The Development Digest | 10 August 2024

We are pleased to provide you with another edition of The Development Digest.

This update will cover:

• JLL Transaction Announcement | 550 Swan Street, Richmond
• Jesse Radisich x Precisely Property Podcast: Inner Melbourne’s Residential & Commercial Development Sites: Current Update & Outlook
• CoreLogic’s Home Value Index – July 2024
• J.P. Morgan Australia Economic Research - Australia Focus: High density drives dwelling approvals
• Headlines of the Week

JLL Transaction Announcement | 550 Swan Street, Richmond

The JLL Development Site Services team are proud to announce the sale of 550 Swan Street, Richmond, acting on behalf of KordaMentha as Receiver and Manager Appointed.

The sales campaign attracted significant interest from local, interstate and international owner occupiers, investors and developers, with the team registering interest from 97 parties throughout the process.

For further information, please contact the JLL team.

Transaction Details - 550 Swan Street, Richmond

Sale Price: $13,600,000

Land Rate: $8,359/sqm

Purchaser: Interstate Developer

Offers Received: 8

Sold in conjunction with Cushman & Wakefield

Jesse Radisich x Precisely Property Podcast: Inner Melbourne’s Residential & Commercial Development Sites: Current Update & Outlook

During the week, my discussion with Richard Temlett from Charter Keck Cramer has now been released on Rich's podcast - Precisely Property.

Having seen the calibre of guests already on the show, I was really excited to get the call-up to join Rich on the podcast and chat about the local and national residential and commercial development markets.

Rich and I discuss the market frequently in a casual setting, so it was fun to get together in a more official capacity and I hope you enjoy the podcast and get some value out of it - see below link to the podcast page:

Key topics covered include:

• Current state of the development market across BTS/BTR/Commercial sectors
• Investor and capital appetite for development projects
• Where we are sitting in the current cycle
• Drivers of the market and how are the dynamics shifting
• Off-shore appetite and demand for Melbourne
• What can be done to address the housing crisis
• How the BTR sector is evolving and are BTS or BTR developers competing more aggressively
• Current tax settings and framework
• The outlook for the future

J.P. Morgan Australia Economic Research - Australia Focus: High density drives dwelling approvals

During the week, J.P. Morgan released their latest Australia Economic Research report, detailing Australian residential building approvals that declined 7%m/m in June, demonstrating that results were quite varied across states. Approvals fell 19%m/m in NSW and rose 15%m/m in Queensland.

The JLL team have provided a summary of this report below:

The below figure plots the index against the monthly growth rate of the aggregate series, and shows there is a strong inverse relationship between aggregate approval growth and the number of areas growing faster than the overall series. This is fairly intuitive, as large increases in a small number of areas will drag aggregate approval growth higher, leaving the majority of areas growing below the top-line growth rate.?

The below graph implies that upswings over the past decade have generally been driven by outsized growth in a small number of areas, rather than broad-based growth across the majority of regions. This is consistent with approvals for high-density dwellings driving aggregate growth in periods of upswings: approvals for apartment blocks span multiple dwellings so lead to lumpier monthly increases, making a given region more likely to be trimmed. This dynamic helps explain why aggregate approvals have moved sideways over the past year. Although approvals for detached dwellings increased in trend terms between June 2023 and June 2024, higher-density approvals declined.

CoreLogic’s Home Value Index – July 2024

This week, CoreLogic released their monthly Hedonic Home Value Index report – July 2024, that national home values rose 0.5% in July, the 18th consecutive monthly increase nationally – a figure on par with the 0.5% increase recorded in June. Following a -7.5% decline recorded between May 22 and Jan 23, the national HVI has gained 13.5% and values have consistently pushed to new record highs since November last year.

The JLL team have provided a summary of this report below:

• Three capitals recorded a decline in values over the past three months. Melbourne led the decline with a -0.9% fall, alongside a -0.8% and -0.3% reduction in Hobart and Darwin values respectively. The rolling quarterly pace of growth has slowed markedly in Sydney to 1.1%, a fraction of the 5.0% quarterly gain recorded at the same time last year. These dynamics are weighing on growth in national home values, which are up 1.7% in the past three months compared to the 3.2% increase seen this time last year.
• The outlook for the housing sector remains complicated. While constraints on new housing supply are likely to keep a floor under home prices and remain a feature of the market for some time yet, downside risks are growing.?

