The Development Digest | 29 June 2024

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

Please contact me on 0402 085 702 / [email protected] if you would like to receive our more detailed weekly updates via email each Friday morning.

This update will cover:

• Event Overview - APDA Mid-Year Economic Update
• JLL Debt & Structured Finance Market Update
• Cordell Construction Report – June 2024
• JLL Apartment Market Overview (Q1 2024) – Outlook and Key Risks
• Headlines of the Week
• Current JLL Development Site Opportunities?????

Event Overview - APDA Mid-Year Economic Update?

Earlier in the week, I presented at the Australian Property Developers Association Inc Mid-Year Economic Update, alongside Tom Watson (Payton Capital) and Francis Goh (Prime Land Consultants), where we had thought-provoking discussions around Victoria's housing targets, population growth, interest rate predictions and construction costs/delivery challenges.

The takeaway? Despite immediate term affordability and delivery challenges, we have no chance of keeping up with housing demand requirements in Melbourne over the medium-long term and this will drive further price/rent growth. Migration will continue to be a key tailwind for our sector.

On a personal note, I have been loving the opportunity to present and speak at more events to share our experiences in the market and incredible JLL research insights.

Should you wish to receive further details or the JLL presentation, please contact the JLL team.?

JLL Debt & Structured Finance Market Update

During the week, Josh Erez from our Debt and Finance Team (who are a 100% independent, specialist team that assists discerning investors to source, structure, negotiate and execute their finance facilities) released their monthly market update and we are pleased to provide a summary below:

Commentary:

As was widely expected, the RBA left the cash rate on hold at 4.35% at last week’s June board meeting.

The Board maintained its neutral stance however retains full optionality over the future path of the cash rate and has once again stated, “the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out”.

The RBA Board does not want to lift the cash rate again, but a Q2 24 trimmed mean CPI north of 1.0%/qtr would test the Board’s resolve not to tighten policy further. Interest-rate markets expect the RBA's cash rate to remain unchanged this year and have a 55% chance of a cut occurring in February 2025.

If you would like to register to receive these monthly debt and finance updates, please reach-out to the JLL team.

Cordell Construction Report – June 2024?

This week, CoreLogic released their monthly Cordell Construction Report – June 2024, that identified 1,375 new projects across Australia over the month of May. The number of new projects identified over the three months to May was up 12.4% when compared to the previous three-month period, however the number of new projects identified over the past 12 months is just -0.5% lower than the 12 months to May 2023

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

• The estimated value of new projects in May is $24.3 billion, up substantially over the month. The estimated value of new projects identified over the past quarter is 27.9% higher than the previous three-month period. Of the 1,375 new projects, 29.8% are located in New South Wales and 29.5% are in Victoria.
• Nationally, 577 projects moved into the construction phase in May, up from 528 in April. The total estimated value of those projects is $3.4 billion. The number of projects moving into construction over the past three months is 23.1% higher than the previous three-month period. New South Wales made up 27.6% of projects moving into construction in May, followed by Victoria (26.5%) and Queensland (19.6%).

Pipeline – Australia

JLL Apartment Market Overview (Q1 2024) – Outlook and Key Risks

In this week’s edition of JLL’s Research - Q1 2024 National and State Apartment Market Overview and Reports, we are pleased to provide below our next overview and summary of the report with a national Outlook and Key Risks focus:

• The medium-term demand/supply balance for apartments is tipping further into under-supply over the next few years. However, in the short-term there remains headwinds on consumers that will keep the market somewhat more subdued. A likely delay in interest rate cuts until 2025 will keep financial pressure on households and a further rise in listings in the existing sale market will dampen price pressures somewhat.
• However, construction will remain muted and growing supply shortages will assert themselves on market dynamics over the medium-term. This likely means further robust price growth for existing apartment prices and a rise in pricing of new mass-market development stock to compensate for higher project costs.

