Keen competition as developers navigate market stagnation

SPECIAL REPORT: Last year couldn’t end soon enough for the state’s land developers, who are banking on a break from adverse conditions.

It is no secret that 2016 was a tough year for many industries in Western Australia.

But the realities of the state’s economic rollercoaster were perhaps most evident in the land development sector, a segment of the property industry that until recently was operating at all-time high levels of activity.

The latest data from the Real Estate Institute of Western Australia show there was a 36 per cent drop in land sales in Perth for the year to September 30, and anecdotally at least, the last three months of 2016 brought even tougher conditions.

“I’ve never seen house and land competition so keen,” one of the state’s stalwarts of residential development, Nigel Satterley, told Business News.

“If you haven’t got a good offer, you’re not selling.

“In the case of Satterley, and we’ve got a 25 to 30 per cent market share, the volumes of the last quarter last year were below the volumes of 1984.”

The state government’s Housing Industry Forecasting Group industry survey last year found that, as of the June quarter, developers had 3,999 lots under construction – a 31 per cent reduction on the same time in the previous year.

Lot approvals also continued to trend downwards in 2016, following a peak of around 5,500 in the June quarter of 2015.

In the same quarter last year, there were 4,037 lots approved in the Perth metropolitan area.

Click here to see the BNiQ list of land developers.

Mr Satterley said the current conditions being felt by developers were driven by rising unemployment, with more than 100,000 people looking for work in the state, an oversupply of existing homes and rental properties, and plunging population growth in WA.

And Mr Satterley provided a bleak prognosis for the next 12 months, with the difficult conditions expected to continue.

The HIFG has forecast around 19,000 dwelling starts for 2016-17, with between 15,000 and 16,000 of those expected to be detached houses, many of which would need vacant lots.

However, Mr Satterley said data coming out of his firm suggested a much lower level of activity.

“New detached housing completions, I reckon this year will be 6,500 to 7,000,” he said.

“That’s from Yanchep to Mandurah.”

Looking past 2017, Mr Satterley said it was unclear where any sort of uptick in demand would come from.

“When you have a look at 100,000 people out of work, you’ve got 25 to 30 per cent of offices and specialty shops vacant from Subiaco to East Perth and falling house prices, all of these things worry people,” he said.

“Clearly, WA needs a proper direction. This government has been a one-trick pony; we’ve got to get leadership and look at where WA can create jobs.”

In response to the pressures in WA, some of the state’s leading developers are looking east.

Satterley Property Group spent $134 million on land in Victoria last year, with Melbourne becoming increasingly important for the company, which expects to sell 2,000 lots there this year.

“Melbourne is a lot safer than Perth at the moment, because of population growth, cost of living is a lot cheaper, and 100,000 to 125,000 people are coming to Melbourne each year,” Mr Satterley said.

Cedar Woods Properties made two interstate acquisitions in 2016, in Adelaide and Queensland, while fellow ASX-listed developer Peet is also becoming increasingly east coast focused.

Peet managing director Brendan Gore said the company launched its east coast aspirations about seven years ago, with activity ramping up to the point now that 80 per cent of the developer’s new lots activity is now outside of WA.

In 2016, Peet acquired three significant parcels of land outside WA, planning more than 5,000 dwellings lots across estates in Queensland, South Australia and Canberra.

“Earnings wise probably 85 per cent to 88 per cent of our earnings will come from the eastern seaboard,” Mr Gore told Business News.

“That has been a deliberate strategy for us for some time. In many ways we had been criticised by the market for being one dimensional and people still probably perceive us as being a solely WA business.

“While our roots will always remain in WA, and we’ll always have a large and active presence in this state, clearly market cycles vary.

“If you want to grow the business as we wanted to and grow our earnings base, having all of your land bank in one state didn’t make sense.”

Mr Gore said the all-time high levels of activity experienced in recent years had contributed to the scale of the challenges in the WA market in 2016, which would likely continue through 2017.

“The transition post the last mining cycle is going to be a lot more challenging than what it has been in the past because we haven’t ever seen a cycle like the one just gone,” he said.

“We went through a period where debt was easy to get, employment confidence was high, economic confidence was high, but post-GFC and post-mining boom that has changed and people have different expectations.

“When you look at the amount of investment, to think that will come back as normal, we are certainly not taking that view.

“But it is what it is, and we’re positioning the business around that environment, and as much as it is challenging, it is going to create opportunities.

“We’re certainly making sure we can look to capitalise on those opportunities as they emerge.” Mr Gore said while pricing land according to the conditions was one part of the equation, the depth of demand remained among his biggest concerns.

“It would be fair to say that the depth is quite shallow,” he said.

