“In two years I think the apartment market is where you want to be. But you’ve got to work out how you’re going to make it work.” Like many developers, John Issa is keeping his eyes on the horizon.  The LIV Developments founder knows the fundamentals are there for a return to form in Sydney’s apartment market. But the builder-developer says “something’s got to give”. “The construction costs have gone up by 38 per cent, but apartments have not kept up with freestanding houses,” Issa says.  “Traditionally, the sale of an average apartment in Sydney would be at about 70 per cent of a house. That relationship is a bit out of whack at the moment. Apartments have not really moved that much. They haven’t kept pace.” But making projects stack in the current market requires fortitude, according to Issa, who was speaking at The Urban Developer’s Members event in ANZ’s Sydney headquarters recently.   “Because when you’re crunching the numbers it doesn’t work at the moment, but you’ve got to look ahead a couple of years and what prices are going to be, and that’s what I’m doing,” Issa says.   ▲ A render of LIV Development’s project in Sutherland, in Sydney’s south. “Baseline scenario is what is the market doing today. So I’m not banking on that it is going to go up in 12 or 24 months, it’s got to work today. And that’s the way the banks will assess it as well.  “You’ve got to make it profitable today, and if it goes up in the future, well, that’s your bonus.” Deals starting to flow through Issa says while he ordinarily would only build out one project at a time, there were some deals flowing through the Sydney market.  “I’ve put myself in a position where I’ve actually purchased two or three sites in the past six months, only because I haven’t over-leveraged myself. I’ve set myself up, and it’s paying dividends now,” he says.   “I’ve picked up a couple of opportunities that say two years ago you wouldn’t get it at that price.  “I think a lot of developers out there have actually over-extended themselves, and with interest rates … I think some guys have got themselves in a bit of trouble, so that’s created some opportunities.” Hills Shire apartment developer Patrick Azizi agrees.  ▲ People are very open to living in apartments regardless of their successes, says Northmark managing director Patrick Azizi.  “There’s definitely deals going around that are a little bit better than before,” the Northmark managing director says.  “Nearly every site in Sydney is a potential apartment site. So, potentially, in Sydney there’s an unlimited number of apartments that could come on the market—the government is just slow at releasing that. “I feel apartments have a good place to go because in Sydney you look back 10 years and you wouldn’t want to live in an apartment. It was always that if you succeeded you would want to live in a home, but that way of thinking has changed and people are very open to living in apartments regardless of their successes. If anything it’s almost better to live in an apartment because it’s a low maintenance building.” Migration driving demand and opportunity ANZ senior economist Daniel Gradwell says the migration story is underpinning opportunities in the NSW development sector.  “Since the borders reopened the return of overseas migration has just been incredible,” Gradwell says.  “We had 150,000 people arriving into NSW from overseas in the past 12 months. Pre-Covid that was running at about 100,000 people—so an extra 50 per cent growth from only a couple of years ago. “That’s quite astonishing and it’s a record level for NSW. Generally that population is incredibly strong and that’s feeding into demand, especially from a housing point of view.” ▲ Migration to NSW has skyrocketed, outstripping pre-pandemic levels. Gradwell says we need to be building about 60,000 homes every year in NSW, but in the past 12 months we have built just 49,000, and that gap looks to be widening plus building approval rates have dropped to their lowest level in a decade.  “This is really where the opportunity is because that population story is going to stick around for some time to come,” he says.  Costs, planning delays hamper industry Azizi says that in the apartment market there is planning risk involved, and Northmark runs a diversified portfolio to mitigate this risk.   “You’ve got the issue of timing (blowouts), but with the timing you also generally get the advantage of some growth in the market,” he says.   “Looking back I think it’s really important when you choose your sites to choose areas that are not oversupplied. There are some areas that have had massive rezonings and suddenly everyone’s in there building 15-storey buildings. You try to avoid those places.” Issa says his builder-developer structure has helped to keep a tighter workbook but in the past two-and-a-half years he has had to absorb a 38 per cent increase in construction costs. Azizi says his costs have almost doubled.  But it’s not just the cost of construction that is causing headaches for developers in Sydney. ANZ senior economist Daniel Gradwell says capacity in the construction sector is constraining the development industry, particularly with the “incredible backlog” of public works.  ▲ The Rozelle Interchange: ANZ senior economist Daniel Gradwell says the “incredible backlog” of public works is constraining construction. “Even if we do that (cancel big infrastructure projects) that’s not an immediate fix because you can’t cancel projects that are already under way. You can’t leave a half-finished motorway,” he says.  “We’ve still got years worth of work to get through so you might see a bit of relief later in the decade. That’s probably valuable, but it doesn’t help the situation today.  “We need skilled migrants coming into Australia who can actually come in and hit the ground running, and that’s where the challenge comes from.” Gradwell says wage growth is growing rapidly with data from the Australian Bureau of Statistics indicating wage growth was at its fastest rate in the history of the data series.  “The starting point of the economy is very good, but that’s part of the challenge that we’re facing into from a construction point of view, that availability of labour,” he says.  “Data shows housing construction costs in NSW are about 8 per cent higher than a year ago, but that’s come down from the 20 per cent growth rate that we had a couple of years ago. But 8 per cent growth is still a real challenge. “Even with migration levels today, the question of where they’re going to live is very valid. I feel like that question used to get thrown around pre-Covid but it was more of a what-if scenario, but now I think it’s a very genuine concern. The vacancy rate across the country is less than 1 per cent, it’s not a balanced market.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.