Melbourne off the plan apartment values could spike 25 per cent: Charter Keck Cramer
The problematic shortage in the apartment development pipeline in Melbourne, paired with huge immigration forecasts over the next decade, has had property advisory giant Charter Keck Cramer predict huge growth for the Melbourne off the plan apartment market.
Charter Keck Cramer said this week that, despite the current difficulties in the marketplace which have stemmed from the aggressive interest rate rises over the last 18 months, there are a number of reasons why apartment values will go up.
"There are a number of fundamental reasons that support the thesis that off the plan apartment value rates across the entire apartment market in Melbourne will simply have to recalibrate upwards over the next 12 months," Charter Keck Cramer's research report authored by their Research and Strategy team Richard Temlett, Ben Carter, and Charlotte Tolfree read.
Their analysis of apartment projects across 10 Melbourne suburbs shows that several of those that have been released over 2023 have increased their off the plan value rates by +15 per cent to +25 per cent. That's in comparison to pre-COVID off the plan value rates of apartments of the same size in earlier stages of the same development or in comparable projects in the same locations.
They added a caveat however, suggesting that not every project in every location would be able to revise rates upwards.
"At present, the ability to increase value rates comes down to the developer, brand, location and respective target markets."
They believe the buyer market will have to accept the new pricing structure, given it is unlikely that land values will fall substantially, nor will building costs fall dramatically.
Interest rates and consumer sentiment
Charter Keck Cramer said the 400 basis point rise since April 2022, which has both dampened purchaser sentiment and cut purchasing power by around 40 per cent, has seen buyer cohorts move into a different property bracket.
"When rates were at 0.1%, all potential buyers had much higher purchasing capacities. A segment of this cohort had the capacity to purchase a detached house or a townhouse whilst another segment that had the capacity to purchase an apartment.
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"With rapid rate rises, there is anticipated to be a “shuffle” downwards (trade-off) where many buyers are forced to trade into medium and higher density dwellings as dictated by their revised finances.
"For those that do not wish to buy, or now cannot afford to buy, will still need a place to live. This in itself provides renter demand which will be attractive to BTS apartment investors (as well as Build to Rent operators)."
There also the renting buyer who is expected to speed up their purchase timelines given the rise in rents over the last 12 months. They expect almost all of these potential buyers will seek the most affordable product type, which will be apartments.
Supply Imbalance
While Charter Keck Cramer prepares it's State of the Apartment Market report for H1-2023, the key take away is that supply remains at incredibly low levels.
"When this is read in light of population growth being at decade highs, it is no surprise that vacancy rates are incredibly low and rents are rising so quickly.
"It is also an explanation for why Charter Keck Cramer feels that there will be a floor under price falls (if any) of established apartments, and also a fourth reason why we believe new apartment pricing will need to adjust upwards and will be supported by the buyer market."
Construction costs and land values
The advisory firm said that while construction costs are starting to slow, their feedback from builders in the industry is that it is unlikely they will ever revert to pre-COVID levels. They also say that there is going to continue to be substantial competition and demand for labour given the city-shaping infrastructure projects being completed across Melbourne over the next few years.
"This stands to keep construction costs elevated in the short, medium and longer term."
There's also the expectation that land prices are unlikely to fall substantially, if at all, given the extremely restrictive planning system across Melbourne.
"Our investigations with many sales agents suggest that well located quality sites are highly sought after and are increasing in value given many developers are aware of the substantial supply / demand mismatch occurring across Melbourne.
2023 Apartment Value Rates
Charter Keck Cramer collaborated with their valuer colleagues and sampled several BTS apartment projects of varying scale across 10 suburbs in Melbourne of similar scale that have been launched for sale to market in H1-2023. That's allowed them to understand the relative change in off the plan value rates in projects as at 2018 and 2019 (pre-COVID) compared to 2023.
They used the two-bedroom, two-bathroom product as it was the most popular and allowed the most meaningful comparison to be made.
They found that off the plan value rates have increased by +15% to +25% in several projects.
"We remind the industry that quite simply, people need a place to live. Given the shortage of supply and substantial demand for housing there is going to continue to be a large mismatch between supply and demand for housing across Melbourne over the next 2-4 years.
"At present, it is apparent to Charter Keck Cramer that the ability to increase off the plan value rates (and by how much) comes down to the developer, brand, location and target market. Some projects have increased value rates by only +2% to +5% whilst others have increased them by amounts greater than +25%."
Charter Keck Cramer's view is that in Melbourne, the pre-COVID off the plan value rate of $10,000 per sqm is now closer to $12,000 per sqm, whilst the pre-COVID off the plan value rate of $12,000 per sqm sqm is now closer to $14,000 per sqm.
"This requires a change in mindset that needs to be led by the development and financer industry after which it is anticipated that the buyer market will follow given they have limited other alternatives in the current market."
The Outlook
Charter Keck Cramer believe the buy to sell apartment market in Melbourne is in the process of being pulled forward.
"Charter Keck Cramer has spoken about the structural changes in living preferences that are occurring across Melbourne. These structural changes include the take up of apartment living, and also renting and renting for longer.
"It is Charter Keck Cramer’s view that the flow on effect of the pandemic described above has meant that the maturity of the BTS apartment market in Melbourne is in the process of being pulled forward (or “jumping”) by a property market cycle (i.e. 7-10 years). This will continue to play out over the next 12 months."
They say part of the pull forward in market maturity (evolution) will be that larger numbers of occupiers embrace living in apartments as well as the buyer market accepting higher prices for BTS apartments as this product type continues to become more mainstream.
"The other critical part of this expedited apartment market maturity however is that developers will need to respond by delivering owner-occupier quality apartments. Some examples of these features include apartments with extra storage, lots of communal amenity, larger living areas, larger functional balconies and more 3 Bedroom apartments."
Charter Keck Cramer also believes that the RBA is close to the top of the rate tightening cycle.
"When rates stabilise, it is anticipated that market demand will start to be expressed and sales rates will accelerate. When rates start to be cut, there is anticipated to be an extremely elastic response across the entire housing market with the BTS apartment market well poised to be a primary beneficiary for many of the reasons highlighted above. "