Residential developers are repurposing sites to capitalise on growing market sectors
EXPERT OBSERVER
The latest ABS figures estimate that the total number of dwelling units that commenced construction fell 9.5% in the December quarter. The current decline in Victoria’s residential property development is pushing many developers to look at diversifying.
Restrictions on foreign investment, changes in statutory fees and investment incentives, lending becoming tighter and policy uncertainty with the looming federal election have all contributed to a decline in the Victorian residential property market. As a result, developers are struggling to pre-sell a sufficient number of properties to fund residential development projects in the current environment.
However, with Australia’s rapidly growing population, the need for new housing will persist and lead to a bounce back in the market in time.
Until then, more and more developers are looking at repurposing their existing residential development sites and transitioning them into commercial sites. Some are looking to capitalise on growing sectors of the market by turning to opportunities in the aged care and retirement living and the up and coming ‘build-to-rent’ sector. Build-to-rent developments are purposely built for rental, rather than sale. This benefits people who want or need to rent for longer periods of time.
Residential developers frequently discuss rezoning and repurposing sites to a commercial development.
Commercial properties are vastly different from residential property developments in terms of size, function, characteristics and most importantly financial risk.
While residential developments involve selling off the asset once complete, commercial developments usually involve retaining and maintaining the asset, which is a much longer-term financial model.
The biggest challenge for residential developers who adopt any of these alternatives is understanding market expectations and changing their feasibility from a short-term to a longer-term return with a different model and risk profile.
However, with the right team of consultants leading the transition of a development, traditionally residential developers are presented with the potential to thrive under the current housing climate in Victoria.
Opportunities in the growing aged care and retirement living market
The aged care sector is expected to boom over the next few years as our population ages and continues to live longer.
Aged care and retirement expectations and offerings have completely changed over the last few years in Melbourne due to our society becoming accustomed to an amenities-rich way of living.
New aged care and retirement living sites are no longer sprawling developments on the suburban fringes. They are now situated in inner city areas and have become high-rise modern developments with the same premium finishes as a luxury apartment development.
Traditional residential property developers are seeing the growing ageing and downsizer population as an opportunity to take advantage of in the current market. In particular, an originally proposed high-density residential apartment site can now present an ideal transition for a modern inner city vertical aged care and retirement living development.
Earlier this year, Lendlease submitted an updated proposal for the redevelopment of the historic Channel Nine studio site in Richmond to include aged care and retirement living precincts.
One caveat is that aged care and retirement living sites have a different set of regulations and requirements which developers will need to consider in terms of feasibility and buildability.
Making moves in the new build-to-rent sector
Some developers are also considering repurposing their residential sites into a ‘build-to-rent-model’.
While this model is still largely untested in the Australian market, there’s a growing demand for this alternative development scheme, particularly as the issue of housing affordability continues across Melbourne.
In terms of transitioning residential development sites into a build-to-rent model, the design and construction remains largely the same, but the financial model is completely different.
Developers will be keenly observing how ‘build-to-rent’ sites, such as UBS Asset Management, Grocon and JLL’s Gold Coast ‘built-to-rent’ site which opened early this year, will perform to see if they should transition their developments over to this model.
The reality is, the Victorian residential property development market as we know it is changing. For developers to stay afloat, they may need to explore different types of developments and repurpose their existing residential development sites.
James Ford is the National Director at WT Partnership