SPECIAL REPORT: Slowing population growth and a stalling economy are producing significant headwinds in the residential land sector.
Slowing population growth and a stalling economy are producing significant headwinds in the residential land sector.
It wasn’t all that long ago that Perth was facing a residential land shortage, with developers scrambling to keep up with demand from record-breaking population growth and a booming economy.
In 2013, the lack of land was the biggest challenge facing developers in the state, with all-time highs for lot sales resulting in a nine to 12-month wait between contract and settlement for most buyers.
Heading into 2016, however, things are markedly different.
With the resources sector moving from construction to production, the state’s economy has cooled significantly.
Unemployment is up, wages have stalled and population growth has reduced by more than 50,000 people per year from the peak in 2012, when 87,914 people shifted to Western Australia.
The flow-on effects of those economic conditions are now being felt in Perth’s land development sector.
A new report on greenfields land development in WA by analytics and consulting firm Urbis, set to be released later this month, shows 8,298 lots were sold in 2014-15, down 30 per cent on the previous corresponding 12 months.
While that’s still in line with 10-year averages, the slowing sales have resulted in significant changes in the landscape for the state’s top developers.
Housing approvals figures from the Australian Bureau of Statistics show developers are facing a challenging time, with 23 per cent fewer dwellings getting the tick in 2014-15, compared with the previous year.
“Things are going to be tough,” PRM Property Group chief executive Brendan Acott told Business News.
“And until sentiment changes, I think it will stay that way.
“My sense is that we’ll be in for conditions that will be a little bit harder than last year, but I don’t see them as being catastrophic.”
Despite the difficult conditions, Mr Acott said there remained opportunity for developers – as long as their product was priced right.
“There is still activity out there, it just goes back to the very basic principles of property,” he said.
“The better locations and the better quality assets will retain their value more than the fringe.
“But one thing we can’t lose sight of is the fact that there is activity.
“That activity might not be as strong as it was a couple of years ago, but there is definitely still a pulse and it’s up to us in the industry to put our product in front of our competitors’ and make it compelling for the market that’s there.”
Peet managing director Brendan Gore had a similar outlook to Mr Acott; it wasn’t necessarily doom and gloom, but things aren’t exactly easy either.
“It’s just an economy that’s had a very strong run over five years and strong population growth, wages growth and things like that, and it’s going to take a couple of years to find its balance,” Mr Gore said.
“Once we reach the bottom, and we’re not too far off it, then I think you’ll see normal market conditions for a number of years, and we’ll likely track sideways.”
Price pressure
Remarkably, the median land price in Perth has held up despite the trying conditions.
The median lot price for 2014-15, according to Urbis, was $250,000, a 6 per cent rise from the previous 12 months.
However, those median prices do not take into account what is a tantalising feature in today’s land market, from a buyer’s perspective at least – the level of incentives available to prospective purchasers.
Many developers across Perth are offering significant rebates, over and above the $10,000 first home buyers grant, as well as landscaping packages to tempt buyers to sign up for their estates.
LWP Property Group is one of the leaders in the incentives field, having recently launched its biggest ever program, dubbed ‘Propertunity’.
The program comprises discounts of up to $41,000 across 100 lots in LWP estates.
LWP managing director Danny Murphy said the developer had forecast that sales in first half of 2016 would be a difficult proposition, while also forecasting price reductions of between three and 5 per cent.
Mr Murphy said incentives were imperative for developers to maintain profit margins in the early parts of a cyclical downturn.
“When volumes get below acceptable levels, that’s when you see the discounting and incentives being offered,” Mr Murphy told Business News.
“In a slowdown, we all try to hold our prices, but it gets to the point where we can’t hold them and we start down the incentive road.
“A lot of those incentives are not included in the official prices.”
Mr Acott said the other factor to be considered when evaluating the steadiness of the median price of land in Perth was construction costs.
Mr Acott said costs had reduced by about 10 per cent from last year.
“If it was costing you $60,000 per lot 18 months ago, that’s probably fallen to about $54,000 now,” he said.
“Oil prices coming off and labour prices coming off have helped that, but civil contractors will be doing things on pretty tight margins so that means there is not a lot of room to move on construction prices.
“The next ticket is further margin squeeze from a developer perspective, and that means some of that incentive pricing is likely to become headline pricing next year.”
Finance factor
A big limiter of future sales growth, according to Cedar Woods Properties WA state manager Ben Rosser, will be the availability of finance, both to first-time buyers and investors.
Mr Rosser said new banking regulations introduced last year by the Australian Prudential Regulation Authority were already having a significant impact on developers’ sales.
The APRA changes comprised a tightening of lending criteria limiting the amount available to borrow for first-time buyers, as well as new restrictions on investor lending.
Before the changes, Mr Rosser said, investors made up between 15 and 20 per cent of sales at Cedar Woods estates.
That proportion of investors had already fallen to under 10 per cent, he said.
“Financing is a big factor for us to be looking at as an industry,” he said.
“The investor market, towards the latter half of last year, just dried up, almost overnight.
“We’re now seeing higher fallover rates for the first home buyer market, and they’re a reflection of the tighter lending criteria coming through.
“The APRA changes that came in last year have knocked things around for investors and the first home buyers market.
“That’s forced a rethink on traditional lending criteria and practices, and again that’s something that we need to be looking at.
“We can have a part to play in that process as land developers.”
Major players
Urbis director of economics David Cresp said his research showed that nearly half of the lots sold in 2014-15 across the Perth metropolitan area were by five developers – Stockland, LWP Property Group, Satterley Property Group, Peet, and PRM Property Group.
