Why Salta Won’t Break Ground on $400m Pipeline

It’s becoming a common theme. Developers across Victoria hold planning permits for projects worth hundreds of millions of dollars but are choosing to delay construction indefinitely as economic conditions render previously viable developments unworkable. Construction costs have risen 30 to 40 per cent since the pandemic. Government levies compound financial pressure, creating a gap between what projects cost to build and what they can generate in returns. Where permits once signalled immediate construction activity, they now function more like options, held until the market realigns with project economics. It’s creating something industry insiders call the “ready-to-build” phenomenon. And Salta Property Group managing director Sam Tarascio says it’s becoming the new normal. The family-owned developer has permits for three commercial office buildings worth more than $400 million in projected end value but says it will not proceed with construction in the short term. The three permitted developments are in Richmond, Cremorne and Collingwood, but even prime city-fringe locations are not enough to make the commercial projects viable. What’s stopping the projects? “The reality is that the office sector is extremely challenged at the moment on a number of fronts,” Tarascio tells The Urban Developer . “Construction costs have increased by 30 to 40 per cent, so face rents need to lift by 70 to 80 per cent before new office supply becomes viable.” Salta completed Industry Lanes at Cremorne during 2021, achieving rent deals ranging from $550 to $650 per square metre. Tarascio says that building an identical building today would require rents of about $950 per square metre to achieve viability. ▲ Industrial development remains a core focus for Salta as it diversifies away from stalled office projects, like Industry Lanes. CBD developments face similar challenges, with new buildings requiring rents between $1500 and $2000 per square metre compared to current premium building rates around $1000 per square metre. “What it basically says is that existing well-placed assets have probably got good growth in them as the office market starts to stabilise towards a more normalised vacancy level, but it also means that development of those office assets is unlikely until well into the future,” Tarascio says. Melbourne’s office market struggles are reflected in current vacancy rates of 17.9 per cent, according to Ray White Group research, well above healthy market levels. But retail vacancy has improved to 8.8 per cent, potentially signalling broader CBD recovery, as office and retail trends often correlate. These tentative signs of recovery may be being undermined by policy changes and levies Tarascio says are making projects even less viable. He singles out “the increase to the Emergency Services Levy and the imposition of the Car Park Congestion Levy causing further damage to development feasibilities” as a barrier preventing projects from proceeding. Salta’s Victoria Gardens precinct at Richmond was required to provide minimum car parking under original planning permits but now faces a $2000 levy per car space. “We were required to provide those car parks. Plus, the customers need them. And now we’re being taxed on it,” Tarascio says. While Salta has begun construction of a 476-apartment build-to-rent project at Victoria Gardens, its plans to develop 1300 additional apartments within the precinct have been taken off the table due to the government levies. “That’s the equity we were going to use to build 1300 homes. That is now gone and so the homes are gone. How does that align with housing policy?” Tarascio says. Tarascio says current policy settings could create unintended consequences for government revenue. “Land values have diminished so substantially that government will start to see that flow through into their land tax take,” he says. ▲ A rendering of Salta's 25 River Boulevard build-to-rent project under construction at Victoria Gardens. The state government’s transition from stamp duty to land tax on commercial property means declining land values will directly impact treasury coffers, Tarascio says. “Unless land values recover, you’re going to start to see a diminution of the tax base.” He says reversing some recent tax implementations could unlock significant housing supply because “more volume means more tax. That’s the right way to earn more tax rather than just higher taxes”. Tarascio thinks there may be a disconnect between government departments hindering progress, saying that “if I was an outsider and I didn’t know better, I would say planning and treasury don’t talk” as planning authorities facilitate approvals while treasury taxes undermine project viability. The vacant residential land tax also hits hard. Salta’s Abbotsford project of 500 apartments was completed mid-Covid and retained almost 300 units on completion due to policy changes. “We’re paying vacant residential land tax on that stock,” Tarascio says. “These taxes are basically a big ‘don’t come to Victoria’ sign for developers.” Three policy changes needed Tarascio identifies three key areas that, in an ideal world, would change immediately to reignite development. First is removing the “Covid-debt levy”—lowering land tax thresholds that particularly impact small investors. “You need a combination of investors and owner occupiers buying stock because particularly with large scale projects, you’ve got to get to your financials close,” he says. Second is reinstating the off-the-plan stamp duty concession, which was critical for apartment sales. ▲ Salta’s Melrose building at Mulgrave, completed at $380 per square metre, would require $500 per square metre to be viable today. “Without a benefit for buying off the plan, you may as well wait till the building’s complete and see what you’re buying. Which does no one any favours. That’s why we saw such a huge drop off in the amount of stock in the market.” Third would be removing or reducing foreign purchaser levies: the 8 per cent additional duty on top of normal stamp duty means “a foreign buyer just simply says it’s not viable to invest here”. Tarascio says it’s a short-sighted levy considering foreign investors are “a big part of underpinning the supply of new products to the market”. There’s also a psychological impact of constant tax increases on buyers, as “every dollar of tax or other charge effectively reduces any property value by $20” based on a 4 per cent yield rate, Tarascio says. “This constant layering of new and increased charges is stripping the value growth out of the properties in the market. So, the market says, ‘I’m not confident buying today because I’m not sure that next year it’s going to be worth more’.” What it will take for office recovery The specific indicators to watch before office construction becomes viable again are “vacancy rates coming down, occupancy improving, face rents starting to go up, and incentives coming off the table”. Current market signs suggest vacancy rates may have peaked, with areas of Cremorne recording deals approaching $800 per square metre, moving closer to the $950 threshold required for new development. Tarascio believes market recovery will begin when premium office spaces fill up and businesses needing high-quality space “can’t find those buildings that can offer those good experiences”—forcing them to “take the lead and set the new benchmark” for development. “But I think there’s probably another couple of years of the market needing to reset itself before you see volume coming back to the sector.” Despite challenges, tenant demand shows recovery signs, with “more interest and demand from tenants seeking to increase their footprint to accommodate business growth, combined with companies requiring their employees to be in the office”. ▲ Salta founding director Sam Tarascio Snr with son and managing director Sam Tarascio. Tarascio, whose company has operated for 55 years, called this “probably the hardest downturn that I’ve experienced” and different from the GFC because “the problem at the moment is not capital, it’s this disconnect between government’s objectives and its policies”. In the meantime, Salta continues expanding its build-to-rent portfolio and industrial developments while maintaining office permits as future options. “It means that ‘ready-to-build’ is probably around for a bit longer yet,” Tarascio says. Addressing the crisis requires government coordination and policy reform. “We’re not asking for handouts, we’re asking for a coordinated, investment-ready environment that supports housing delivery at scale, with a tax structure that enables more projects to get off the ground—not just for us, but the whole industry.”

Why Salta Won’t Break Ground on $400m Pipeline

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