Turn of the Tide as Supercycles Track Upwards

All signs point towards a supercycle upturn, according to panellists on day one of The Urban Developer’ s Urbanity conference on the Gold Coast. The audience at the Everest Basecamp panel was told that green shoots of financial recovery were emerging and some markets would rise more quickly than others. Peregrine Projects managing director Joseph Chahin said that the current market conditions provided a “unique opportunity” for those developers who knew where to look. “What I’m seeing, I’ve only seen twice in 31 years,” Chahin said. “I saw it in the early ’90s , during the recession that we had to have, where there were some incredible buying opportunities that provided providers with a pipeline of work for five to 10 years. “I saw it again during the GFC … and those things seem to be playing out at the moment.” Cost of capital KordaMentha head of real estate partner Tony Massaro said that macrotrends were affecting the channeling of capital. “With the shenanigans going on in the US, there is some global capital saying we’re still going in there, but we might divert a little of that down into Australia,” Massaro said. MaxCap head of research Bruce Wan agreed, and said that interest rates were also an important factor. “Every time the Reserve Bank cuts the interest rate by 25 basis points, you see building approvals go up by about 2.5 per cent. “[We’ve had] two rate cuts so far, two more to come. We are looking at a breadth of opportunity that’s 10 per cent higher than what we’ve seen over the last couple of years.” And a balancing of interest rates would benefit lender and borrower, he said. “Borrowers will find feasibilities stack up a little bit better, and lenders are still making respectable money.” Chahin said that there were indications that there was compression in the cost of capital. “Combine that with a very stubborn rate that doesn’t seem to be going anywhere fast, that certainly is a key driver to decision making,” he said. ▲ Rendering of Peregrine’s mixed-use project at Collingwood. Sector specific outlook Another signal the panel considered was commercial asset valuations. “Over the past six months, we’ve seen everything turn around, reach the bottom and start rising again,” Wan said. “The unloved office sector, even of those segments, we’ve seen Melbourne office find a bottom and start to recover in prices. “The retail sector, facing the onslaught from online shopping, even there, we’ve seen a stabilisation of values, industrial warehouses, again, very much in demand. “All of those sectors have sort of reborn by the last six months and start to recover in terms of values.” This is a boon for developers and also lenders facing reduced collateral risk because asset values are rising. “So there are a lot of positives to be taken away in terms of this market environment,” Wan said. But office is still lagging behind despite the positive signs, according to Chahin, as institutional capital is raising its head but not yet making moves. “We still haven’t seen evidence of those sorts of buying groups re-entering the market,” Chahin said. “They’re certainly there, they’re spectators, but they haven’t strapped their boots on. “Those fundamentals are starting to turn but that risk appetite isn’t such that we’re prepared at this point in time to deploy capital into those spaces,” Chahin said. “We’re a lot more comfortable in terms of the maturity of residential.” Different markets, different recovery Developers need to remain nuanced in their thinking about market recovery with different sectors and markets at different stages of their supercycles. “The past five years taught us immense dislocation in state-based property markets,” Chahin said. Melbourne had been “somewhat of an outlier” during the past five years, he said. “But I think there are some key things that are starting to evolve at the moment that suggest to us that Melbourne is on the cusp of the super cycle.” “Or is this a once-in-a-lifetime moment to recapture five years of gains in a very short period of time?” If you ascribed to the counter cyclical perspective, Chahin said, then there was one place you needed to be. ▲ Rendering of Peregrine Projects’ Toorak Road residential development. “Depending on your risk profile and where you want to allocate capital, we can’t see any better buying opportunities than what currently exist in Melbourne. “And interestingly, before vendors start to readjust their price expectations upward, we think there’s this moment of time, a small window of opportunity where you could buy a project and get a level of comfort that you could get a capital partner on board that can understand your mitigated risk around planning, and around sales and marketing.” Massaro said it was clear markets were doing different things, but underlying drivers remained. “Australia is a market of micro-markets. What is happening in Perth is not necessarily happening in Sydney and is not happening in Melbourne at the same time. “You need to understand the markets that you’re playing,” Massaro said. “We have had for 10 to 15 years a lack of ability for new stock to come to market and keep pace with demand. “But I am an optimist, and I believe that there is always opportunity out there. You just have to work hard enough to find it.”

Turn of the Tide as Supercycles Track Upwards

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