Land market set for win-win year; Melbourne to lead capitals in affordability: API-HTW

Land in Melbourne’s growth corridors will retain its affordability throughout 2016 compared with other capital cities, despite a trend for smaller allotment sizes, according to the latest Australian Property Institute (API)-Herron Todd White Residential Land Subdivisions Update.

Developers could look forward to another strong year in the residential land sales sector, although Australia-wide there will be a need to balance allotment sizes, infrastructure costs, increasing levies and increases in supply in order to maintain development margins, said Paul Wheate, Herron Todd White director, Residential Development Division and API spokesperson.  

“The difficulty developers are now having is to ensure they can produce the allotments and deliver the final product within the time-lines stipulated by ‘sunset’ clauses in the pre-sale contracts,” he added.

“Coming off 2015, many developers experienced a significant increase in the absorption rate for allotments, however some are also now seeking to increase prices in order to slow the rate of sale and maintain better control over their future allotment delivery obligations given demand is currently so strong,” Wheate said.

This scenario, where there is readily available allotment supply, sufficient resources to construct roads, provide the services and deliver the allotments, there is a slowing in the rate of growth in prices and developers are able to maintain development returns, will provide a compelling “win-win” situation in the market, he said.

Land prices would remain high in Sydney through 2016, whilst allotments in Melbourne’s key growth corridors around transport routes and key infrastructure would retain their relative affordability.

“Allotments in Melbourne’s growth corridors are available at around $200,000-$220,000 whereas similar allotments in Sydney will cost around $400,000-$450,000, suggesting that Melbourne remains a great proposition to acquire affordable land for either first homeowners, upgraders or investors.”

However, developers’ margins are coming under increased pressure, bringing into focus several issues like development costs, which he said are becoming a larger hurdle for developers nationwide.

“The difficulty with that is you’re talking about smaller allotments being developed remotely from key amenities along normal growth corridors - developers are being required to do this in order to meet the ongoing contributions they need to make to Councils and to state governments through different infrastructure charges. There is biodiversity levies and development contribution levies that have to be paid so allotments tend to be getting smaller to deliver a more affordable block,” he said.

“In Melbourne the cost involved in delivering a typical allotment is around $100,000, whereas in 2007 this was around $35,000 per block. Development levies and charges are now contributing up to $65,000 per lot to the cost of producing an allotment and new home.

“In Sydney, developers face costs which can range from a total of $60,000 per allotment to $120,000 per allotment, likewise Perth, whilst Brisbane and Gold Coast developers face costs of around $100,000 per allotment.”

Wheate said the clear trend across the country for decreasing allotment sizes, allowing developers to achieve increased allotment yields, offer more product diversity and maintain development margins, would carry through 2016.

“Residential lot sizes are an average of 448 square metres across the growth corridors of metropolitan Melbourne. There’s been an ongoing growth in the number of 300 square metre to 400 square metre allotments, predominantly driven by affordability issues – that is, developers trying to deliver a product that is around a price point of $200,000 per allotment which then allows a house to be erected for circa $150,000, achieving a ‘house and land’ cost in that $350,000 sweet spot.”

“Likewise in Sydney, allotment sizes are decreasing across the market, which now has a general acceptance that blocks will be less than 500 square metres in area.”

Brisbane allotments have also reduced in size, driven primarily by Councils allowing denser levels of development, whilst the Gold Coast has seen average lot sizes reduce from around 600 square metres to 400-450 square metres.

Similarly, allotment sizes in Perth have decreased over the past 10 years, which has assisted in easing local affordability issues, and now the market accepts that smaller allotment sizes are the “new normal”.

A large pipeline of demand spurred by strong net overseas migration and natural population growth, particularly in Victoria, will continue to drive growth in sales after more than 12,000 allotment sales were transacted in the state in 2015 - the market’s best ever annual sales performance.

“There’s usually a lag of some 12-18 months after an increase in population prior to an increase in demand for allotments, and that’s what we’re currently seeing after an influx of people, particularly via net overseas migration, over the last couple of years,” Wheate said.

“We’ll continue to see that steady demand for land through 2016.”