Lockdown weary Melbourne might be conducting property business at arms’ length thanks to the pandemic, but that hasn’t slowed the number of developers circling the southern city in search of opportunity.
The permit pulse in the southern city still beats strong, with lockdowns and a cautious economic outlook doing nothing to discourage developers looking for a way to capitalise on a market that has very real evidence of being two-speed.
Apartment supply data is showing continued signs of slowing. A number of approved projects are experiencing delays brought on by weakened pre-sale demand, rising land and building costs, and stricter funding conditions.
The Melbourne market has been battling a range of factors impacting the sector, including forced border closures, the ongoing cladding crisis, a global shortage of construction materials, tightening planning requirements and widespread issues with building defects.
Indeed, a property market analyst told The Urban Developer off the record that a number of high-profile residential developments that had been marketed strongly overseas had been heavily discounted.
“Some projects have been severely impacted by the border closures and won’t ever fully recover. Having said that, when borders reopen, demand will come back strongly,” he says.
Another property market analyst admits it’s a “very strange two-tiered market”.
“While the high-density CBD market is very soft, by contrast, across the market there’s more movement in the outer Melbourne housing market. But there is still a lot of stock in the residential market,” they said.
While inner city retail is struggling, industrial precincts on the outskirts of the city are showing promise, such as 26 premium industrial land allotments selling in Melton.
Government support has also been wound back. According to JLL, lockdowns threaten to deflate sentiment and stifle the near-term recovery in the apartment market.
But once borders re-open, demand will likely far exceed moderate apartment supply, predicts JLL’s head of residential research, Australia, Leigh Warner.
“Investor demand has clearly picked up in 2021, and this demand has started to flow through to the apartment market,” Warner said.
“Rapid rises in detached housing prices has also helped push more owner occupier demand towards more the affordable apartment market.”
JLL insights reveal that developers had started to become a lot more confident about the next apartment cycle, but long project lead times more than this cycle were still some years off.
But glass-half-full developers see nothing but opportunity, moving ahead with multi-million-dollar projects despite the border closures and other restrictions.
While the city was locked down repeatedly during the past 18 months, it will switch gears and be an undersupplied residential market once the borders reopen again and the population boom returns, the managing director of Melbourne property developers Beulah Jiaheng Chan says.
“Many who are unfamiliar may shy away, but with demand set to recover in 2022, the completion rate of CBD apartments is only 20 per cent of that in 2017, so we definitely think that this is a market to watch, whether its build-to-sell or build-to-rent,” he says.
Boutique developer Samuel Property recently purchased a three-storey block of 1950s flats in Louise Street, St Kilda for $21-million. It will be demolished to make way for a tower development.
Managing director Illan Samuel is betting on investors coming back into the market, telling The Urban Developer that the pandemic is the perfect time to get projects under way.
An off-market property was bought to market this year, selling for 10 to 20 per cent more than what was being thrown around while it was off-market last year, he says, adding that Samuel Property has zigged while everyone else has zagged.
“Capital is cheaper and we’re getting a number of approaches from buyers on a range of projects. It’s the sweet spot right now,” Samuel says.
“I’m a big believer in forward momentum. I don’t believe it's fair to not do anything, and I’m not in a position financially to sit there and do nothing, to be honest.”
Another boutique developer Hip V. Hype confirms it has a pipeline of boutique projects in inner urban Melbourne.
“Prices in the land market are incredibly strong in metropolitan Melbourne and have only continued to strengthen during the past 18 months, making apartment living a viable and sought-after solution for many families,” head of sales Katya Crema says.
“Lockdown six has impacted property supply in a material way.
“Restrictions have disrupted the spring selling season and people seem to have put major decisions on hold.
“We’re expecting to see significant activity in the market when restrictions ease.”
New players are heading south, too. Sydney-based developer Fortis has also viewed the pandemic as a chance to enter the Melbourne market, with plans for a $90-million development in Richmond, a mix of commercial and residential in a proposed 13-storey development.
Director Charles Mellick remains confident about city-fringe locations and was positive that the demand for office space would continue to accelerate in Melbourne once borders re-open.
Meanwhile, property behemoth Gurner has added another $250 million to its growing $7-billion pipeline with the acquisition of 334 City Road, Southbank, for a 40-level tower featuring retail, a gym and 400 apartments.
Gurner’s latest project will form one of the developer’s landmark mixed-use developments as it increasingly looks to add more projects of scale to its pipeline.
“We are increasingly building a portfolio of larger mixed-use projects where we can incorporate our wellness and concierge services as a longer term play, and this project perfectly fits that model,” Tim Gurner says.
“I believe that this next property cycle will move quickly and it will be critical to swiftly capitalise on the economic recovery period we are experiencing, underpinned by what I am forecasting will be significant movement and migration from overseas from 2022 onwards.”
Meanwhile, alternative asset classes could provide an opportunity.
JLL data reveals that Victoria’s transaction activity for childcare assets have almost doubled New South Wales and Queensland sales volumes in 2021, it says.
The state recorded approximately $92 million of childcare asset sales, compared to $53 million for NSW and $45 million for Queensland in the first half of 2021.
Demand has been boosted by rising utilisation rates, increased government stimulus, longer leases and a growing emphasis on centre quality, with more than $220 million of childcare assets exchanging hands to June 30, 2021.
However, what the market will want in the future has shifted, Chan says.
“People are craving new and exciting experiences, so having a differentiated offer is what will help developers stand out, whether it’s in sectors most negatively impacted by the pandemic such as retail, hotel or hospitality or arts and culture.
“An opportunity exists to do something radically different, so it’s an exciting time.”
Similarly, a structural shift in the commercial office market requires a major rethink.
“In order to attract workers back to the office, the offering needs to vastly improve” Chan says.
“Landlords need to put a bigger emphasis on wellbeing and lifestyle, as brainstorming sessions, workshops and culture don’t quite provide the same experience virtually, so high quality offices will need to see a net positive demand, but grade B and C may need to convert to other uses.”