“There is still a very strong local contingent in the Perth market, and while some of them are locally based companies, some of those are national developers,” he said.
“Perth might only be 10 per cent of the national economy and population size, but when you look at the land market, we’re the second-biggest in the country.
“We are a very substantial part of the national land market.”
Mr Cresp said Stockland had held the highest market share for the past five years, taking that title from Satterley, which traditionally had the highest market share in Perth.
“While most of the top 10 developers have been fairly consistent for some time, a new entrant into the top 10 is Golden Group,” he said.
“This has been thanks to the success of their Vista Private Estate, near Singleton beach in the southern suburbs.”
The Urbis sales data closely matches with developer forecasts researched by BNiQ.
In the 2015-16 financial year, the top 10 developers (according to BNiQ research) expect to complete 8,608 lots for sale.
Stockland is again leading the way, with Satterley, Peet, and LWP also featuring strongly.
PRM Property Group is likely to drop out of the top five prolific sellers for the coming financial year, as it is close to wrapping up its Piara Waters and Banksia Grove estates.
Buyers and sellers
The slowing market is drawing out differing strategies among the state’s biggest developers, some of which are looking to other states to balance out the slowing conditions in WA.
In August, Cedar Woods Properties spent $26.2 million on a 50.7-hectare plot of land in Baldivis, adjoining its existing landholding in the southern suburb.
Following that purchase, Cedar Woods shifted its focus to other states, partnering with Renewal SA for a 16.5ha urban renewal project in Adelaide in September, and buying a 3.8ha infill site in Queensland for $24.6 million in late December.
Mr Rosser said Cedar Woods’ long-term strategy of maintaining balance sheet strength ensured it was in a strong position to move when an opportunity arose.
“They were good opportunities that came up, and we’ve got the benefit of being able to balance that flow of capital around the country and manage our market exposure,” Mr Rosser told Business News.
On the local front, Satterley Property Group was the most acquisitive developer in 2015, purchasing 168ha of land in Perth’s eastern suburbs in November for a collective $120 million.
Satterley also partnered with Seven Group Holdings for the old Channel Seven studio site in Dianella, which will be known as Seven Hills Estate.
Outside of WA, Satterley splashed $93.1 million in August on a Peet-owned estate in Victoria’s Greenvale area, a subdivision that will add 1,350 lots to the developer’s landbank.
Peet essentially offset that sell-off with its purchase of a residential estate in Tarneit, west of Melbourne, for $90 million in late December.
Mr Gore said the developer was firmly focused on growth markets in the eastern states, particularly in Queensland and Victoria.
In WA, Peet also sold a 50 per cent stake in its Shorehaven Town Centre, a move Mr Gore said was in line with the company’s core strategies.
“Owning the town centre as an end product is not our model,” he said. “Like we’ve also done at Lakelands with ISPT … it fits in with our model to use third-party capital to bring the amenity out of the ground.
“If we can continue to use our capital to continue growth and use third-party capital to bring the amenity through, that’s what we’ll continue to do.”
The biggest challenge for developers in WA, Mr Gore said, would be to replace the stock that was currently being sold, with uncertainty around the value of large-scale plots of land suitable to be subdivided.
“The big thing for us, is pricing,” he said. “If englobo land comes up, what do you pay for it?
“Do you pay up for it on the basis that you’re going to get revenue growth? Some will always do it, but that’s going to be the biggest challenge – being patient.”
“When you’re buying land in WA, you have got to take a pretty firm view on where the growth is going to come from in terms of price escalation,” Mr Gore said.
Innovative industry
Innovation becomes a feature of any sector of the economy when things slow down, and residential land development is no different.
WA’s developers have been responding to affordability pressures for more than a decade, with the median size of lots in Perth falling by 30 per cent over that time, to around 405 square metres, according to Urbis research.
The smaller lots have resulted in increased collaboration between developers and builders, which have found traditionally dominant methods of building may not be as efficient when dealing with the tighter confines of a smaller block.
However, Mr Rosser said Cedar Woods was experiencing steady demand for larger lots of 450sqm and over at its estates, which showed that reducing block sizes would not always provide a value proposition for prospective buyers.
“People continue to pull down the size of the lots, but there is a threshold that you get to where if you go any smaller than that, you’re not getting any building efficiency out of it through traditional masonry techniques,” Mr Rosser said.
“If you talk to builders about those smaller lots, the practicalities that they find is that there is no room for tradesmen’s vehicles, trailers and storage of all the materials that you need to go into the builds, the lots just aren’t big enough to do that.
“That’s probably the opportunity for framed and lightweight building techniques.
“If you can bring in pre-built built form, you don’t need to be thinking about all of those logistics.”
The prospect of micro-lots in Perth was a big headline grabber in 2015, with the Western Australian Planning Commission exploring the possibility of lots as small as 40sqm.
LWP Property Group is leading the way on micro-lots, with 80sqm lots at Ellenbrook in the works and likely to hit the market by the middle of this year.
Mr Murphy, who said the investment in new lot designs, housing designs and building materials was at its highest point for the last 30 years, expects the product to be warmly received at the entry-level of the market.
However, Mr Murphy said the biggest innovations in land development were occurring in the provision of services such as electricity, gas and water, to address affordability constraints.
“In our NSW project, we’ve gone off-grid, we’ve got our own water and sewerage recycling system, which is providing water to homes at a lower rate than the normal arrangements, and that’s for 7,500 homesites,” he said.
“We are also assessing the provision of electrical services off-grid, with the objective of reducing energy costs by 10 per cent.
“There are a number of initiatives being trialled across Australia now that will result in permanent innovations across the industry.”