RBA – Holds Rates for the Sixth Consecutive Month

Following the RBA’s meeting on Tuesday, the board has elected to keep the cash rate steady at 4.35%. This is now the sixth consecutive month the RBA has held rates steady, with the last 25bp hike in November 2023.

The ongoing debate remains where there will be a rate cut before Christmas, with NAB predicting rates are to be on hold until H1 2025, having pencilled in May 2025 for the first cut.

Headlines of the Week

The AFR – Brookfield eyes $2b student beds portfolio

• Brookfield plans to expand its student housing portfolio in Australia to $2 billion, leveraging potential partnerships with universities and new developments.
• The current pipeline includes a 1000-bed facility in Melbourne, a 952-bed project in Brisbane, and the company aims to double its platform size in the medium term.

The AFR – RBA to hold rates steady as war on CPI recedes

• The Reserve Bank of Australia (RBA) is expected to hold the cash rate at 4.35% for the sixth consecutive meeting due to cooling inflation, with trimmed mean inflation dropping to 3.9% in June from 4%.
• Economists predict that with no major surprises in inflation or labor market data, the RBA will maintain its current policy stance.

The AFR – Developers offer big rebates as unsold lots surge

• Melbourne developers are offering significant rebates and low deposits to clear a growing inventory of unsold housing lots, with lot sales plummeting from record highs in 2021 to about 600 per month in 2024.
• High lot prices and over-selling during the pandemic are key reasons behind the current market struggles.?

The AFR – BTR market ready to lift off

• US property giant Greystar predicts a surge in build-to-rent (BTR) deals as more projects are completed and leased, with 1900 units under construction and another 600 in the pipeline in Australia.
• The sector faces challenges from high construction costs and interest rates, but long-term prospects look favourable with new government policies encouraging foreign investment.

The AFR – $13.6m Richmond Sale

• Sydney-based developer Fortis, part of Pallas Group, acquired a 1660 sqm development site at 550 Swan Street in Richmond, Melbourne for $13.6 million, planning to develop a 10,000 sqm mixed-use project.
• The sale was brokered by Jesse Radisich, Josh Rutman, and Tim Carr of JLL

The AFR – Rates on hold not enough to lure buyers: analysts?

• The Reserve Bank of Australia's decision to hold interest rates is unlikely to boost housing demand due to continued poor affordability and lower borrowing capacity.
• In the past month, Sydney home sellers reduced asking prices by 1%, those in Melbourne by 0.9%, and by 0.5% across the combined capitals.

The AFR – Cycle of write-downs for listed landlords could soon be over

• Analysts believe the cycle of commercial property write-downs for ASX-listed landlords may end by year-end, with the Reserve Bank of Australia expected to keep interest rates steady at 4.35%.
• They anticipate an average operating earnings decline of 3.5% for REITs, but expect growth in operating earnings per security and dividends.

The AFR – Uni Chiefs at blast over the foreign student cap

• University leaders criticised the Albanese government's plan to cap overseas student placements, calling it "economic self-sabotage" with potential to trigger a recession.
• The policy could force universities to reduce enrolments significantly, risking economic impacts given the sector's value of nearly $50 billion annually.?

The Australian – Signs of life for city’s revival

• Melbourne's office market has struggled with high vacancy rates, hitting a 24-year high due to the pandemic and subsequent increase in remote work.
• Despite challenges, indicators like reduced sublease vacancy and a slowdown in new office supply suggest potential future recovery.
• Melbourne's relative affordability, population growth, and economic diversity position it for long-term optimism in both commercial and residential sectors.

The Australian – Building sector stabilises as cost pressure begins to ease

• The Australian construction sector is stabilizing as material costs ease and market confidence increases, although challenges like labor shortages and fixed-price contracts remain.
• Despite a rise in construction insolvencies, fewer major companies have collapsed in the past six months compared to the prior 18 months.

The Australian – Capital uncertainty a cloud over rental sector

• Uncertainty in taxation rules and investment settings has significantly slowed down Australia's build-to-rent (BTR) market, impacting fundraising and project development.
• However, despite these challenges, some projects like Cedar Pacific's in Brisbane still attract international investment and proceed with development plans.

We hope you have enjoyed another edition of The Development Digest. Please contact our team if there is anything we can assist you with.

Jesse