residential projects into student housing, in part to avoid approval authority parking requirements, and into build-to-rent projects where presales are not required for a project to stack up—started during the Covid years. “It’s happened before, during the pandemic, where in the Melbourne CBD there were points where a lot of approvals were flipped from residential to commercial office and more recently they’ve flipped back to residential because commercial office sector is struggling,” he says. “But even with student accommodation or build-to-rent, the costs of delivery are much higher, so it really depends: it’s location-specific as to whether the renters or the students can pay the rents that are required to justify the delivery.” ▲ Charter Keck Cramer national executive director of research Richard Temlett. Temlett says developers are looking at alternative financial models to combat the crunch. “I think finance is very innovative anyway [but] one of the [current models] is just pulling more levels of equity into the project, which is not always what a developer wants to do,” he says. “Also, some of them are proceeding to try and lock in builders and building costs and building up low levels of presales and building more speculatively. “And then there’s just different tiers of equity or debt coming in, whether it’s senior debt or mezzanine finance, they try to structure it differently or perhaps bring in the builder ... as a joint venture partner, putting in equity and then sharing the risk and then also sharing the reward on the way through.” Temlett says the feasibility crunch is not a new normal. “ I think it’s a function of where we are in the economic cycle and unfortunately in some areas like Melbourne still dealing with the delayed hangover impacts of the pandemic,” he says. “But I do think the market is going to have to recalibrate and either land values are going to have to move or prices are going to have to move or in some areas, it’ll be a combination of both. “But the market, I believe, will ultimately move to equilibrium; it just needs some time to do that and it doesn’t help when there’s interest rate rises and wars—stuff like that just creates uncertainty.” He says that governments of all levels, particularly state and local, could help to kick the crunch by eliminating or reducing some fees, taxes and and charges. Cutting your cloth, choosing your suburbs Samuel Property managing director Illam Samuel says project feasibility is an issue but there are a “couple of different ways you can tackle it”. “You can focus on your sales rate, you can also look at getting your bill price down, being more efficient through your design, or also trying to go faster and trying to get a better rate of return,” the Melbourne-based developer says. “And also thinking about sales velocity—how many can you sell and how quickly—what does that allow you to do in terms of the overall life cycle, or timeline of a project? “So like a Formula One car, we pull our feasibility apart and try to find where we can go a little bit faster so that we can make up.” He says Victoria’s better apartments design standards, BADS for short, introduced in 2017, are hindering home-buyers rather than helping them. “I guess architects as a result just started designing larger apartments,” Samuel says. “I would say the best market is a free and open market where, if I’ve got 40sq m one-bedders and I get it wrong, then I’m the one stuck with them and if I get it right then they sell. ▲ Illan Samuel: Australia apartments are very large and very high quality compared to elsewhere in the World. “The government doesn’t tell me what car to drive or what colour shirt to wear; I don’t know why they tell people what size apartments they should live in.” In another motoring analogy, Samuel rhetorically asks: “ There’s more Toyotas on the road than Porsches, right?” “And there’s nothing wrong with a Toyota.” Samuel says apartments in Australia are very large and very high quality compared to elsewhere. “If you look through Asia and parts of Europe, you’ve got three-bedders that might be 80sq m,” he says. “For us, it’s hard to make one work at less than 100sq m based on these standards.” He says Samuel Property is focusing on smaller homes at a 275-apartment tower it is conceiving at South Melbourne. “All the research for that location to us suggests that the buyer is more one to two-people households, not two or three,” he says. “So we’d rather go to the market where, if people want a bigger apartment, they can buy two [apartments] and put them together.” NSW design guidelines a barrier From 1000km further north, Deicorp executive manager corporate communications Robert Furolo says that in Sydney apartment design guidelines, implemented by the New South Wales government in the early 2000s, are also a problem. “They stipulate very stringent standards on minimum site areas, minimum internal areas, and things like that,” he tells The