2024 Market Update for Property Developers

Economic Outlook

According to data retrieved from the CoreLogic Monthly Housing Chart Pack (December) we highlight that Australia’s dwelling market has shown a 2.1% increase nationally for the three months to November 2023 with Melbourne increasing 0.6% over the same time period. However, over the past year, dwelling prices in Melbourne have increased by 3.0%. For the three months to November the medium days on the market for dwellings within Melbourne was 29 days compared to 30 days over a similar timeline within 2022. However, over the same timeframes the number of listings within Melbourne is 7.9% higher in 2023.

Rental Markets:
Australian rent values increased a further 0.7% in November, taking the national annual increase to 8.1% for the third month in a row. Annual growth in rent values remains elevated across all dwellings, and there has been some reacceleration in the annual growth of house rents, to 7.2% in the year to November.

While growth in rent values remains elevated, gross rent yields have stabilised in recent months. Gross rent yields nationally recorded a slight decline from 3.70% in September to 3.69% in November. Annual rent changes are diverse across cities and dwelling types. Most unit markets saw a slowdown in the annual rate of increase in November, while house markets saw a slight acceleration in growth. Hobart and Canberra saw rents fall but declines across the Canberra market are easing.

Dwelling Approvals:
Dwelling approvals have begun to trend higher since a recent low in January 2023, but remain relatively low overall. For the past six months, monthly dwelling approvals have averaged 13,838, below the decade average of 17,277.

Cash Rate:
The Reserve Bank of Australia (RBA) left the cash rate on hold in December 2023 with the rate remaining at 4.35%. In a statement from Michele Bullock, Governor of the RBA, it was noted “this decision reflected the Board’s view that progress in bringing inflation back to the target range of 2 to 3 per cent was looking slower than earlier forecast. While the economy has been experiencing a period of below-trend growth, it was stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market had eased but remained tight. Housing prices were continuing to rise across the country as was the number of new mortgages. Given this, the Board judged that the risk of inflation remaining higher for longer had risen and an increase in interest rates was therefore warranted to be more assured that inflation would return to target in a reasonable timeframe.”

COVID-19 Debt Land Tax Surcharge:
The State Budget 2023–24 includes a number of announcements related to legislation administered by the State Revenue Office. One noteworthy change which has an expected start date of 2024 land tax year is the COVID-19 debt — temporary land tax surcharge. A new COVID-19 debt temporary land tax surcharge will apply in addition to existing land tax from the 2024 land tax year for ten years.

Exempt properties — including your home — remain exempt from this surcharge. This means the value of exempt property is not included in your landholdings.

Australian Property Market Trends

Property prices: Australia has experienced significant growth in property prices in recent years, particularly in major cities like Sydney and Melbourne. However, there has been some more recent moderation in price growth. It is important to note that property prices can vary significantly across different regions and property types.

Demand-supply dynamics: The demand for housing in Australia remains strong, driven by factors such as population growth, low interest rates, and government incentives for first-time homebuyers. However, there are challenges in meeting this demand due to supply constraints, including limited land availability and construction labour shortages. This has led to a situation where demand often outstrips supply, putting upward pressure on property prices.

Affordability: Affordability remains a significant concern in the Australian real estate market, particularly for first-time homebuyers and low-income households. The high property prices, especially in major cities, have made it difficult for many people to enter the housing market. This has led to increased demand for affordable housing options and government initiatives to address affordability issues.

Emerging trends and opportunities for property developers: Despite the challenges, there are still opportunities for small-medium property developers in the Australian market. Some emerging trends include the demand for sustainable and energy-efficient housing, the growth of mixed-use developments that combine residential and commercial spaces, and the increasing popularity of co-living and co-working spaces. Additionally, there may be opportunities in regional areas where property prices are relatively more affordable compared to major cities.

To capitalise on these trends and opportunities, investors can focus on development potential in niche markets, such as affordable housing or sustainable developments. They can also consider partnering with government agencies or non-profit organisations to access funding or incentives for specific types of projects. Additionally, staying updated on market trends and consumer preferences can help developers identify new opportunities and tailor their offerings accordingly.

Englobo Market Commentary:
The development market is in a transitionary period. Development land values are coming under downward pressure as it has become increasingly difficult to support project feasibility at previously higher land prices given the confluence of the rising cost of debt, increased construction costs and higher labour and wage costs etc. However constrained land supply is aiding stability of land values.

