Stabilising Conditions in Melbourne Bring Hopes of Improved Feasibility

Developments remain difficult to stack up in Melbourne’s property market as revenues fail to keep pace with costs, forcing developers to work with significantly lower margins than they may have previously considered. But on the bright side, construction costs have stabilised after years of volatility, banks are dropping long-standing profit thresholds for development loans, and international investment capital is pivoting towards Australia—and Melbourne is becoming a prime target. These were key takeaways from a property development panel at The Urban Developer Greater Melbourne Residential Summit, which last week examined the challenging yet evolving landscape for developers. MaxCap chief investment officer Bill McWilliams says capital that had flowed into the US is now shifting direction. “Since Trump has been in power, we’ve seen appetite move away from North America towards Asia-Pacific regions,” he says. Australia’s position in this shift is strengthening, according to McWilliams. “Australia always features highly on a list of countries to invest in Asia-Pacific, but really Japan has always been at the top of that list. “That’s slowly changing, and we’re starting to see Australia be the number one target country to invest in.” This capital influx coincides with financial institutions removing internal profit thresholds for development funding. “Banks that wouldn’t touch a project below certain profit margins are showing more flexibility, enabling developers to proceed with projects despite compressed returns,” McWilliams says. ▲ Kurtis Prescott, Bill McWilliams, Elissa Loh-Brown, Tim Hyland and The Urban Developer chief executive Adam Di Marco. Developers are adjusting their risk tolerance, accepting profit margins that would have been rejected in previous years, recognising that modest returns are preferable to leaving capital idle. “Feasibility is difficult to stack with revenues not escalating while costs continue to rise,” McWilliams says. “Even if a project looks like it works initially, when you get a building tender, the prices come back increased, revenues haven’t escalated, and it doesn’t work. “But we are seeing more developers pull the trigger on lower profit projects. It comes down to how confident you are in your ability to sell.” Construction market stabilising Mitchell Brandtman associate director Kurtis Prescott says the construction market is showing significant signs of stabilisation after years of volatility. “We’re seeing stability and predictability across the board,” Prescott says. “Builders know where their prices need to be, they’ve been through the worst. The labour market has capacity now. Resources are available and subcontractors are more predictable.” This stability extends to pricing. “What we’re seeing is those prices haven’t moved in the last year or so, which allows builders to secure work,” Prescott says. This price plateau marks a turning point after extended periods of escalation that made feasibilities nearly impossible to calculate with confidence. The stabilisation is extending throughout the supply chain, with suppliers now offering payment terms and credits again, helping improve market liquidity. ▲ Mitchell Brandtman associate director Kurtis Prescott. The risk of contractor insolvency, which has plagued the industry with high-profile failures, appears to be diminishing. Prescott says “we think the worst is past”. The labour market, particularly in Victoria, has experienced a significant shift with increased capacity after years of shortages. Legacy Project Management associate Elissa Loh-Brown says the subcontractor market is “hungry” and “improving massively”, with most trades showing increased appetite for work, though electricians remain in high demand. Prescott says tenders are coming back more aligned to developers’ expectations, “but the profit risk margin is still well squeezed compared to a few years ago”. South-East Asian investment surge RPM national strategy manager Tim Hyland says more overseas investor groups are actively seeking Melbourne opportunities. “There’s a lot of money looking for a home now,” Hyland says. “The Japanese have been big players over the past couple of years and now we’re seeing newer groups entering the market.” He notes increased interest from a Japanese company previously focused on Sydney, along with Thai and Vietnamese groups, while local private capital remains active, particularly in greenfield developments. Safety is a motivating factor for South-East Asian investors amid global uncertainty. “Australia has always been considered safe. And it’s also the diversity here. Melbourne’s greenfield market offers real diversity, and that’s why it’s attractive,” Hyland says. ▲ RPM national strategy manager Tim Hyland: “There's a lot of money looking for a home at the moment". Established market competition Developers face significant competition from the established property market, particularly in greenfield developments. “One of the biggest competitors is the established market—2500 lots currently sitting on the market,” Hyland says. “These are often resellers who bought land but can’t afford to build. The established market is more attractive—the driveway is done, the letterbox is here, the garden’s done, and it’s a cheaper option.” Hyland believes interest rate cuts will help developers overcome this competition. “Rate cuts will give the land market the ability to capture some of those sales,” he says. In the meantime, developers are offering rebates while adjusting financial projections. “We’re generally running two years of flat prices, then threes, then four to five per cent growth, and then a big healthy J curve at the end, just to get it through the investment committee,” Hyland says. The challenging environment has affected land transactions, with landowners showing greater flexibility. “Landowners are saying, ‘My site is worth X million per hectare on two-year terms, but I’m willing to sell it on four-year terms at the same price.’ That’s where we’re getting results,” he explains. ▲ There are about 2500 empty residential lots on the market in Victoria, according to Hyland. Projects move forward Despite challenges, projects are still proceeding, according to McWilliams. “We’re seeing two main categories of development moving ahead despite compressed margins,” he says. “First is boutique high-end projects in premium Melbourne locations—relatively small-scale developments where developers are betting on price escalation by completion.” The second category takes a more practical approach. “I’m also seeing more investor-focused developments with efficient designs that prioritise cost control—projects with replicated floor plates and simplified specifications. It’s all about making the build process more economical.” While times are tight, there is “cautious optimism” about improvements in the market. Government stability is a step in the right direction, and now “we’re starting to see the interest rate cycle come down”, McWilliams says. “For every 25-point reduction in the interest rate there’s a 2 to 5 per cent increase in building approvals in the market, because it stimulates confidence and stimulates revenues, people are more likely to buy, their borrowing power is greater, and feasibilities work again. The message is simple, McWilliams says: “If we want feasibilities to work, we need increasing revenues.”

Stabilising Conditions in Melbourne Bring Hopes of Improved Feasibility

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