Foreign developers prevail: Melbourne CBD

January 16, 2017 / By  

Foreign investment in Australian property is a widely discussed topic in the media. Most commentary has surrounded private foreign investors and their impact on apartment demand. However, foreign investment is also prevalent in the form of developing residential property in Australia’s major cities, especially in the CBDs. The Foreign Investment Review Board noted AUD $12.85 billion of proposed investment in Victorian residential developments by foreign investors in FY2015.

With Melbourne’s CBD population in 2036 forecast to be 83 per cent higher than in 2016, construction of residential developments has been on the rise. Foreign developers comprise just over one-third of all apartment developments in Melbourne’s CBD supply-pipeline (see Figure 1). This includes all development stages from plans submitted to under construction. However, when the supply-pipeline is measured as a percentage of units, foreign developers equate to almost half of the CBD’s total unit supply.

Figure 1: Supply pipeline in Melbourne CBD by origin of developer
Source: JLL Research

This divergence is caused by the differing average size of projects that foreign developers prefer to deliver. The average size of a foreign developer’s project within the Melbourne CBD is 619 units compared to 396 units for a domestic developer. This is reflective of foreign developers’ preference for large-scale developments which are more likely to be feasible in the CBD rather than in the fringe. The prevalence of foreign developers in Melbourne’s CBD is also reflected in recent site sales. In 2016 just 25 per cent of CBD residential sites tracked by JLL were purchased by domestic developers, totalling AUD $102 million. In contrast, foreign purchases comprised the remaining 75 per cent and totalled approximately AUD $372 million.

Developers’ preference for Melbourne’s CBD stems from similar reasons to those driving private foreign investors. Melbourne has a strongly growing population and was ranked the most liveable city by the Economist Intelligence Unit in 2016 – for the sixth successive year – scoring highly in stability, infrastructure, education, health care, and environment. The Melbourne CBD is also a popular choice for international students. The Times Higher Education ranks the University of Melbourne as the 33rd best university in the world, while RMIT scores highly on a number of ranking indices too. Melbourne is also a familiar location for overseas visitors reflected in the 14.3 per cent rise in international visitors in 2015.

Foreign developers account for 51 per cent of the 7,733 units currently under construction in the city’s CBD. The majority of domestic developments will complete in 2017 including Cbus Property’s 35 Spring Street and Sinclair Brook’s La Trobe Tower. Hence from 2018 onwards, 74 per cent (2,133 units) of stock currently under construction will be produced by foreign developers. The future supply‑pipeline and high percentage of site purchases by foreign buyers suggest that the presence of foreign developers will continue.

As foreign developers become more familiar with the geography of Melbourne, it is likely we will see them expand their geographical focus outside the CBD. The $174 million acquisition of the Bradmill site in Yarraville by Beijing-based Chang Sheng provides one example of this. This trend is expected to strengthen in 2017 providing further competition to domestic developers.

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