Demand risks are moderate, but persist

• A number of financial headwinds remain for Australian households, while global macroeconomic and financial market downside risks remain, particularly in relation to ongoing geopolitical risks that still have the possibility of escalating into wider global conflicts. This could potentially put upward pressure on oil prices and stifle the fall in global inflation, keeping interest rates higher and households under pressure.

Policy mistake risks are still high

• It has long been a very fine balance for central banks globally between cutting rates too early and risking over- stimulating the economy and housing markets or cutting too late and risking dampening domestic economies too far and pushing them into recession. In Australia (and the US) it appears the risks have swung back towards cutting early, with strong recent employment, inflation and house price data all seemingly supporting waiting longer.

Development delivery risks remain extreme

• For developers, financiers and investors the most pressing risk in projects at present is ensuring construction is delivered on time, on budget or at all. Cost growth is moderating but has not gone and there remains significant risks around securing construction capacity in many cities in a tight market and risk of more builder collapses.

Headlines of the Week

The AFR – Tiny Sydney studio sells for $425,000 as clearance rate slides

• By contrast, Melbourne’s clearance rate rose sharply to 64.2 per cent from 58.7 per cent on Domain numbers (CoreLogic’s preliminary clearance was 72.9 per cent, up from 70.2 per cent), but also remained below its June ‘‘normal’’ of 67 per cent, according to Mr Oliver.
• Nationally, Domain recorded a 63.6 per cent clearance rate, up from 61.5 per cent last week, while CoreLogic’s clearance rate for the combined capital cities was 72.4 per cent, down slightly 72.9 per cent a week ago.

The Age – High-rises to 50 storeys given the OK in Box Hill

• A seven-tower development in Melbourne’s east has been given the green light as the Allan government forges ahead with its promise to squeeze tens of thousands of new homes around Suburban Rail Loop stations.
• Planning Minister Sonya Kilkenny is to announce today approval of the Box Hill Central North Masterplan, a $1.57 billion project set to create 1700 homes, with 10 per cent set aside for affordable housing, under the government’s scheme to fast-track residential developments.
• The smallest of the seven buildings will be 19 storeys, while the largest will rise 50 levels. Box Hill’s current tallest building is the 36-storey Sky One apartment tower, which is also the tallest building outside central Melbourne.

The AFR – ‘Less risk’: super fund steers clear of build to rent

• AustralianSuper is investing $500 million in equity to develop 1400 Melbourne apartments, which tenants can buy after renting for up to five years, but the country’s biggest industry super fund is steering clear of build to rent, which it says is not as attractive a proposition.
• The pipeline of complete, under-construction, approved and in early planning build-to-rent apartments, which consultancy Urbis put at 50,485 units at the end of March, has drawn the interest of overseas funders such as Dutch fund manager PGGM and Japan’s Sumitomo Forestry.
• AustralianSuper and Assemble have four more build-to-rent-to-own projects at 4 Ballarat Street, Brunswick (171 homes, completion later this year); 342 Victoria Street, Brunswick (284 homes, late 2026 completion); 519 Sydney Road, Coburg (526 homes, late 2026); and 17 Whitehall Street, Footscray (458 homes, late 2026).

The AFR – WeWork’s exit opens the door for new co-working venture

• Sydney property veteran Phillip George has opened up a new own co-working business to fill the vacuum left by WeWork, which vacated his office building at 66 King Street last year just before its US parent filed for bankruptcy.
• WeWork’s exit from King Street in the Sydney CBD was part of a global push from the company to renegotiate leases and reduce its footprint. The former Wall Street darling officially emerged from bankruptcy last week.

