[+] Why No One is Developing Larger Apartment Stock in Melbourne

Melbourne’s inner-city is awash with small apartments and high vacancy rates, while families and residents looking for more space are forced out of the inner- and middle-ring suburbs.

Melbourne’s apartment market has languished in the wake of Covid-19 and the substantial reduction of international migration.

Median unit prices have grown about 6 per cent during the past 12 months in Melbourne, while house prices have increased by about 12 per cent according to the Real Estate Institute of Victoria.

Data compiled by Ignite, a not-for-profit research group supported by the University of Melbourne’s Faculty of Architecture, Building and Planning, shows a significant shortfall in larger apartments being developed in Melbourne’s inner and middle-ring suburbs.

According to the Victoria in Future 2019 report, 27,690 one to two-bedroom apartments, and 5112 three to four-bedroom apartments were required to be built each year to meet the forecasted population growth of Melbourne.

Ignite’s research data indicates that Melbourne is experiencing a significant shortfall in new housing with about 8352 one- to two-bedroom apartments, and 2144 three- to four-bedroom apartments coming online each year.

Melbourne housing shortage

Melbourne is experiencing significant shortfall in housing.
Source: Ignite

Developers’ perspective

But for developers building in Melbourne striking the right mix of apartments is a balancing act according to Samuel Property development director Romy Jackson.

“In terms of financial viability, it can be a difficult balancing act as naturally with increased space comes increased cost,” he said.

“However if the product is designed right and placed in a location that can support the pricing, while still representing an acceptable percentage of the buyer’s house value, it can stack up for both parties.

Jackson said there had been a strong appetite for the boutique developers’ three-and-four-bedroom product, which had appealed to the “downsizer” looking to stay in their hyper-local area and still have a spare room and study.

Lendlease head of residential developments Ben Christie said the developer made apartment mix and design decisions “with a customer lens”.

“Generally speaking, one- and two-bed apartments are in greater demand among renters, and therefore more attractive to investors who traditionally make up a large portion of apartment purchasers,” he said.

“However larger apartments are becoming more popular in line with the pace of urbanisation, as families are prioritising amenity over space.

“While this trend has slowed in the short term due to the pandemic, our forecasts show it will increase again over time.”

Christie said Lendlease built a residential portfolio with a mix of studios, one, two, three and four-bedroom apartments, as well as the ability to amalgamate apartments.

▲ Samuel Property's Caspian in Melbourne is spearheading the demand for boutique bigger apartments.
▲ Samuel Property's Caspian in Melbourne is spearheading the demand for boutique bigger apartments.

Investment value proposition

MaxCap chief investment officer Bill McWilliams said higher price points and lower yields meant the market for larger apartments was geared towards owner-occupiers.

The median property price for a three-bedroom apartment in inner-city Melbourne was $940,000 at the end of March according to realestate.com.au.

“I think there are a number of developments that are more tailored to the owner-occupiers … with a higher-end fit out and they take a lot longer to [sell],” McWilliams said.

“The reality is it’s probably easier to get a better yield on one to two bedroom apartments.

“The higher [price] per square metre makes the yield a lot less attractive on bigger apartments from an investment perspective.”

McWilliams said the high price and lack of stock of bigger apartments meant it was not an attractive value proposition for investors.

He also believed the market was largely based in the high-end downsizer owner-occupier presently.

McWilliams said developers relied on the sale of one- to two-bedroom apartments off the plan to investors to help underwrite the costs of construction, as the larger three and four-bedroom apartments took longer to sell.

“People will absolutely come back into the CBD, it’s not a matter of if, it’s when. There has absolutely been a change in demography … people will return to the CBD market, it will just take some time.”

▲ Non-bank lender MaxCap says price point too high while yields are low on bigger apartments, which makes it less appetising as an investment.
▲ Non-bank lender MaxCap says price point too high while yields are low on bigger apartments, which makes it less appetising as an investment.

The family-friendly future of our cities

Demographer and co-founder of The Demographics Group Simon Kuestenmacher said he believed more needed to be done to develop larger family-friendly apartments in Melbourne’s inner city.

“I think from a developer perspective if you build a big tower you make more money as one or two bedroom apartments, everything you put online sells,” he said.

Kuestenmacher said millennials were the “procrastination generation” who had delayed relationships and families to live in inner-city suburbs across Australia.

“All of a sudden millennials are having 1.7 kids and need a zoom room,” he said.

“So they are now seeking family friendly housing of three to four bedroom dwellings.

“When it comes to property everybody needs to make compromises, but one thing that people don’t want to compromise on is the number of bedrooms.

“They will go out to the suburban fringe … they’re not going to stay in the inner suburbs because there’s no housing available.”

Kuestenmacher said we needed to develop large European-style family-friendly apartments that normalised families living in four or five-bedroom apartments in inner-city suburbs.

He said the tyranny of distance meant many families had long commutes into the CBD. Kuestenmacher said he believed there was a market for building stacked townhouses and in doing so developers could help to regenerate Melbourne’s lockdown-ravaged inner-city and boost the diversity of its social landscape.

University of Queensland Professor of Urban and Regional Planning Neil Sipe said Australian Bureau of Statistics Census data indicated families with children moved to the suburbs, while young adults, singles and childless couples moved to inner-city suburbs.

One-third of Melbourne’s inner-city residents were aged between 25 and 34 in 2016.

“Despite their smaller housing sizes, the inner cities offer more convenience and accessibility to work, study and recreation. But they’re failing to meet the needs of families in terms of space, amenities and affordability,” Sipe said.

“Australian planners must find ways to facilitate a shift toward more compact living to create more diverse neighbourhoods, bring people closer to their jobs, and give families more flexibility.

“Future policies should integrate people’s non-negotiable needs and wants, including a desire for ample space, privacy, quietness and liveability.

“Developers should be required to offer mid-rise buildings with affordable and sound-proofed three or four-bedroom units. Inner-city units should include multiple bathrooms, storage rooms and large porches where residents can keep plants and pets.”

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Article originally posted at: https://www.theurbandeveloper.com/articles/melbourne-apartment-shortfall