Development Sites – Supply is Diminishing - with Guillaume Volz
Three seemingly unrelated events in NSW, combined with a predicted sharp fall in future supply levels of new apartments will, according to Guillaume Volz (National Director, Development Sites) with Colliers International re-shape the demand for residential development sites across Sydney over the next 2-3 years.
“A prime driver of any property market is a stable environment of government policy. While the three events I’m referring too might look disjointed, they each signalled an unfortunate drift of policy.”
“When your dealing with developments, that often take years to deliver the end product, the impact of government policy is even more critical.” He Said.
The three events that were turning point in policy were: reversing the Grey Hound Racing ban (October 2016), the abandoning of Council amalgamations called off (July 2017). Plus, the major shift when in June 2018 planning policy changed with the abandoning of the State Government’s control and back to the local councils.
What occurred with the planning policy backflip was that after two and half years the State Government announced that Ryde Council and Canterbury/Bankstown Council would be exempt from the new planning code until 2020; The Department of Planning reasoned that a lack of infrastructure to cope with additional development made the backflip necessary.
This final policy change had a direct impact on site zoning with policies for example to protect the supply of industrial sites which the entire city needs to function, clearly every parcel of land cannot be residential site.
Demand Shifts to Smaller Infill Sites.
However, in combination both directly and indirectly these three policy changes started to unwind the future demand for many potential development sites.
As a result, the demand for development sites has shifted away from large-scale brownfield sites and regional greenfield sites to a focus on selective infill sites that have the potential for the end product to appeal to an increasingly selective pool of buyers.
The trend comes at a time when evidence is mounting that by 2021-22, Sydney will once again face a shortage of new apartments, leading to an undersupply of new stock and renewed upward pressure on prices. This is despite the fact that currently apartment prices have fallen and there are areas of oversupply, with the prospect that both trends will accelerate over the next 6-12 months.
However, according to Guillaume Volz, “There’s no blood on the streets and after a solid period of outstanding price growth it’s not unexpected to see the market in a period of adjustment, starting with a re-shaping of demand for development sites.”
“While there is some downward pressure on the value of larger sites, and even more so when there are planning issues involved as few developers are now willing to be thrown into a hot-bed of planning issues to solve.” He added.
There’s already clear evidence that supply levels of new apartments and build-ready development sites has peaked and that the next few years will deliver far less stock, with a dramatic slowing evident from 2020 onwards.
According to Guillaume, this slowdown will also be marked by the emergence of a new style apartment project as demand moves away from very large-scale developments to more neighbourhood, smaller and bespoke style projects.
“This is not a matter of looking for any sort of market ‘silver-lining’, it’s simply the reality that given Sydney’s predicted growth and the shift away from big-ticket projects, the demand for development sites will not evaporate but will evolve. It’s really a very natural part any mature apartment market, which Sydney now is.”
“Instead, I’m confident that we will continue to see good support for quality infill projects, this trend will also deliver a shift in the size and quality of apartment projects that, despite current market trends will continue to be in high-demand.”
“The long-term trends among buyers have been evident for some time and will gain momentum over the next few years as developers respond with new projects in sought-after locations and suburbs, and it is those development sites that will experience strong demand.”
The trend will, Guillaume suggests, be accelerated by the reality that prospects for the production of new stock is now starting to look very limited and that’s despite all of the negative commentary which only acts to supercharge negative sentiment well ahead of development the fundamentals.
However, despite better mid-term prospects, it is true that the pool of potential buyers is not as large, and we no longer see speculative buyers in the market.
Professional developers with a solid track record, with a firm knowledge of the market and with ample cash reserves, are still active and some are planning several projects, but most have moved to a different delivery model. Accordingly, we are seeing a shift from projects of say a hundred plus units, to a combination of several smaller projects, and often by the same developer.
This is happening while the general supply of development sites is diminishing, and this will in future lead to far less finished product on the market and when that happens reversing the trend we need to remember that there’s no ‘quick-fix’.
The experienced developers have also had the legacy benefit of a buoyant market over the last 5 plus years, and these developers sitting on sustainable cash reserves.
Development site buyers understand prices have fallen however, by how much depends on a wide spectrum of circumstances. If looking for distress sales, the stress only really starts when construction gets underway because cash is spent and holding costs soon mount-up.
However according to Guillaume, “it’s important to consider the development cycle and if taken to market, which is rare, a partly complete project might sell at a heavy discount because of what the buyer inherits but that sort of sale even in the current market is not common. It’s more the case that potential sites will be withdrawn from sale.”
Popular Sites are in High Demand
With little demand for brownfield sites and even less for greenfield sites, the main sales activity and demand is for smaller infill sites in prime well-established locations.
While demand is cautious because of the settings surrounding the end sales, there’s strong buyer support for well-located smaller infill sites. These sites are also small enough that they may not require funding tied to off-the-plan sales. But have strong, almost assured demand, with a price premium at the completion of the project.
There have been a number of sales that clearly show this trend, and these include sites as diverse as Neutral Bay and St Ives and both are high-demand and popular suburbs. Both of these transactions demonstrate similar development qualities.
Development Sites: Less Demand will Impact Apartment Supply
While there’s been a very big increase of new apartments over the past 5 plus-years and some projects are yet to complete, the next 3-years look very different, and the shift in demand for development sites will play a critical part in how much supply is limited beyond 2020-22.
Developers require the ability to fund and then hold the initial site purchase – and land is a major input cost for the apartment market, if prices are falling, then naturally site values will also fall and it’s necessary to re-shape the end product. Another key factor is that there’s a big impact from planning and zoning regulations because of the time involved to deliver the end product
“Currently the most active buyers for development sites are experienced groups concentrating on prime, zones easily deliverable sites. However, this group of buyers are also looking for favourable terms and that includes access to progressive settlement, this is very important.
“They are mainly private local and very experienced buyers, and apartment development is their core-business. They are long-term players, not speculators however, they are well aware of where buyer demand is concentrated, with an eye on how supply will be re-shaped between 2020-22 with the potential slump in supply.”