NSW Opportunities Go Beyond Planning Reform, Experts Say
The NSW market has plenty of appetite for mid-sized development plays, industry stakeholders say but don’t rely on planning reforms or government support to get a project over the line.
At a Sydney roundtable hosted by alternative asset manager Remara on November 13 in conjunction with The Urban Developer, property professionals, developers and financiers spoke on the difficulties and opportunities in NSW markets and planning systems.
Government reforms have helped crack open feasibility and speed up approvals for larger residential projects, speakers agreed. Initiatives such as the NSW Housing Pattern Book, which provides peppercorn-priced architectural templates, can also help homeowner builders.
But a slew of project types that fall between micro and mega-scales are reliant on developers’ experience in identifying opportunities, working at speed and careful positioning in order to stack up.
PropCode chief executive Will Sullivan said that the Labor government had overseen “a constant stream of changes in the system—granular things, pathways and now the reform Bill to change the Act itself in a number of important ways”.
“At the big end of the scale, in the order of 600 expressions of interest have been reviewed under [the Housing Delivery Authority] pathway, rather than having to fight through council. And the real opportunity with that pathway is changing the planning controls, so a concurrent rezoning,” Sullivan said.
“On the other end of the scale, something that’s come through is more permissibility and more options to get approved by [Complying Development Certificates] in the fast-track pathway, instead of DAs through councils.”
But for the missing middle, costs of labour and materials and the regulatory and compliance load on developers and builders are still causing trouble.
Tass Assarapin, a quantity surveyor and partner at Mitchell Brandtman, said that design and compliance mandates were impacting mid-sized developments.
“Are the rules too hard? Now, that’s open for discussion. There is the appetite of contractors, I think no one disagrees. It’s just everyone’s scared.”
According to Assarapin, some developers are seeing optimistic quotes for work and are unable or unwilling to factor in cost overruns. The average apartment in Sydney takes 40 months from construction start to contract completion, according to Assarapin’s research.
“We’ve been seen as a Negative Nancy industry for a while but unfortunately, that’s my job. I’m there just to deliver the news, not the good news or the bad news. I’m just there to say this is where things should suck.”
Capital deals for mid-sized projects may require closer attention and particular expertise than property teams at banks may be able or willing to devote, according to Remara head of real estate credit Scott Morgan.
Remara’s loan book of about $500 million across the east coast is largely placed in projects of $2 million to $20 million in value but speed and flexibility can help projects outside that bracket too.
“If it’s bigger, if it’s a good deal, if it makes sense, we’re happy to kind of work out a solution that works,” Morgan said.
“So if it’s first mortgage, second mortgage, or equity, we can stretch across the capital stack depending on the project … we try and get back to people pretty quickly with solutions.”
LMR, luxury opportunities may be passing by
Attendees agreed that penthouse sales in the range of $20 million were unlikely to become a trend and couldn’t be relied upon when considering project feasibility.
But strong prices are the norm in some high-income areas. Tilkoma Developments director Jessica Duce said that a good product could sell for $10 million to young professionals buying their first home in the Bronte market.
However, regulation changes around low- and medium-rise projects are only marginally helpful.
“It’s that classic missing middle where you are delivering very small product, eight to 20 homes and you have LMR … but you still need to go through council,” Duce said.
“And getting approval through is a nightmare, because they think it’s all highrise.
“So it doesn’t really help us a whole lot. I guess it makes it possible but if your delivery structure doesn’t change, it’s just as challenging.”
Sullivan said that his datasets were still able to identify appropriate sites for low and medium-rise projects but landowners may not be willing to play at a reasonable price.
“There’s actually a lot of unrealistic expectations out there around what developers would pay thanks to these new rules and to be able to build six storeys,” Sullivan said.
“Yes, that’s great but construction cost wipes out the residual land value. So it doesn’t actually mean that developers are going and buying houses for $20 million.”
First Quadrant Properties managing director Chris Rose said that LMR east of the “Red Rooster line”, particularly in higher-wealth suburbs such as Mosman and Rose Bay, was the target for developers.
“I’m focusing now on those niche markets but they’re the markets that seem to make sense from a feasibility point of view,” Rose said.
However, developers who specialised in those projects may have already snapped up the top-tier opportunities.
“I’d say it’s almost got to the point now where all the good developers have already got their sites. There’s a lot of people coming to the party late,” Rose said.
Achieving uplift by including an affordable component may actually be easier in higher-wealth suburbs, Rose said. Where properties are investor-owned and negatively geared, owners might well be comfortable with rents staying below market price for 15 years, instead of pursuing asset valuation growth.
“The $50-, $60-, $100-million projects ... it’s a nice size to digest, both construction and funding. So we’re really, really happy about the LMR legislation and the affordable housing supercharge,” Rose said.
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