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Wednesday 11 April 2018

Bust looms for Sydney's apartment developers

Apartment boom over

Both new residential building and renovation activity declined significantly in 2017, with total seasonally adjusted dwelling starts down to 52,600 by the final quarter of the year, well down from the peak of 62,300 in the first quarter of calendar year 2016.

The drop was driven by a 17 per cent year-on-year decline in attached dwellings, with Brisbane's inner city apartment market the prime culprit. 

Sundry indicators suggest that activity across Queensland should now trend moderately upwards, spurred on by a healthier spread of boutique developments, 'plexes, and townhomes.

But inner Brisbane's new build high-rise sector is absolutely cactus as the renters move in. 

Interestingly, despite the extremely high level of apartment starts through this cycle, total dwelling completions continued to decline for another quarter, suggesting that all is not well in developer-land. 

Crunch looms for developers

By the end of the year there were still some 150,000 attached dwellings under construction. for the seventh consecutive quarter.

Drilling down a level it's clear to see that while apartment activity was fading fast in Melbourne and Brisbane respectively, Sydney and the state New South Wales had more than 68,000 attached dwellings under construction.

To say that this is unprecedented would be an understatement; the numbers are off the charts!

Now it does take a long time to see apartment projects through from approval, but in Sydney the completions just haven't been hitting the market in the numbers expected.

Total dwelling completions in 2017 for New South Wales were 61,600, with just over half of that total accounted for by attached dwellings, which on a net completions basis is barely keeping pace with demand. 

Officially, of course, everything is fine.

There are few reported defaults, and settlement valuations are holding up reasonably well despite the softening of the resale market and the total evaporation of the offshore Chinese bid.

With pre-sales flagging it's certainly hard to envisage as many new projects getting off the ground, as investors grapple for finance in the midst of a Royal Commission into banking misconduct.

It's become a vicious circle, with nervous banks requiring higher pre-sales which developers are unable to achieve, and finance for construction thus not forthcoming. 

In any case, a raft of actioned and proposed budgetary and regulatory macroprudential measures have made property investment less appealing at the margin (and totally unappealing for foreign investors). 

Another compelling indicator of troubled times ahead for developers is the sheer number of dwellings approved but not commenced at 46,400, mostly accounted for by apartments and by far the highest figure in Australia's history. 

What happens next?

Now sure, the plural of anecdote is not data, but I believe that we'll see many of Sydney's apartment projects running into trouble. 

The official line is that defaults are low, and everything is going swimmingly, but I'm not so sure. 

By the way, don't rely on anything you read here either, this is just my opinion.

Take a drive around, speak to a few sales staff, observe how apartment projects are progressing. 

In addition to the astonishing boom and collapse of Chinese investors, another potentially unique aspect of this cycle is that construction and materials costs could remain high in Sydney, even in the face of a sharp drop in apartment activity.

Forged on the back of a stamp and transfer duty bonanza from both residential housing and asset sales, the state has embarked upon an overdue thrust at tackling its infrastructure deficit, in turn propelling total construction employment to even greater heights. 

As a result construction employment surged higher than it had ever been before both in absolute terms and as a share of the workforce, squeezing developer margins.

Incidentally, I personally believe that most of the apartments approved in Sydney will be converted into dwelling starts in the fullness of time, but quite possibly at a different price and rate. 

Receivers and cashed up opportunists will stand by at the ready.