Nine months down and heading into the home stretch of 2015, I feel like a lot of local developers are very much standing on the sidelines. They are just itching to get into the marketplace, but have either been the bridesmaid but never the bride in missing out on their desired sites or are simply waiting for the market to cool down.
If you refer to yourself as a “developer”, you instinctively have trouble with the above two scenarios. You want to find that next project, but you can’t overpay. Surely the market is about to turn downwards. It has to!
The flow of money from Asia has to stop soon, it can’t keep going on like this forever! Maybe, but maybe not. No one has the magic property 8-ball.
Some have turned to selling existing sites (with or without permits) given how strongly the market has performed, while others have looked at sites interstate or further out from the Melbourne CBD, something they would have never originally considered. Whilst most would never admit it, they are now working to smaller profit margins.
Are there risks in the above? Absolutely. Flipping sites is never easy, and the profits can pale (as do the risks) in comparison to actually developing the end product. Investing in an interstate market can be fraught with obstacles, from using an unknown consultant team, misunderstanding local planning laws, and misjudging the end market based on a lack of local knowledge.
Working to a smaller profit margin also leaves one open to a correction in the marketplace from an increased supply (or just a stalling of appetite) on end residential values or the mercy of builders/construction cost. If the margin gets too tight, that will trickle onto lenders viability to lend against the project, no matter how maybe boxes may be ticked to de-risk.
What Other Issues Are We Seeing?
Obtaining planning permits is getting more and more challenging to forecast from a time/cost perspective. Local councils in the middle or outer ring of Melbourne are struggling to keep up with applications and the ability to correctly vet them. Many are simply deemed too hard in unknown GR zoned land and have refused to let VCAT make the decision.
I’d also suggest there are some political benefits in this approach given heavy local objector groups in some municipalities. In the inner city, the backlog with the Planning Minister is still significant from all reports. Is there a risk of a bottleneck, or Melbourne becoming just “too hard”?
We might find out if overseas developers don’t make repeat purchases, or a few local developers come unstuck working to lower margins.
Local buyers are also becoming more sophisticated in every respect. Where a location has traditionally been “King”, a smart floor plan is now “Queen”; and buyers want both! A one bedroom apartment can be sized at 52 sqm with an outdoor area, but if the kitchen is stuck in a dark corridor or the living space is too narrow to accommodate a couch, coffee table, and TV unit, be prepared to be left with that stock at settlement unless heavily discounted or sold wholesale.
Developers really need to push architects to create usable spaces whilst balancing yield requirements. Too often a developer can get caught up in profitability, and that is of course important. But it is also important to realize an actual profit and not carry compromised stock. Your last stock sold is often your profit.
Also, selling apartments off the plan is more sophisticated than ever before, predominantly due to the quality of 3D renders which often reflect a kitchen or bathroom buyers might have been used to seeing in “The Block”. It’s great that the marketplace is pushing quality, but this comes at a cost.
I am certain buyers expect the finished product to look like the marketing render, regardless of how many “artist impression” disclaimers might appear in the bottom corner. Everyone loves putting in some feature joinery or a nice pendant, and it should also be in the apartment at settlement.
Do I still think there are opportunities in the marketplace? Without a doubt. Samuel Property has sold two development sites (one with and one without a permit) this year, two developments have been sold out off the plan, and we’ve purchased five other parcels for development. Property is supposed to be long-term and safe, whilst the stock market is supposed to be fluid and liquid.
But in the current 2015 marketplace, I see some similarities. If you intend to be active, you need to be willing to be nimble, do your due diligence, act with conviction as you read the market, and be comfortable with the high risks associated with your project.
Whatever comes in 2016, it won’t be the same as 2015.
Illan Samuel is the Managing Director of Samuel Property.