Investors Return to Build-to-Sell Market

Despite developers’ hesitating to launch new projects, and a drop in supply in east coast cities, the appetite for build-to-sell apartments remains keen.

Apartment supply in the first quarter of 2022 in Brisbane, Sydney and Melbourne fell below the average for the past decade, according to Charter Keck Cramer’s latest data. 

Many developers have paused launching build-to-sell apartment projects due to escalating costs raising their financial risks and sale prices, or worry the market would not be accept current pricing in the face of increasing interest rates, or both. 

However, Charter Keck Cramer associate director Richard Temlett told The Urban Developer there were key groups of buyers developers could sell to, noting investors, downsizers and first-home buyers remained keen on unit stock. 

Many downsizers were seeking to scale down in the short-to-medium term as their living preferences and housing requirements changed, Temlett said.

And many in this target market didn’t need finance, given they had paid off, or had significant equity in, their family home and were therefore less affected by rising interest rates, he said.

Downsizers have also seen the value of their home increase during the pandemic and are also poised to take advantage of the federal government’s amendments to the downsizing superannuation scheme.

Apartment market supply during the past decade

_{Source: Charter Keck Cramer Apartment Market Update, June 2022} 

Temlett said that with increasing demand and increasing rent prices, but low supply, investors would also look favourably at entering the market.

“Given interest rates are now rising, investors will be seeking assets to use as a hedge against inflation and rising rates,” Temlett said.

“As residential rents grow in an inflationary environment, apartments have the potential to achieve this goal.”

First-home buyers were another key group for the sector as new government schemes making buying more practical for more people, and skyrocketing house prices may drive this cohort towards apartments.

“While rates are increasing, it is important to appreciate that they are still low by historical standards and many households have saved money for a deposit during lockdown,” Temlett said.

“Many of these buyers have now been priced out of the established housing market and with their lending capacity diminished, it is anticipated that demand from them stands to be driven into the apartment market.”

▲ While Melbourne's apartment supply has decreased and developers are hesitant, Charter Keck Cramer says there is still demand for apartments.

Temlett said that if developers hesitated to launch build-to-sell apartment projects it would lead to even lower supply in the next few years. 

“Launching projects and targeting these groups has multiple other effects,” Temlett said. 

“If more downsizers move into apartments, it frees up family-sized housing in other areas for home buyers in those areas to buy or for developers to redevelop into apartments to allow more people to buy, move in and live in those desirable areas.”

Temlett also said this would happen with investors and the build-to-rent sector. 

“Not everyone can afford the build-to-rent offerings and if more investors buy apartments, that creates more supply in the rental market,” he said. 

Temlett said flipping a project from build-to-sell to a build-to-rent model would depend on the area, project and the developer’s finances

It would mean a developer would need to construct the apartments before renting them, rather than the usual model of pre-selling apartments before construction.

Charter Keck Cramer’s data showed that in the first quarter of 2022 Melbourne hadjust 604 apartments for sale, compared to 2393 in the first quarter of 2012. 

Sydney had 2721 apartments for sale in the first quarter of 2022 compared to 2809 apartments for sale in the first quarter of 2012, while Brisbane had 1024 apartments for sale in the first quarter of 2022 compared to 835 apartments in the first quarter of 2012. 

During the past decade, Brisbane averaged 1700 apartments, while Sydney averaged 4800 apartments and Melbourne averaged around 3300 apartments for sale per quarter.