The doorbell is ringing again as institutional property players from near and far increasingly look to dig deeper foundations in Australia’s $9-trillion housing market.
And with the gap between detached and attached housing prices widening to record levels, the welcome mat is well and truly back out in the nation’s apartment sector.
After shying away from large-scale investment in the sector in recent years, the institutional urge to get back in the apartment game is on the rise again, driven by a dwindling pipeline, strong growth in capital flows and the reopening of global borders as Covid vaccination levels increase.
Stockland, the country’s largest listed residential developer, has recently shown its hand, revealing a plan to “dynamically reshape” its portfolio by increasing its exposure to apartments over the next five years.
The announcement last month—ironically, while the company still rides a wave of detached home sales brought forward by the pandemic—is a clear signal of the shift in sentiment.
“We think the apartments sector has the potential to outperform the established market over the medium term,” says Stockland chief executive of communities Andrew Whitson.
“We’re looking at a number of opportunities at the moment, predominantly in Sydney and Melbourne, and we think now is the right time to start to build that pipeline progressively.”
Its strategy to grow its apartment business—including “exploring” the emerging build-to-rent sector—and unlock mixed-use opportunities is aimed at capitalising on the return of pre-Covid immigration levels and the price disparity between detached and attached dwellings—now nudging 80 per cent and beyond in some major cities.
But Whitson stresses it is only one component of an overall company strategy to increase its exposure to the residential sector more broadly and “not a huge shift into Stockland being the largest by volume developer of apartments in the country”.
“We see it being of moderate scale ... 500 to 1000 settlements per annum,” he says. “By comparison, in our masterplanned communities business, we’re settling 6000 to 7000 per annum at the moment.”
Stockland plans to offload up to $2 billion in retail and retirement assets to re-weight its portfolio and allow for more space within its development pipeline for apartment projects.
“We think urbanisation is going to continue to be a strong theme, particularly as you get migrants returning and particularly when you look at settlement patterns across our cities and where government policy is pushing new housing,” Whitson says.
“The only way to accommodate population growth is going to be through densification in the inner and middle rings ... and if you want to be a player in somewhere like greater Sydney you’re going to have to be prepared to develop at density, so that pushes you into both build-to-sell and build-to-rent apartments.
“We’ll be looking at precincts where we can leverage our community creation capability but we also like the value proposition of build-to-rent and think that in time it is going to play a larger part in housing the growing population.
“At the right time, we’ll be a fast follower... we think there’s an opportunity there but we just need to see it mature in Australia similar to how it has in the UK.
“Over the next 12 months there’s a number of projects to be completed across the country and we’re going to get far greater visibility to the depth of demand for that sort of product and what sort of rental premiums customers are going to be prepared to pay.”
Whitson says as part of the strategy to increase its exposure to the apartment sector, mixed-use opportunities also were on Stockland’s shopping list.
“I think as part of the Covid recovery we’ll see an acceleration of mixed-use government sites coming to market as well, so we’re positioning ourselves to look at those mixed-use opportunities. As a diversified asset creator, we think we can play a part in delivering those precincts and a high-quality product.”
In the latest Urbis Apartment Essentials report, the planning consultancy firm calculates that this year 9732 fewer apartments will be completed across Australia than in 2020, and 19,698 less than when the market peaked in 2018.
“It is likely supply will need to be mobilised quickly to deal with the effects of increased immigration as border restrictions continue to be eroded,” the report says.
“This is especially the case following a four-year period where the volume of launches, approvals and applications has been trending down across the country.”
Urbis director Mark Dawson observes: “The big players tend to position themselves pretty well in terms of when to get in and out.
“Affordability at the moment is a big thing and it’s not just about people buying, it’s also about people not buying. We know more people are renting and they are renting for longer.
“And when you marry that up against reduced investor sales and a diminished pipeline, fast forward that trend over the coming years with a rebound in migration and you start to risk a shortage of rental accommodation and elevated rents.
“So, that drives not just a need but also a desire from potential investors whether they’re individuals or institutions to meet that demand.”
The difference between house and apartment prices across Australia’s capital cities is the widest on record (37.9 per cent) as a result of the demand for detached dwellings since the onset of Covid.
Colliers latest data indicates that in Brisbane—where the property market has been spurred on by interstate migration and the 2032 Olympics—the median detached housing price is currently 82 per cent higher than the median attached housing price.
“That’s really driving interest back into the residential market,” Colliers residential director Brendan Hogan says.
“We’re seeing an increase in institutional money coming back into Brisbane and south-east Queensland.
“From an apartment perspective it looks like a really strong proposition at the moment.
“Detached house price growth has moved to levels where apartments look compelling value ... and all the major institutional groups are back, dusting off the plans and looking at Brisbane from a build-to-sell and build-to-rent perspective.”
Speaking at the recent Australian Financial Review Property Summit, Mirvac chief executive Susan Lloyd-Hurwitz told the industry forum there had been a significant change in Australia’s development landscape over the past few years.
“Way before Covid ... we stepped right out of the market for acquiring new sites because people were paying prices and, more importantly, taking risks that just really were well beyond our tolerance.
“That disappeared about three or four years ago. So, what we’re seeing now is a willingness of landowners to work with people like us and Stockland and Lendlease to unlock value in sites together through some kind of agreement.
“Certainly, for us that’s something we’re actively looking for—it’s good for us, it’s capital efficient and it’s good for the landowner ... and we can keep our balance sheet light as we go through the long process of rezoning and planning.”
At the same forum, Stockland chief executive Tarun Gupta spoke about the company’s commitment to expanding its capital partnerships.
“Australian real estate on a global standard is still providing a superior, much higher return ... relative to other markets we are still good value on a risk adjusted basis, which is attracting a lot of capital from offshore.
“But also, domestically, our super funds are getting bigger and, therefore, their requirement to do bigger deals is getting more prevalent, which plays at the scale that Stockland plays and wants to play.”
Gupta says although the “clouds” of skill shortages and supply chain disruptions were still hovering over the sector “on the whole the trajectory we think is still positive and the forecast is for some significant growth next year”.
“We have a very vibrant, successful over-decades-proven housing market ... and part of that is because we have great diversity of product. We need to continue to have a free flowing market, with checks and balances, that allows it to innovate and provide those options—it’s not one size fits all."
Urbis’ Mark Dawson agrees.
“Our view is that the years ahead have got a more diverse and more innovative approach to housing to come and apartments are part of that and within that there’s a whole array of things like build-to-rent, co-living, affordable housing, shared equity and other models.
“So, what we’re going to be looking at is a broader spectrum of housing and a deeper spectrum of housing going forward.”