[+] Melbourne Apartments Will Stall Without Price Correction

It’s tempting to think the toughest hurdle in development is achieving planning permission. But in Victoria the dust is settling on many sites where planning permits have been granted. Getting projects to stack up at current pricing is simply not feasible. At The Urban Developer ’s recent Melbourne Long Lunch event, industry leaders advocated for apartment pricing correction. “We’re going to have to take a view on sales rates which we haven’t looked at before,” Time &amp; Place founder Tim Price tells lunch attendees. “You have to break sales rates to make a project feasible.” The feasibility issue Times are tough: there have been increasing construction costs , builders have gone to the wall, and developers have had to redesign projects to account for feasibility and planning changes. Charter Keck Cramer’s State of the Housing Market report on metropolitan Melbourne for the first half of 2023 shows the situation is incredibly hard. “Conditions in parts of the Melbourne build-to-sell apartment market are arguably some of the toughest they have ever been,” the report says. “The market has moved incredibly quickly over the last 12-18 months in light of the volatility and ‘push and pull’ of rapid interest rate rises, the strong return of overseas migration, substantial increase in construction costs and volatile consumer sentiment. “These factors are leading to many build-to-sell apartment projects being unfeasible, very slow pre-sale rates and projects being abandoned. “Limited new apartment supply, less confidence by purchasers and increased NOM has contributed to significant rental price growth.” Less than 10,000 build-to-sell apartments have been delivered in 2023 so far, which is a decline of 40 per cent compared to pre-pandemic years. An additional 9200 are being marketed, however the report says these projects are likely to be delayed given the “challenging pre-sale environment”. Salta Properties chief operating officer Emma Woodhouse says that something needs to be done to account for how much supply is failing to come to market. “It’s going to be a supply and demand issue,” Woodhouse says. “We have barely any supply coming on to the market compared to what we had in the mid-2000s.” ▲ Salta Properties chief operating officer Emma Woodhouse said developers needed stability and certainty before continuing with projects. But Melbourne is where the housing is needed, according to Charter Keck Cramer’s report. “Melbourne needs to build between 15,000 to 18,000 build-to-sell and build-to-rent apartments every year to accommodate the growing population,” the report says. The report also says that the Victorian government is not planning ahead appropriately with a “misalignment between supply and demand is anticipated to remain an ongoing issue”. Apartment pricing So what do developers do when a project cannot get off the ground? Many have opted to wait for more favourable economic conditions, others have opted to sell on their projects and cut their losses. “I think that the market needs to shift,” Woodhouse says. “In the build-to-sell space there hasn’t been a lot of movement in revenues for a very long time. “So those revenues have to readjust to what it takes to stack up a project with these sorts of revised economic inputs—so I think there has to be a market adjustment.” Developers have already adopted this as a tactic, changing prices to reflect higher incurred costs in delivery where possible. ▲ Time and Place co-founder Tim Price says that you have to know how different geographic pockets of the market will respond to pricing. But, as Time and Place co-founder Tim Price says, it is important to understand the difference in perceptions depending on where your project is. “Build-to-sell is a big part of our pipeline in Sydney and Melbourne,” Price says. “In Sydney you can shift the sales rate by $10,000 a metre and no one blinks. “In Melbourne you shift it by $1000 and everyone gets excited—so there’s sensitivities in different pockets as well.” Woodhouse says a price differential between houses and apartments will still be needed. “The price tag will have to adjust but there still has to be that big enough gap between buying a house versus buying an apartment to sort of push people into that space,” Woodhouse says. Price says that without a price adjustment, some developers like Time and Place are pivoting to build-to-rent . “We started looking at [build-to-rent] because the build-to-sell model was under a bit of pressure,” Price says. He also says developers need to look at feasibility differently. “For us, build-to-sell developers, to be able to get things off the ground, we’re going to have to take a view on sales rates which we haven’t looked at before,” Price says. “You have to break sales rates to make a project feasible.” ▲ Hamton chairman Paul Hameister speaking at The Urban Developer 's Melbourne Long Lunch event. Future market cycles and recalibration Charter Keck Cramer’s report says the Melbourne apartment market is in a state of recalibration. “Many stakeholders in the industry are suffering from what we are calling ‘recalibration pains’,” the report says. “The majority of buyers as well as many developers, sales agents, builders and financiers are still operating on prepandemic assumptions when it comes to land and build costs as well as apartment revenues.” The report also notes that land values will increase in certain areas and building costs will increase but stabilise with the Commonwealth Games cancellation and the Airport Rail Link postponement. Woodhouse says the future of the apartment market will depend on how stable people feel. “It just makes people nervous that things are still changing like we’re still in a period of instability,” Woodhouse says. “We really need things to settle. “I think once we get that stability going, I think they will get some simple momentum.” Charter Keck Cramer’s report points out that market acceptance is key to prices increasing though the lack of supply will help increase the demand for apartments prices have already pushed inflation to a five-month-high -->. “Further opportunities may also be available to increase prices if developers make a concerted effort to adapt to evolving purchaser expectations and offer highly desirable product,” the report says. “From a market perspective, lack of new supply will invariably result in greater demand for apartment stock, being the most affordable dwelling typology.” Hamton Property Group executive chairman Paul Hameister says without government intervention some of it won’t work. “I think without a change to the transfer duty system, we are going to have a lot of permits and no change on the ground,” Hameister says. “The biggest policy change the Victorian government can make is to create an incentive for people, including foreigners, to buy off the plan.” Woodhouse remains positive that the market’s new cycle will bring good news. “We know the fundamentals are there—people want to move to Victoria,” Woodhouse says. “We know that people need houses. “They’re going to need offices to work—people are going to help them return to work. “So, we have got all the fundamentals and we will go back into a good cycle.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. 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[+] Melbourne Apartments Will Stall Without Price Correction

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