The panel discussion was moderated by Mark Wizel, National Director, CBRE (Melbourne Capital Markets & Australian Retail Investment Properties) and included panellists Michael Argyrou, Managing Director, Hickory Group; Justin Madden, Principal/Cities Leader VIC/SA, Arup, and former Victorian Planning Minister; Stuart Morris QC, leading planning and environment barrister; Sam Tarascio, Managing Director, Salta Properties; and Anneke Thompson, National Director, National Head of Research, Colliers International.
The event was covered in today’s Australian Financial Review by journalist - and forum attendee - Nick Lenaghan, who highlighted that lenders needed to learn about build-to-rent risks and returns in this emerging investment class.
The panel discussed a number of topical issues and trends in the property and development space in Victoria. Their insights are summarised below:
On red tape and getting projects over the line:
- Getting planning approval for projects is becoming increasingly more difficult and time frames are being pushed out.
- “VCAT is a lag indicator and not a lead indicator on the state of the development market”.
- “These are the types of things we need to address, if we want to bring affordability back to a level everyone is comfortable with”.
On increasing demand for build-to-rent:
- “Build-to-rent is a subsector of the property investment class. It’s a lower return but it’s a lower risk sector, so you have to adjust your thinking. You can’t expect to receive the same return”.
- Temporary migration, for example, from international students, as well as future population growth, are increasing demand in the built-to-rent sector in Melbourne.
- The expectation of the population is changing: “People are becoming more focused on inner city living. From a return point of view, there’s a convergence on the risk return profile”.
- Common thinking overseas is that a minimum of 300 apartments are required to make a project viable. In Australia, however, there could be opportunities for projects on a smaller scale.
- Banks are still developing models to rate the risk of build-to-rent projects - there is not yet enough data/activity in the sector to encourage banks to develop a specific risk model.
- Unless this data is mined from overseas, banks will wait for a market increase in scale before developing a specific risk model. Until then, developers will need to contribute more equity.
On quality and affordability issues:
- Developers are responding to a greater demand for quality, size and amenity: “They’re catering their projects to owner occupiers rather than investors. Quality is resonating with everybody and we, as a business, have had to shift to cater for those demands”.
- In the office space, this means high quality offices with flexible spaces and in residential, “campus style apartment buildings”.
On higher office rents:
- Office projects are delivering more creative open spaces and commanding high rents.
- Commercial rents have increased from $350 to $600 per square metre in 12 to 24 months.
- University demand for commercial office space in Melbourne CBD is also driving demand in this sector.
- An example is Monash University taking 40,000 square metres at 750 Collins St, Docklands to be used for a VCE campus, indicating an emerging trend of education providers taking more city office space. This demand is something we do not see in other Australian capital cities.
- “Rental growth will continue this year, until 2020, when it will begin to tail off”.
- Developers need to be alive to growing demand for university degrees by international students. Opportunities exist for developers in mixed use sector.
- There is a need to evolve retail assets, integrating office, hotel and accommodation, and focus on services rather than products.
On what Melbourne is doing right:
- “Firstly, we have a very open economy; secondly, we have a generous immigration program - we need to understand that these two factors are really key to why we are generating so much interest. A lot of it is coming from overseas”.
- Our “top class education and health sectors” are also driving growth.
- “On top of that is the relatively affordable housing situation”, an example being the greenfield developments along the Geelong - Melbourne train line.
On Fishermans Bend planning freeze:
- “To make it work you probably need to put a train and tram line in, which could cost more than $10bn. In an election year, you can probably spend that as a commitment in other areas and get a lot more political good will out of it”.
- Transport has not been considered and there has been a phobia about building heights: “Developers have been led on and lent on”.
On the hotel market:
- Is it concerning that we can’t finance hotels? “It’s all about certainty of the income stream. Funding hotels is difficult and will continue to be difficult despite the undersupply of hotel property types”.
- “Out of 100 hotels that run through the cost planning phase, we probably build two. They are difficult to get out of the ground and finance. Often they are loss leaders in a major project”.
- AirBnB has not slowed the hotel market. In fact, “a lot of new brands are coming into the market to compete with AirBnB”.
On height controls in the CBD and Southbank and public benefit trade-offs:
- “I think [the ability to trade public benefits for extra height] is very much an experiment and the jury is still out whether it will work, although, early indications would suggest it is not working”.
- “One of the things on the public benefit list a developer can provide in the CBD is commercial office space. After a year, there has not been one uplift for anything besides commercial offices”.
On difficulties in the market:
- “Over the last 10 years we’ve absorbed price increases by productivity gains. We’re expecting about 3-4% construction price increase this year”.
- “Our market is being looked at with very sophisticated lenses throughout the world, but within our bubble we are not opening our eyes to it”.
On where we are heading with finance:
- “Our experience is that the finance is there, but what we are finding is that the terms & conditions that we are getting under the finance are tighter than two to three years ago because of the perception that the market has an oversupply. However, the number of interest-only loans has decreased”.
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