Australia’s housing crisis is likely to deepen in coming years as new home building slows, presenting opportunities for apartment developers to kickstart build-to-rent and build-to-sell projects now.
“The mismatch between supply and demand is going to grow,” Charter Keck Cramer Director Richard Temlett (pictured) told ANZPJ.
“There are opportunities for developers now to look further into the market cycle and acquire sites, take them through planning and design right now in anticipation to launch in about 18 months when the market will be at a very constrained point.”
In 2022, the business of building new apartments has faced challenging conditions such as very-high land and construction costs, as well as weakened buyer appetite due to the housing downturn and the uncertainty in the broader economy.
Temlett said the build-to-sell apartment market had been very slow due to a lack of pre-sales to local and overseas investors that typically helped developers get the presales to obtain construction funding needed to kickstart building.
Pre-sales have been impacted by the removal of stamp duty incentives to investors, Chinese capital controls introduced prior to COVID, increased taxes and charges, the initial impact of COVID on the rental market, and increasing construction costs that have shuttered many projects.
“There’s going to be a shortage of supply of BTS projects across Australian capital cities in the next couple of years because pre-sales are so slow,” Temlett said.
“It’s slowing dramatically at a time when net overseas migration and population growth is starting to bounce back very quickly, which means there’s going to be a mismatch between supply and demand over the next two to three years.”
Temlett said there was an opportunity for BTR to mobilise faster than BTS since it was generally backed by institutional investors rather than relying on pre-sales.
“There’s an opportunity for BTR to fill a gap in the market that BTS won’t be able to fill, however the issue with BTR is that it is also struggling to get construction funding because it’s an emerging asset class in Australia,” he said.
“There are a number of brave forward-thinking developers that are proceeding and moving ahead and they’re likely to get a rental premium given the shortage of rental accommodation.”
For example, ASX-listed developer Mirvac has secured five BTR projects across Sydney, Melbourne and Brisbane so far that are set to deliver close to 2200 apartments.
The developer, which has an initial target of 5000 BTR homes, expects 3300 residents will live in its BTR homes by 2024.
“The federal, state and territory governments need to bring back local and foreign investors through changes to stamp duty because investors often make up the majority of buyers, which underpin the pre-sales needed to get developments built,” Temlett said.
The director said investors had been slowly coming back into the apartment market before the Reserve Bank of Australia started raising the cash rate earlier this year.
Investors had been attracted to the rising rents resulting from the very low vacancy rates at the time.
However, Temlett said the combination of rising interest rates and negative media sentiment had dissuaded many of them from purchasing.
“That being said, if the supply keeps receding as much as it is and demand keeps bouncing back, I feel there will be investors that actually realise that they can get a good increasing rent and a strong yield for an apartment project,” he said.
“COVID has really distorted the market and so in sub-markets where there is reliance on overseas migrants and students, vacancies increased in certain areas like Docklands or Southbank in Melbourne and rents dropped by up to 30% peak to trough.
“But what’s happened more recently is that vacancy rates have dropped dramatically and they’re actually tighter than they were prior to COVID.
“Rents are responding or rebounding very quickly and in some areas they’re already at pre-COVID levels.”
One reason for the vacancy rate shift was opportunistic renters moving into areas like Docklands to take advantage of the lower rents.
An RBA analysis found that people living with roommates in house share arrangements also took advantage of the lower rents and moved into their own place.
Looking ahead, Temlett said there were a number of factors to watch around the BTR and BTS markets.
Supply was expected to be more constrained while demand was going to return faster than the federal, state and territory governments were expecting.
“There’s going to continue to be a chronic shortage of rental accommodation going forward unfortunately, which doesn’t bode very well for housing or rental affordability,” Temlett said.
He said he anticipated that interest rates were going to start stabilising in around the middle of the year, which would hopefully give buyers a little more confidence around their purchasing plans.
Major infrastructure presented opportunities too.
“There’s a lot of city-shaping infrastructure going on right now and that often is capitalised into higher land values, prices and rents,” he said.
“For example, there’s a huge amount of infrastructure going into Brisbane over the next decade in the lead up to the 2032 Olympics.
“There’s a deadline on when the Olympics is going to be held, so there’s a deadline for when the infrastructure needs to be delivered. It’s the same with the Commonwealth Games in Victoria in 2026.”
Another factor to watch was construction costs.
“I’m not quite sure where construction costs are going to land, but I think that certain developers are going to be able to start pushing up apartment prices because of that shortage of supply,” he said.
“It’s not going to be in every submarket, but there will still be quite a bit of uncertainty in the next six to 12 months.”
Temlett said he was anticipating some braver developers to start buying sites and launching their projects soon due to the lack of competition on the horizon.
“The BTR players that get their products into the market are highly likely going to be able to get their rental premium and get stabilised quite quickly,” he said.
“BTS will get quite fast sales rates if they know their target markets and know the areas that there’s most demand for.”
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