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DevelopmentTaryn ParisSun 06 Oct 24

‘We’ve Paid Our Penance’: Melbourne Developers Ready for Turnaround

It has been one of the toughest years for the industry in decades, but Melbourne’s challenges will yield golden opportunities. 

“We’ve paid our penance. It’s been two of the hardest years of my career and we deserve some tailwinds,” Goldfields managing director Marco Gattino says. 

And Gattino is hoping those tailwinds are starting to blow as he executes a project in Richmond with prices of $16,000 per square metre, which he says will be “the new watermark in Melbourne”.

Speaking at an industry lunch held in partnership with non-bank lender IDA, Gattino says a drop in interest rates would unlock the industry, but he is also among a growing chorus of industry who are calling for a reduction in red tape and taxes. 

Melbourne ripe for resourceful developers


IDA managing director Adam Kaye says the growth fundamentals of Melbourne would provide opportunity for developers if the government removed the roadblocks constraining the industry. 

“I think this is the moment where it’s the real entrepreneurs, the developers who see the opportunity, not the problems, that find a way through,” Kaye said. 

“There is capacity in the construction contracting space now, the population growth we have enjoyed is on par or higher than any other state in the country, and a price point in our real estate now that is hyper competitive with all other jurisdictions. 

“The ingredients are there, it’s about what is the recipe to unlock that platform … developers are still active, they still see opportunity.” 

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▲ IDA managing director Adam Kaye said Melbourne had all the ingredients for strong returns on capital investment.

Kaye says Melbourne has been a premier destination for Australians and it looks “relatively more affordable than every other state, and that has to be the big opportunity” for attracting capital. 

Feasibilities are being worked hard


Developers are having to work feasibilities hard to keep projects afloat. Even the high-profile Sth Bnk project has been recut in the face of cost price rises, explains Beulah executive director Adelene Teh. 

“The costs spike is a challenge for everyone, and all our projects are going through the same challenge. For example Sth Bnk over the past few months we’ve been working very hard with the building team to optimise the design,” Teh says. 

“We put in a lot of effort to build that comfort with authorities, and the outcomes were positive, they were supportive in the end. That is one of the biggest hurdles to get the cost down, it’s not just working in-house with your design team, it’s also working with authorities to show them that we actually need it, we had to do that to make the project work. 

“Sales are still going strong, pre-sales are still committed. We’ve worked with a few financiers, but it’s really about getting the costs at the right price.”

Beulah executive director Adelene Teh
▲ Beulah executive director Adelene Teh said the Sth Bnk project had to be reworked amid rising costs.

Central Equity director Karl Kutner said the 40 per cent cost increase in building prices along with taxes had all but killed the high volume apartment market. 

Patience key in current landscape


Kutner says the developer will be unlikely to shift its Southbank stock for $15,000 per square metre for a number of years to come. But the developer has shifted gears. 

“We’re looking at a lot of sites and trying to make the feasibilities work and we can’t make them stack up,” Kutner says. 

“We bought a shopping centre, we’re working pretty hard on that, land subdivision is okay, there’s still some activity—but it’s a very difficult time and I think you’ve got to be patient.”

Townhouse developer Above Zero’s managing director AJ Batra has his eyes on the horizon and says the downsizer market will be one to watch into the near future. 

“We’ve always prided ourselves on developing in a low supply environment, so high planning obstacles, getting the project in a position where we’ve got an approval for an exemplary outcome,” Batra says.

“And then we can deliver that knowing that if we need to chase certain rates we can push for it because we’re in an environment or a location where there aren’t many other competitors. 

“We had a recent approval, which took three years and two VCAT cases but it’s 13 homes in one of the best streets in Camberwell. We know that we can deliver a really good quality project at a price point that people haven’t seen before.”

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▲ Above Zero managing director AJ Batra (centre) said the downsizer market was one to watch in the next few years.

Delays in planning and construction are adding to feasibility challenges in Victoria and Fieldwork principal Ben Keck says developers are wondering if it is worth it in the face of headwinds around taxes and government policy and planning. 

Off the plan a tough sell


“We also need to look at the off the plan process itself, critically. If you think about the amount of time developers spend on the off the plan process, it’s probably 30 per cent of the overall time spent on a project,” Keck says. 

“There’s reasons why they don’t sell off the plan in America. 

“Display suites, dealing with purchasers, spending all this money on marketing and trying to paint this mirage on what the project is going to be. I’m encouraged to hear that the banks are more open to funding speculative developments. I think that’s where it needs to go. 

“We need to set up a development model that is actually rewarding developers for the time that they’re putting in and the risk that they’re taking. And I think we need to remove that 30 per cent of their time from the process and look to models which are more sell on completion. Yes they will require more equity and that equity might be more costly, but we need to set up a build to sell industry that is actually more viable and can be doing three or four projects rather than just two.”

Capital backs ‘right projects in right places’


IDA’s Adam Kaye says the market has been inverted from asymmetric tailwinds for industry, to “really confronting headwinds”. 

“Victoria was the most appealing destination for Australians because of its affordability, its liveability, its ease of ingress and egress, and we’re now experiencing a compound force of the growing pains that come with that, needing huge infrastructure delivery, against the backdrop of some transition from low-cost high growth to higher-cost lower growth. 

“That is being compounded by time suddenly becoming expensive and value destructive. 

“The good news is that capital understands all of that. We also understand the structural buttresses within the market that say that if you’re building the right product at the right price, even if the price has to move from $12,000 per square metre to $16,000 per square metre, there’s no lower replacement cost at which that accommodation can be provided, and certainly the capital we know and speak to attuned to real estate fundamentals, they get that. 

“Ultimately the industry will recalibrate.”

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AUTHOR
Taryn Paris
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Article originally posted at: https://theurbandeveloper.com/articles/melbourne-developers-ready-for-turnaround-ida