Urban Developer . He says the guidelines are a barrier to delivering housing that people can afford. “If we use a number of $10,000-a-square-metre to build an apartment and the minimum size that you have to build a two-bedroom one is 75sq m, that means it’s a minimum $750,000 to deliver that just in construction,” he says. “If [instead] you can find a really good architect that can be clever and innovative [and have] a good use of space, and you [are permitted to] deliver a 65sq m apartment that is functional and has good amenity, you’ve just taken $100,000 off the delivery cost. “ [And] if we could, instead of basement car parking, put it above ground without impacting the floor space or the height limits, that would save another $90,000 per apartment.” ▲ Deicorp executive manager corporate communications Robert Furolo and Deicorp’s Melrose Central. Furolo says Deicorp has been “very deliberate” about ensuring its residential projects are in relatively high value areas. “There’s no magic trick that we can pull to rip cost out of projects,” he says. “So we can only build where we can build them for a price that we know the market can carry. “The amount of work happening in high value, inner city, inner west, Lower and North Shore, eastern suburbs, parts of Sydney reflects the fact that those are the locations where it’s feasible.” Furolo says he’d love to say Deicorp was innovating and finding modern methods of construction. “The truth is the industry is not quite there yet, both in a regulatory sense, but also in just a capacity sense,” he says. “[Deicorp is] using pods for our bathrooms; they’ve been great. “But more broadly across the industry, I’m not really seeing any radical off-site construction solutions that are solving problems.” Similar story across the Nullarbor From the other side of the continent, Australian Development Capital executive director Rod Hamersley also says location is king, with the company focusing on premium riverfront, oceanside and western suburbs sites. “The buyers of those projects are less impacted by things like interest rates because of where the [projects are] located and they’re luxury projects,” he says. “We’re fortunate [in WA that] we’re in a marketplace where there’s continued demand and lack of supply coming through, so it’s fairly elastic in the sense that we can increase prices for those apartments that remain available for sale to try and absorb what’s coming. “We’ve done that already, and our peers are doing the same we understand.” Hamersley says WA’s position as a world mining powerhouse, and future maintenance site for the AUKUS submarines , creates threats in the form of labour shortages and opportunities in the form of economic activity. “That all leads into good medium to long term economic activity but it doesn’t get away from the fact that it’s very expensive to try and deliver a project,” he says. “The cost of our apartments these days is $800,000 a box before you’re throwing land and professional fees in and it certainly makes it difficult to get any project to work outside of those really prime locations.” ▲ Rod Hamersley says the mining industry and AUKUS are doubled-edged swords for Western Australian developers. Image: Chris Thomson Perth-based Stamford Capital partner Andrew Dilorito says rising build costs continue to squeeze feasibility, and in Perth multi-residential developments are feeling the pinch. “Across the country, luxury product has consistently been the segment where numbers work, and that’s been the case for a few years now,” he says. “Historically, the WA construction sector has always competed with the mining industry for workforce and trades [and] that competition has intensified with the WA government stepping in to take a more hands-on role to deliver more social and affordable housing . “The prospect of rising build costs and interest rates, drawn-out construction timeframes, as well as builder availability, are the main concerns—not only in WA but across the country.” Dilorito says he is working with developer clients to look at how they’re structuring land settlement in relation to forward works and main contract works and analysing margin and line fee structures to achieve efficiencies. “Nil or low presale solutions allow for construction contracts to get signed earlier and works under way sooner, resulting in less cost escalation prior to putting shovel in the ground and the ability to allow for sales revenue to progressively increase and absorb cost escalation,” he says. “Whilst there has been strong property price growth in WA for some years now, we need this to outpace the construction-cost growth, particularly for larger developments to ease some of this pain. “Getting more consistency in trade availability and material supply would also help take some of the volatility out of build costs.”

Living on the Edge: Finding Feasibility in a Fluid Market

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