Melbourne’s Mean Reversion Strategy Gains Momentum

But increasingly, those same headwinds are creating what some developers describe as a ‘tactical window’, attendees at an industry lunch hosted by Centuria Bass and The Urban Developer heard. 

Rather than retreating further, many are acquiring sites on the belief that Melbourne is nearing the bottom of its cycle—and that today’s pricing disconnect won’t last forever.

While sentiment continues to dampen the market, the consensus is that it is the bottom of the cycle, and sophisticated Melbourne and interstate developers are finding opportunities to position themselves for the next cycle. 

It’s a strategy increasingly being described as a “mean reversion” play.

The thinking is straightforward. Melbourne’s price growth has significantly lagged that of other capital cities over recent years, despite retaining many of the long-term fundamentals that historically made it Australia’s fastest-growing market.

“You hope one day Melbourne’s gonna... mean revert back to where it should be. It’s so far below... it’s fascinating,” Tobin Developments director Patrick Tobin said. 

▲ Developer Patrick Tobin believes Melbourne is at the bottom of the cycle and a recalibration is on its way.

Melbourne’s tactical window

That gap between fundamentals and current pricing is what many developers believe creates today’s tactical acquisition window.

It was a common thread in the cross-section of developers at the industry lunch, who have also had to diversify in some way to weather the storms. 

Developers acknowledge that delivering projects in Victoria remains exceptionally difficult. Financing remains selective, feasibility margins are thin, and planning challenges persist.

Diversifying key to navigating tough conditions

But those conditions are also reducing competition for quality sites, allowing well-capitalised groups to secure assets at valuations that would have been difficult to achieve several years ago.

The city’s long-term structural drivers—population growth, housing undersupply and constrained future supply—are reasons prices will eventually recalibrate.

“I don’t think Melbourne will continue at this bottom,” DCF Property’s Calvin Huang said. 

“The only way to [succeed in this market] is to diversify. 

“Melbourne’s really in a great position to make the most of the upside because that price growth is going to come.”

Huang is already backing that conviction in his First Light project (pictured in main image) in Melbourne where he is launching a flagship product. 

“We’re confident about Melbourne. That’s why we picked Melbourne to be the first [luxury fashion-branded home],” he said. 

“It also gives us the opportunity to hold some of our product.”

Affordable market garnering interest

The sentiment also reflects the fragmentation of Australia’s residential markets.

“I’ve never seen the country so disjointed in terms of the markets within markets,” Centuria Bass’s David Stone said. 

“Looking at the developers on our books at the moment, we’re probably erring more towards the more affordable end of the market, where we think there’s depth in market … from a lender perspective it’s great because our collateral will be underpinned.

“There’s still a housing crisis and an affordability crisis.”

▲ Centuria Bass’s David Stone said he had not seen such a fragmented market, but the fundamentals still underpinned the right investments.

It’s an area that Pitard Group’s Rick Impala said the builder-developer was also looking at closely. 

Impala said Pitard had been well positioned to cope with the challenges of the pandemic as a builder-developer and it had focused on medium-rise residential projects in good locations. 

“The bread and butter has always been build-to-sell, but we’ve done two affordable housing projects now and that seems to work,” he said. 

“As a builder we’re getting margin and it works, and you’re not taking that risk.”

▲ Rick Impala (right), pictured with DCF’s Calvin Huang at the Centuria Bass industry lunch.

Impala said it was, however, growing more difficult to make the projects stack with the way the government was structuring the deals and the capital. 

Goldfields’ Thompson said the developer had deliberately diversified interstate years ago because each state moves through different property cycles at different times.

“We said let’s diversify geographically because not every state will fly at the same time... we’re lucky we made that call seven or eight years ago,” Thompson said. 

Now, many believe Melbourne’s turn is approaching.

That doesn’t mean the challenges have disappeared. Affordability pressures, conservative valuations and settlement risk continue to shape project feasibility, with developers increasingly focused on products that sit within the deepest parts of buyer demand.

Despite those near-term hurdles, confidence is quietly returning, and Centuria Bass chief executive David Giffin said the group was focused on working with well-established developers with strong balance sheets to get projects out of the ground in Melbourne. 

Giffin said investors were prepared to look through today’s conditions; the city’s prolonged underperformance has created one of Australia’s most compelling counter-cyclical opportunities.

In other words, while Melbourne remains Australia’s toughest development market, it may also be becoming its most attractive.