With 2023 behind us, all the speculation about what is ahead for the sector this year is about to become a reality.
The past year held many challenges, from adverse economic conditions to investment declining across key sectors.
The Urban Developer takes a look at five of the major factors that will shape the year ahead.
It is, to borrow a famous line, the best of times and the worst of times for developers in the residential sector.
Demand for housing has increased a lot during the past few years, creating opportunity and challenges.
And what kind of housing is in demand has changed and evolved across and within key demographic groups, particularly for millennials, who are struggling to enter the market.
“The millennials will shape the next decade of housing decisions,” Charter Keck Cramer national executive director Richard Temlett said.
“Many younger Australia are different today to the generations previous—they get married later in life and have more than one job.
“They are much more transient.”
Meanwhile, baby boomers are downsizing as they put freedom and flexibility above maintaining larger homes.
As they sell their homes, they have the money and means to move into built-to-sell or built-to-rent apartments—as well, this generation is driving change around what retirement living and aged care look like.
“This age group will need different types of dwellings, more health care, have lots of wealth to pass on and are living longer and longer,” Temlett said.
“It’s also a reason we need high levels of population as we need to become more productive and also need more tax payers to pay for their health care.
“We are basically getting two target demographics that will shape the market over the next decade.”
Migration levels are also placing pressure on housing supply with the federal government at the end of 2023 announcing it will change the way some visas are handled, reducing the incoming number of expected migrants in the next few years.
That includes international students who have helped increase demand for housing in 2023 as they flocked back to Australia when borders reopened.
It is still however keen to reduce migration numbers.
“Government projections ... show that the numbers are scheduled to slow down to 375,000 this year and 260,000 the year after,” AMP chief economist Shane Oliver said.
“We’re currently producing about 170,000 homes per year, so if you’ve got 375,000 immigrants plus 140,000 natural growth in the population ... there’s a shortfall of 120,000 homes
“By the end of the year (2023) it will be a 180,000-home shortfall.”
Migration has also had an impact on the unemployment rate, according to Commonwealth Bank of Australia senior economist Belinda Allen, who says the latest ABS figures show that the working age population is growing at a rate of 3 per cent year-on-year,
“This means around 35,000 more jobs are needed each month just to keep the unemployment rate steady,” Allen said.
“If migration slows, as intended, this number could slow in 2024, but still should outpace demand for labour.”
One sector that has had a 2023 to forget is office. There may not be much change to that in 2024.
The trend of working from home has lingered post-pandemic, leaving employers struggling to get staff back into the office fulltime.
That slow return means many office asset owners are struggling to attract or maintain tenants. If their assets are less than premium-grade, the struggle is greater,
And smaller retail that depends on daily commuters and office workers are casualties too.
It means investors are wary of taking on assets, particularly older ones.
“There’ll still be demand for A-grade office buildings,” Temlett said.
“The risk is if they are not A-grade office buildings with ESG credentials then they lose out on demand and investors probably will look elsewhere as it is quite risky.”
But Temlett doesn’t think it is all necessarily doom and gloom.
“Australian capital cities such as Melbourne will just have to reinvent themselves,” Temlett said.
“Some of the older buildings will get knocked down and reused. Some will be repurposed and the city will still be very attractive to work in.”
Investors are now moving to industrial and logistics assets but there is also concern that recent fee hikes will turn investors off parts of the residential sector.
The pain goes on for many developers as they face rising labour costs, worker and material shortages, and less than ideal economic conditions.
Samuel Property managing director Illan Samuel thinks developers will have to make a choice in 2024—hold or sell.
“With residual stock or developments under way as market conditions changed becoming more of a thing of the past, developers are going to be faced with a clear decision to make: go to market, or continue to hold for better conditions,” Samuel said.
“Without the core fundamentals paving the way for sites to be acquired, designed, launched and progress into construction, we are stuck in this state of limbo.
“This hasn’t been as obvious during the past 12 to 18 months as developers have been caught in the middle of acquisitions, projects completed or under way, and no ability to hold fire.
“I’m tipping 2024 to be the year that the market is crying for supply, but developers will only press the button if prices rise by 10 per cent or more and to make this happen, the government is going to need to create some stimulus.”
Oliver believes that the material shortages will not be as much of a concern as labour shortages will be but also points out that interest rates will have an effect on project feasibility.
“Developers potentially face problems from higher interest rates, which may force some of them to sell anyway, even if they’ve survived this long, because eventually the excessive debt level will get to them unless they can quickly sell their properties,” Oliver said.
“High interest rates will continue to bear down on demands for new properties.”
Infrastructure Australia’s latest report for 2023 has reported that Australia needs a 127 per cent increase in workers to complete the current pipeline of projects.
It has also raised concerns about quality control and supply chain risks if the solution to material shortages is to increase importation.
“Supply chains are open,” Temlett said. “The industry material is still in short supply because of the infrastructure project.”
The federal government announced in its Mid-Year Budget Review that it would delay several infrastructure projects to save $8.8 billion, which would theoretically also help free up labour.
“That might take a little bit of the pressure off but I have a feeling there’s still too many projects,” Oliver said.
Policies announced at local, state and federal level in the past year will take effect in July, 2024.
It means the industry is this year is facing changes in how people are able to buy, develop and hold property and the taxes and fees paid.
“During the next few years government programs kicking in will include the Housing Australia Fund and the federal government commitment to build 1.2 million new homes, starting in July, 2024,” Oliver said.
At the local level, developers will need to design projects to fit within certain frameworks such as all-electric builds within the City of Sydney, or designing to retrofit and refurbish existing buildings within the City of Melbourne.
An increase in online shopping post-pandemic continues to drive demand for data centres and last-mile logistics.
It’s a trend occurring across the Asia-Pacific as investment pours into data centres to keep up with the growth in online retail.
“Investors see these data centres as safe, viable assets,” Temlett said.
“There is also increased demand for last-mile logistics but one issue is the scarcity of suitable land.”
Infrastructure is also driving industrial projects and business parks such as the Nexus project in Victoria’s South Dandenong, connected to an intermodal freight terminal, and the planned Beveridge Intermodal Freight Terminal, which will also be one of Australia’s largest solar power plants.
Temlett agrees that completing certain projects will ensure that developers can do more.
“The property industry needs those sorts of decisions made and projects done and with politics, all sorts of issues can get in the way,” Temlett said.