Sydney Housing Conundrum: Luxury Inner City or Bust

Nothing outside of Sydney’s 10km inner-city ring stacks up.

It’s a grim reality for developers sitting on parcels of land, but with the cost of labour, construction and finance, the odds are against multi-residential projects. 

Speaking at a recent industry lunch with MaxCap Group, JLL head of residential development valuations Bill Fatouros said it costs a minimum of $500,000 per box anywhere in Sydney. 

“That means you’ve got to deliver the product at least $15,000 per square metre. If you then work out where you can affordably charge $15,000 per square metre and achieve the sales, you are generally within the 10km ring,” Fatouros says. 

“Anything within the 10km ring is what we’re seeing in our assessments generally stacks up.”

Projects outside that ring are much more challenged, according to Fatouros. 

MaxCap Group chief investment officer Bill McWilliams said while debt coverage had gone down, which should help activate sites, it hasn’t necessarily “translated into feasibilities working”.

▲ JLL’s Bill Fatouros said project valuations often did not support feasibilities outside the 10km radius in Sydney.

Price growth required for future of projects

McWilliams says in the current market the lenders and developers have to take a view as to whether the demand and price growth will be there when the project is completed. 

“Where they probably work the most is the high end owner-occupier market. Still it’s difficult to get pre-sales off the plan, and it comes back to sentiment consideration,” McWilliams says. 

“The projects that are getting off the ground are lower debt coverage and we’re prepared to run a supply demand analysis to say there will be demand by the time the project is completed.

“There’s some landbanks on our books that the developer thought would be activated three years ago, but it still hasn’t been activated and that hurts. There’s holding costs, there’s land tax costs.” 

A reduction in interest rates could help to unlock some of the sites outside the 10km radius as it would enable greater borrowing capacity for purchasers. 

Fatouros said it was unlikely that construction costs will go down, so interest rates needed to ease or “revenues must increase—and at the moment with borrowing costs people can’t afford to pay much more for apartments”.

“Therefore we build nothing for the next 12 to 18 months and therefore we have greater pressures on demand and by then interest rates will fall, and people will have to commit to buy to the market and we will have to pay a slightly higher price,” Fatouros said. 

▲ CBRE’s David Milton says the downsizer market will be the fastest to recover with strong pent-up demand.

CBRE managing director of residential projects David Milton says although there are a diminished number of people able to deliver at scale, the sub $1-million market “hasn’t missed a beat”.

Whereas buyers in the $1 million to $3 million bracket were highly geared and heavily impacted by interest rates and tighter lending conditions. 
 
“The empty-nester market is probably the most cautious, but probably where there’s the most future demand,” Milton says. 

“There’s more empty nesters moving into that stage of life than there’s ever been. But they’re not acting. I think that market will be one of the fastest to recover as interest rates come down. 

“If you asked me what market to move into I would say the 10 to 20 apartments in well located areas, I think that market is going to be extremely strong, because the take-up has been very little, and there’s been very little supply, and they’re less price sensitive once it starts to move.”

High-end apartments bag robust prices

Sydney’s inner-city luxury market is as strong as Milton has ever seen it.

“We’ve made five sales in the last 10 days down at One Circular Quay from $16 million to $33 million. We’ve exchanged an apartment off the plan at Manly Beach for $22 million, with two other pending sales one at Bondi Beach and one at Manly Beach with a circa of $20 million,” he said.

“The amount of sales in that high end is unbelievable.”

Sydney and Gold Coast developer Allen Sammut said prices would need to increase in order to get projects to stack, but it would do nothing to address housing affordability challenges. 

“I have not seen anything that has come across my desk in the last two years that warrants the risk,” Sammut said.  

“If I want to develop something at the moment, I have to set the sales rates [high] because it just doesn’t work, and there’s a cap to what people are going to pay, even if interest rates do drop. 

“Interest rates dropping 1 per cent, that’s not going to change the affordability crisis. I don’t see a solution to this housing crisis that we’ve got at the moment in the next 10 years.

“A lot of developers have lost their confidence to put their head out there, and confidence will be the key.”