Through 2021 and 2022 there has been a hive of speculative market activity for smaller parcels of medium-to-long-term englobo land and generally between 1 to 12 hectares in major Victorian growth corridors, particularly in Melbourne's north and west. However, most transaction activity is occurring using protracted settlement periods (over 24 months) and using nominations of existing contracts and option arrangements. Thereby most sales are not being transacted on conventional cash-settlement terms. So, while there is a lot of market activity there is limited sales evidence of conventional cash-term sales and also limited recent settled sales.

Demand and market activity for residential-development land in the second half of 2020 and first half of 2021 was considered strong which was initially spurred by the Home Builder grant and sustained with record-low interest rates and in greenfield areas by decentralisation, with increased working from home (incited by COVID lockdowns).

More recently, in RPM’s September 2023 Victorian Greenfield Market Update, it was noted that the growth areas of Melbourne, Geelong, Ballarat, Bendigo, and Macedon recorded 775 gross lot sales in September; a 10% increase from last month. The cash rate remained on hold at 4.1% for the third consecutive month in September (since increased in November to 4.35%), which may be providing more certainty regarding maximum borrowing and purchasing capacity. Despite this, affordability across the new home market remains extremely challenging. This is reflected in the high incidences of rebates and discounts; as purchaser incentives are needed to overcome the considerable market headwinds and persistently weak sentiment.

However, New home demand increased across the south east and western growth areas of Melbourne and Geelong. Conversely, Melbourne’s northern growth corridor witnessed a decline in lot sales, with activity in Hume, Whittlesea and Mitchell all falling to levels commensurate to the start of the year. As a result, its proportion of total lot sales also diminished to its lowest share since January.

Absorption continues to outpace new supply despite releases escalating over September. Combined with lots returned to the market though, total stock on the market continued to increase. This, together with the added competition from lot supply in the secondary market, has resulted in a more pronounced downward pressure on lot prices through September. Melbourne’s median lot price declined by 1.3% to $385,000, while its per square metre rate contracted by a greater 4.8% after the median lot size increased by 3.7% to 363sqm. Geelong’s per square metre rate decreased by a sizeable 11.9%, following a 13.6% rise in its median lot size to 414sqm and its median lot price remaining static at $395,000.

Further to this we comment there is evidence of a two-tier market (particularly in the west and north growth corridors of Melbourne) wherein it is common for syndicates of purchasers paying premium nominal prices for the benefit of favourable settlement terms (in some instances up to and including 5-year settlements). These sales transactions are occurring through off-market investor real estate channels and achieving sale prices often far in excess of that achievable through conventional local real estate agents. The purchaser syndicates often buy the sites unseen and rely on advice and 'guidance' from the agents with respect to value. They generally buy the properties as speculators, with no intention to develop the land instead, intending to on-sell the land at a profit, with many intending to re-sell (via a nomination or assignment) before settlement so as to never outlay more than the deposit. This has caused substantial nominal transaction price increases, for these medium to long-term small parcels of englobo land in growth area localities. These land speculator market prices appear to be regularly surpassing the developer purchaser market value levels, and as such this sub-market is considered to represent a higher than normal risk of a downturn.

Sustainability and Green Building

Large and/or experienced Australian property developers would be well versed in the government initiatives and regulations to promote green building practices and sustainability in the industry. For those looking to get started or increase their exposure to the property development world, a basic understanding of the following is useful:

1. Green Star Certification: The Green Building Council of Australia (GBCA) developed the Green Star rating system, which assesses the environmental performance of buildings. Developers can aim to achieve Green Star certification for their projects by meeting specific sustainability criteria, such as energy efficiency, water conservation, and indoor environmental quality.

2. National Australian Built Environment Rating System (NABERS): NABERS is a performance-based rating system that measures the environmental impact of buildings in terms of energy efficiency, water usage, waste management, and indoor environment quality. Developers can use NABERS ratings to benchmark their buildings' performance and identify areas for improvement.

3. Commercial Building Disclosure (CBD) Program: The CBD program requires owners and lessors of commercial office spaces with a net lettable area of 1,000 square meters or more to obtain and disclose a Building Energy Efficiency Certificate (BEEC). The BEEC includes information on the building's energy efficiency rating and provides potential tenants with valuable information to make informed decisions.

4. Renewable Energy Target (RET): The RET is a government policy that aims to increase the share of renewable energy in Australia's electricity generation. Developers can capitalise on this trend by incorporating renewable energy technologies, such as solar panels or wind turbines, into their building designs.

