It is inaccurate to over blame land prices to 'land banking': Colin Keane
Greenfield land supply is expected to address on average 44% of demand for the six major capitals.
Sydney, South East Queensland, Melbourne, Perth, Adelaide and Canberra have well defined expectation around the role of new land supply. That role centers on being able to respond to the need for families to access a home situated in a well thought through urban context.
For the role of greenfield markets to be effective, state governments need to ensure that there is sufficient supply to cater for expected demand. Additionally, that the nominated supply needs to be largely controlled by parties with the capacity to take it to market.
Research from the National Land Survey Program shows that as at the beginning of 2012 there were an estimated 1.6 million future lots across the six major markets. Future lots will include lots remaining in active projects and also supply yet to be defined by a project.
Of this future supply, 13% is held in active projects, 36% is classified as “short-term supply” and 51% of the 1.6 million lots are classified as long term supply. In summary the 1.6 million lots of future supply is equal to approximately 32 years of demand.
Considering the Melbourne future supply situation, the major listed developers control only 30% of the estimated 350,000 lots (includes active projects supply balance). It cannot be stated that major developers are holding the future supply of Melbourne at ransom when only an estimated 50,000 lots of the 276,000 future lots (outside active projects) are currently being managed by the top developers.
It would be fair to say that major developers control a small proportion (16%) of total future supply earmarked by the state governments for the six major growth regions across Australia. The reality of future supply is that a large proportion is controlled by land owners who have no clear intention on bringing it to market and by an array of smaller land developers.
Of the nominated future new land supply across Sydney, 44% is under the control of parties who intend to develop. The 44% includes major and minor developers.
There is a suggestion that the actions of the major developers with respect to how they handle their supply lines is contributing to the level of unmet demand and rising new land prices. It would be fair to say that developers are in the business of selling land. The concept that developers manipulate supply lines in order to build up demand and then leverage that demand to lift prices would be inaccurate.
Despite the relatively modest supply of land held by the major listed developers, land sales across the six major markets have continued to perform well below expectations (with the exception of the Perth market). As at the December 2012 quarter new land sales were only addressing 60% of expected monthly demand. The result cannot be blamed on lack of product or stock ready for sale, as at the close of December 2012 there were close to 16,000 lots ready for sale. The 16,000 lots which are ready for sale represent 32% of the total annual demand for land across all six markets.
This high level of supply does not suggest that developers are holding back in terms of producing new lots, but rather have continued to produce more land parcels in the face of weakening sales. The current lower than expected sale rate has nothing to do with supply levels but more to do with an array of issues impacting on price, location of supply, drivers of demand and production capability.
Taking the price issue, some would say that the industry is experiencing lower sale rates because the price is too high. The price points for land is a factor in deterring potential customers, however to blame it on 'land banking' would once again be inaccurate. As already mentioned the volume of land under control by the major developers is small, not enough to influence pricing strategy across the market. Also the fact that there are in excess of 750 active projects operating across the markets means that the level of competition in each sub market would ensure that projects are competitive.
The industry has been moving price back; however there is a floor under the price point. That floor has more to do with the cost of development and the embedded overheads imposed on the industry by governments. It is now very hard for projects to offer product to much below $200,000 due to the cost framework associated with producing lots.
In summary, the concept that the major developers are holding the residential market to ransom by having only 16% of future supply is difficult to support. The ability of the greenfield markets to perform their role efficiently depends on much more than simply looking at a wholesale stock number. It would be more accurate to suggest that markets perform better where there is a healthy representation of larger developers with well defined supply lines.
Colin Keane is director at Research4.