“That’s a function of the employment outlook or uncertainty for some people, and clearly we are going through a period of uncertainty; so that impacts people’s decisions whether to buy now or buy later.

“Our big focus is making sure that whatever money we spend, whether that’s marketing initiatives or incentives, it’s sustainable and we use shareholders’ money wisely.”

Not all of WA’s land developers are completely pessimistic about their prospects in 2017, however.

One of the newest entrants to the market, M/Land – the land arm of boutique development and construction firm M/Group (formerly Match), has reported a significant lift in sentiment in the early weeks of 2017.

“In 2016, everyone wanted to shut down and go on holidays earlier than usual, and that was across the board, in all levels of the property market,” M/Land director John Wroth told Business News.

“General sentiment in other sectors was the same – it was a very tough year for a lot of people.

“However, everyone has come back with renewed vigour and we’ve seen more inquiry, interest and live deals kicking over in the last two weeks than we’ve seen in six weeks.”

Mr Wroth said potential buyers were sifting through the plethora of offers available to them and beginning to make decisions.

“I can’t remember hearing and seeing so much developer advertising,” he said.

“There is a lot of noise out there. We found in the last quarter of 2016, people had no sense of urgency, they were taking their time to do their homework and they weren’t engaging to communicate on the phone or anything, it was just email.

“But this year, they are picking up the phone, they want to meet with salesmen and go over the plans and make decisions.

“I think what’s also driving that is the affordability and what you get – the bang for your buck – has never been as good as it is at the moment, and that’s because builders and developers are having to compete with the established market, and in order to do that, they have to add more and more incentives.”

Mr Satterley shared Mr Wroth’s view that now was the best opportunity for first homebuyers in the history of WA.

“Just through the fierceness of the competition you are getting a very sharp-priced block, a very sharp-priced house, plus $15,000 from the government and you are getting incentives on top of that.

“The market is smart, they are getting a $25,000 to $35,000 kicker to their deposit for a new home.

“Buyers know that there is not a better time to get into the market.”

Frasers Property Australia WA residential general manager, Tony Perrin, also prefers to take a glass-half-full approach to the market.

“We’ve ridden through some of the hardest parts of the cycle but consumer confidence is the missing link,” Mr Perrin said.

“A lot of other economic indicators are moving in a significantly more positive direction, and we’re yet to see the flow on from that, so I’m cautiously optimistic about the back end of 2017.

“But a lot of the market is waiting for the bottom. The issue with trying to pick the bottom is the minute there is energy in the market, the bottom is gone and prices are rising.”

Stockland WA general manager residential development Col Dutton also provided a more positive view.

Mr Dutton said the state’s most prolific land developer in 2016, according to the BNiQ Search Engine Land Developers list, was seeing the early signs of stabilisation in the Perth market.

He said a strong focus on community facilities had held Stockland in good stead throughout the downturn, including a new retail centre at Newhaven, state-of-the-art sports fields in Eglinton, and WA’s first all-abilities playground at Whiteman Edge.

Mr Dutton also said Stockland was encouraged by the state government’s $5,000 increase to the First Home Buyers grant, and the income limit increases for Keystart loans.

PRM Property managing director Brendan Acott said it was still very early, but indications since Planning Minister Donna Faragher announced the increase to the grant late last year were that it was already having a significant influence on enquiry levels.

“There is a lot of inquiry floating around that wasn’t there last year, so it will be interesting to see how that converts over the first half of this year,” he said.

Mr Acott said the changes to Keystart, including a $20,000 increase to income limits, would reopen the market to buyers who previously did not have access to finance.

“There are a whole heap of people who couldn’t qualify for Keystart before that now can,” he said.

“Likewise there will be a number of buyers who purchased lots before and couldn’t get finance for them and they fell over, but if they are still keen to buy a block and build a home, Keystart will be an avenue for them.

“The real interesting piece will be how quickly titled stock is able to be cleared out.

“There is a lot of titled stock floating around the market and hopefully the adjustments that the government have made, both to Keystart and the First Home Buyers grant, will enable that stock to be dried up.”

However, interest rates are the big unknown for the market, according to Peet’s Mr Gore.

“You’re starting to see banks move independently, rates are starting to creep up despite the RBA rate, and that sends a message to the consumer,” Mr Gore said.

“Hence why I think volumes are low and the depth of the market is quite shallow at this point in time.”

Mr Acott said he held the view that if the RBA were to raise rates, it would be a long, slow process.

“They would destroy the east coast markets if they actively ramped up rates and there is no reason for them to do it,” he said.

“Really, the only talk of interest rates rising here is off the back of what’s happening in the US, but we don’t really know what’s going to happen there.”