The AFR – Macquarie joins in land lease rush after $2.9b raising

• Funding for Macquarie Asset Management’s push into land lease – a type of affordable housing product where a home owner owns their home, but leases the land on which it stands – will come from the $US1.9 billion ($2.85 billion) raised for its second opportunistic real estate fund.
• Last week alternative real estate fund manager GreenFort made the first acquisition for an $800 million land lease portfolio it hopes to build in partnership with private equity firm Gaw Capital. In May, ASX-listed Stockland struck a $1 billion capital partnership with Invesco Real Estate to jointly develop land lease communities while in February, ASX-listed Lifestyle Communities launched a $275 million raising to support its growth into land lease residential estates

The AFR – Property profits balloon to 14-year high as proportion of sales

• The proportion of profit-making residential sales ballooned to 94.3 per cent nationwide, the highest level of profitability in 14 years, boosted by the persistent increases in home values, which outweighed weakness in the economy and higher mortgage rates.
• Across Melbourne, houses made a median gain of $405,000, more than twice that of units, which raked in $154,750 gross profits. Similarly across Brisbane, Perth, Darwin and the ACT, houses delivered more than double the profits achieved by units.

The AFR – August rate rise on the cards

• Annual inflation jumped to 4 per cent last month from 3.6 per cent in April, the Australian Bureau of Statistics said yesterday. The S&P/ASX 200 closed 0.7 per cent lower at 7783 points, as investors reckoned with the prospect of another interest rate rise.
• Investors also raised their bets on a rate increase, pricing a 36 per cent chance that the Reserve Bank board will lift the cash rate to 4.6 per cent in August, up from 13 per cent on Tuesday. The probability of a rise by September hit 54 per cent.

The AFR – Building costs surge 37pc higher than four years ago

• The cost of building a new home has surged almost 40 per cent over the past four years, threatening the Albanese government’s efforts to build 1.2 million homes and keeping upward pressure on interest rates.
• After steadily falling from mid-2022 to mid-2023, inflation in the cost of building a new home has become entrenched at 5 per cent, due in part to a substantial pipeline of state government infrastructure projects putting upward pressure on building material and labour costs.
• Building costs have increased 37 per cent cumulatively since the onset of the pandemic, and are a major driver of high inflation.

The AFR – Rates forcing home owners to sell: RBA

• Highly leveraged borrowers are selling out of property as rising mortgage rates stretch budgets and prompt households to consolidate their savings into offset accounts, Reserve Bank of Australia assistant governor Christopher Kent says.
• Property research firm Suburb-trends this month said the number of investors bailing out of the Melbourne market had jumped 34 per cent over the year due to lacklustre returns and state government tax changes. In Sydney, investor-owned property listings were up 17 per cent.

The AFR – Home-building boom is just around corner

• Home-building will pick up from the end of this year on demand from existing homeowners and investors, peaking at 254,000 starts in 2027, new forecasts from consultancy Macro-monitor show.
• The upswing – led by a greater mix of detached homes – will lift Australian housing starts sharply from a forecast 162,000 this financial year (a 6.5 per cent decline from FY23), up nearly 12 per cent next year to 181,000, up 20 per cent in FY26 to 217,000 and a further 16 per cent to 251,000 in 2027, Macromonitor estimates.
• As a ‘‘rough’’ estimate, demand attributable to net overseas migration would account for 130,000 to 135,000 dwellings a year between 2022 and 2026, or an average 60 per cent of the total each year of the five-years, Ms Bray said.

The Australian – Property prices defy threat of rates pain

• Australian residential property prices are expected to rise by as much as 5 per cent in 2024, according to a new report, as buyer demand holds up despite fears interest rates are likely to remain higher for longer.
• PropTrack estimates suggest home prices in Perth are likely to rise by between 8 per cent and 11 per cent in 2024-25, followed by Adelaide, where prices are up 12.9 per cent in the financial year to May, and are expected to rise a further 5-8 per cent next financial year. Home prices in Brisbane, Sydney and Melbourne are projected to rise by between 3 per cent and 6 per cent in 2024-25, outpacing the predicted national average of 2-5 per cent.

Current JLL Development Site Opportunities?

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

Jesse