Demographics key to choosing residential development sites

Apartment construction now provides the impetus for much of the growth in construction and will be an important driver of the economic in 2013, which can also be linked to the demand for development sites.

And so against this background let's continue our conversation with one of my associates, Shane Dargue, from Colliers International, Melbourne.

By looking at some current trends that are starting to show up in the Melbourne CBD and in Sydney we can gauge how headline demand impacts the wider market for development sites.

As might be expected, it’s an area that demographics will always influence and where trends are not always universal because varied pockets of demand are driven by particular local conditions, which Shane refers to here.

“Across the inner-ring suburbs, we see that because of the mixed demographics associated with these areas, which are common to all capital city markets, development sites have the potential to be very desirable, because it is usually possible for the end project to deliver a good cross section of apartments. If the mix matches market expectations then these sites have a lower risk-profile and as such attract ongoing support.”

Shane also believes that Melbourne’s CBD market is now partly driven by international factors, while land values by direct comparison to Sydney’s CBD residential market remain competitive.

“For two years running in 2011 and 2012 Melbourne has rated as the world's most livable city by the Economist Intelligence Unit, heading a list of 140 cities worldwide. This combined with strong growth predictions, (Melbourne is set to over take Sydney as Australia’s major city by 2020) means that foreign investors are taking a keen interest. Investors in particular from Asia and the USA are attracted by these positives and the government stated intent to promote and support Melbourne’s CBD as a 24/7 location, which makes it even more attractive to offshore buyers.

“As a result the CBD residential market is now being driven by foreign investors and despite a predicted spike in supply in 2015 there is still opportunity as Melbourne’s population continues to grow. Because the CBD market is driven less by local demand by comparison with the inner-ring and outer suburbs this reflects in the demand for development sites.

“We also need to keep in mind that any development site purchased today would not deliver end product for three to five years depending upon its scale and individual circumstances.”

It is also worth noting that Melbourne’s layout creates more growth opportunities and thanks to recent planning changes it’s now becoming a much more streamlined process. Despite this, there is some cross flow of activity between Melbourne and Sydney now several major developers are active in both cities, Sydney’s reputation as a more expensive location remains intact, and both still face hurdles when it comes to infrastructure.

Looking beyond the CBD I was keen to ask Shane if he felt that there were particular pockets of demand for development sites which are more likely to emerge in 2013, and so fuel stronger project delivery.

“In Melbourne the demand for development sites across the inner-ring locations will be boosted by the Victorian government’s new planning regulations. These zoning reforms will encourage more development, because the current policy is very prescriptive and now there will be much more room for mixed-use sites and there is demand for those locations.”

While Shane’s comments relate mainly to Melbourne, I also think that in Sydney and Brisbane there is the potential to see more demand across similar inner-ring locations. They are universally popular with buyers, and funding is easier, these sites are what Shane describes as more digestible and again local demographics are driving demand.

However planning will remain a key issue no matter where sites are located, and as Mark Percy from Cbus raised in his recent interview for Project Agenda, planning and in particular delays are an industry wide concern, no matter if we are dealing with very large or smaller developments, planning has a common impact.

Referring back to Shane’s comments the changes to zoning in Melbourne have the potential to be very positive. Beyond my own views and the comments from Shane and Mark Percy, the need for planning reforms highlight a much wider economic impact and the need to stimulate and sustain growth.

When we look at the demand for development sites, not matter the location, it is clear that progressive planning has a big impact. It is also possible to achieve a balance with community needs and expectations, while meeting the demands of changing demographics.

At the start of this topic I made mention of the fact that all development sites are complex by nature, Shane has helped highlight some key issues and now we look at a general view of where site values might be heading in the immediate future and Shane continues.

“ Given the complexities involved and some that have already highlighted, unconditionally it is necessary to look at values against the varied conditions in our three markets, CBD, inner-ring and Greenfield outer ring locations.

“However I also think it is possible to ascribe some key factors that still act to influence all of the markets, and these include: demand which will be lifestyle driven (demographics), government policy in particular as that relates to planning and funding which for some markets in particular the CBD currently highlights foreign investment.

“My remarks here also have to be framed as general comments, I am looking to signpost some broad trends for the immediate future, it’s not about discussing detailed site values as such.

“In our zone ‘A' for CBD apartments we are looking at a starting point of $50,000 per apartment, but when you take into account all of the factors we have been discussing this can be as high at $110,000 per apartment and in Sydney more $150,000 per apartment.

“Values in Melbourne are being driven by the factors we talked about earlier the CBD is moving to being a fully fledged 24/7 effervescent city, and so attracting more residential interest. There is ample room for this to happen and again this will encourage more international investment. I also have to say that much the same applies to Sydney the goals are similar, but here we are making good headway.

“Across the inner-ring suburbs vales in this area will be driven by many key factors, some of which are more local, headed by lifestyle, the diversity of product, a wider base of developers and the all important planning initiatives. One such initiative is Footscray in western Melbourne, which is projected to grow by 175,000 people over the next decade. Inner ring development sites are also more closely aligned, more sensitive to the state of the general housing market.

“ When it comes to values in the outer-ring Greenfield locations we see that because of a less active housing market and increased supply, that the demand for medium and high density sites is down. One key reason is that sites in these areas are much bigger if buyer confidence wanes, so does the appeal of building apartments or town homes. However as a price sensitive market that can quickly change if product is supplied at very competitive prices.”

Over the next two weeks we will continue to cover off this chat with Shane, expanding upon key factors such as planning and funding while also looking at marketing sites, and the demand trends for sites in major urban renewal projects.

Peter Chittenden is managing director for residential of Colliers International.