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THE STRENGTHENING RESIDENTIAL-LED RECOVERY

June 06, 2013

THE STRENGTHENING RESIDENTIAL-LED RECOVERY

The residential market is gaining momentum, and owner-occupiers are increasingly active.

While Queensland’s Property industry is still best described as patchy (depending upon which segment you are in), we are now experiencing all the signs of a strengthening and recovering market, based largely on investor-led residential sales.

Previously

For the last 4 years, astute developers have been providing what the market demands – which has been for more affordable, low cost, smaller apartments, designed to maximize investor returns. One-bedroom units have become a higher proportion of most developments and two bedrooms apartments have been getting smaller. The National Rental Affordability Scheme (NRAS) has also influenced this trend.

We believe that this market has largely been driven by a financial model enabling private investors to purchase residential property through their Superannuation Funds, often via their Financial Advisor. Their focus has been on financial returns, not on the long-term quality of their property investment. And some recently-completed developments have made a poor contribution to our city’s environment.

Meanwhile

Many commentators and researchers have been pointing out that residential property fundamentals are actually quite sound, citing low interest rates, steady or increasing demand, improving confidence, and well-funded banks, however viable projects that proceed into construction have still been rare.

While there is no doubt that investors have been driving the market, this may be because funding requirements require a high level of pre-sales to achieve construction funding. It is far more difficult to achieve pre-sales for owner occupier apartments, who prefer to see the completed building before committing.

Accordingly, developers have had little incentive to undertake higher quality developments targeting owner occupiers, due to perceived funding risk and a largely untested market.

Owner Occupiers back in the Market

So while demand for quality product apartment projects has been subdued, there have been some developments willing to test how strong this market is.

A prime example is Arena in Edmondstone St South Brisbane, developed by the Sydney-based Galileo. A well planned and executed Sales Campaign from CBRE has resulted in an exceptionally successful project, with 92 units of Building One selling out within a week and to local Brisbane residents looking for an improved lifestyle in close proximity to the city.

According to Paul Barrett of CBRE:

“We haven’t seen the high quality type of product that talks to the owner occupier at all in the last few years in Brisbane. Owner occupiers expect well-designed apartments with quality finishes in an unbeatable location, and finally Arena gives them this”

It is also clear that owner occupiers do not feel comfortable buying into a development that has a high proportion of apartments for rent.

What we are currently experiencing

While our market spread is not extensive, we offer the following observations from our business that leads us to conclude that the property market is now in the early stages of recovery:

– We have noticed a marked increase in project enquiries since November 2012, with an 80% increase from early 2013 – a significant improvement on previous years.

– New developer clients are entering the local market from interstate and overseas, as they perceive better value here than elsewhere (particularly Melbourne), and our well-positioned local developers are increasing their project activity.

– There is a greater focus on project deadlines and delivery speed,reflecting an increasing urgency in the market.

– An increasing proportion of our projects are moving from Design and Development Approval into Construction Documentation, indicating that sales and project funding are now in place.

– We understand that this upswing in residential and multi-residential developer activity is widely spread, with many of our Planning and Development Consultants also experiencing a heightened level of activity and enquiry.

Our predictions

Based on everything we are experiencing, we feel that a Tipping Point has now been reached, where the Property Market is firmly in the early stages of an upswing, driven initially by affordable residential, but now maturing into the owner occupier market.

This has to be positive news for the industry, where most recoveries start with the residential sector.

Article written by Scott Whiteoak, Director at Ellivo Architects.