5. Grants and Incentives: The Australian government offers various grants and incentives to support sustainable building practices. For example, the Sustainable Cities Investment Program provides funding for projects that improve the sustainability and liveability of cities. Developers can explore these funding opportunities to offset the costs of implementing green building features.

To capitalise on the trend of sustainability and green building, property developers can:

1. Incorporate Sustainable Design Principles: Developers can integrate sustainable design principles into their projects, such as passive solar design, energy-efficient lighting and appliances, and water-saving fixtures. These features not only reduce environmental impact but also appeal to environmentally conscious buyers and tenants.

2. Use Environmentally Friendly Materials: Developers can choose construction materials with low embodied energy and a reduced carbon footprint. This includes using recycled or locally sourced materials, as well as materials with high thermal insulation properties.

3. Implement Energy Efficiency Measures: Developers can focus on energy-efficient building systems, such as HVAC (heating, ventilation, and air conditioning) systems, insulation, and smart building technologies. These measures can reduce energy consumption and operating costs for building occupants.

4. Explore Government initiatives or regulations for green building practices.

Technology and Innovation

Technology and innovation are playing an increasingly crucial role in enabling developers to stay competitive in the market. Here are some emerging trends in technology that developers can leverage:

1. Smart Properties: Smart home and business technology allows control of various aspects, such as lighting, heating, security systems, and appliances, through connected devices. Incorporating smart features into projects attracts tech-savvy buyers and enhances the overall living/working experience.

2. Virtual Reality (VR): VR technology enables developers to create immersive virtual tours of properties, allowing potential buyers to explore and visualise the space before it is built. This can help developers showcase their projects to a wider audience and make more informed decisions about design and layout.

3. Construction Automation: Automation technologies, such as robotics and drones, are transforming the construction industry. Developers can work with their builders to leverage these technologies to streamline construction processes, improve efficiency, and reduce costs. For example, drones can be used for site inspections and monitoring progress.

To leverage these technologies effectively, developers should:

• Stay updated on the latest technological advancements and trends in the property development industry.

• Collaborate with technology providers and experts to implement innovative solutions in their projects.

• Conduct market research to understand the preferences and needs of potential buyers, and tailor their offerings accordingly.

• Invest in training and upskilling their workforce to adapt to new technologies and processes.

• Build partnerships with technology companies or startups to access cutting-edge solutions and expertise.

Financing

Property development financing options vary according to the size, scale, type and location of projects, ranging from traditional bank loans, joint ventures, government grants and even crowdfunding.

1. Traditional Bank Loans: Small-medium property developers can obtain financing from banks and financial institutions by applying for a loan. These loans typically require collateral and a thorough evaluation of the developer's financial history, creditworthiness, and project feasibility. The loan amount and interest rates will depend on various factors, including the developer's financial standing and the project's potential profitability.

2. Crowdfunding: Crowdfunding has emerged as an alternative financing option for property developers. It involves raising funds from a large number of individuals through online platforms. Developers can present their projects to potential investors and offer them various incentives or returns on their investment. Crowdfunding can be an effective way to access capital quickly, especially for smaller projects or developers who may have difficulty obtaining traditional bank loans.

3. Government Grants: The Australian government offers various grants and incentives to support property development, particularly in areas such as affordable housing, sustainability, and urban regeneration. Developers can explore programs like the National Housing Infrastructure Facility, which provides funding for infrastructure projects that support new housing developments. Additionally, the government may introduce new programs or make changes to existing ones in 2024 to address emerging challenges or priorities in the property development sector.

It is important for investors and developers to stay updated on the latest financing options and programs available. They should research and evaluate each option based on their specific needs, project requirements, and financial capabilities. Additionally, developers should consider consulting with financial advisors or experts in the property development industry to make informed decisions about financing their projects.

Market Opportunities and Challenges

In 2024, investor property developers in Australia face both market challenges and some serious opportunities. Our nation's demographics are constantly evolving, with shifts in population size, age distribution, and lifestyle preferences. Developers should stay updated on these changes relevant to their investment areas, to understand the demand for different types of properties and seize on opportunities. For example, there may be an increased demand for smaller, more affordable housing options due to changing household sizes, an aging population and a renewed increase in migration numbers following the relaxation of Covid-19 pandemic restrictions. The sea/tree change shift from inner urban areas to outer suburban and rural properties has remained consistent in recent years, realising opportunities for savvy investors who know their region well.

To navigate these opportunities and challenges, remember to conduct thorough market research, stay updated on industry trends, and adapt your strategies accordingly. Collaborating with experts, leveraging technology, and building strong partnerships can also help you stay competitive in the evolving market landscape.