Melbourne apartments: who’s got a stake?

March 14, 2018 / By  

Melbourne is Australia’s fastest growing city and many developers are seeking to capitalise on this. Inner Melbourne[1] apartment development has been rampant in recent years and a further 76,000 apartments could potentially complete over the next five years. Inner Sydney[2], which is geographically double the size of inner Melbourne, has approximately 45,000 apartments that may complete in the same period.

However, due to declining investor demand and limited development finance, the fate of many of these projects is uncertain. Developers could face a number of challenges going forward. These include minimising settlement risk, obtaining development financing, re-configuring projects to adapt to a changing market and potentially, holding sites until the next development cycle. So, which are the groups responsible for driving this incredible phase of residential development in Inner Melbourne?

Figure 1: Developer stakes in Inner Melbourne apartment supply (by number of apartments)

Source: JLL Research

Local private developers
These developers account for approximately half the apartment pipeline. The scale of these developers varies and consequently so do their projects. They are dominant outside the CBD, where many of their projects are of a smaller scale compared to offshore developers. In a market where the relevance of owner-occupiers is growing, local private developers may be at an advantage due to their familiarity with the local market.

Offshore developers
Foreign developers comprise 29% of the pipeline and are predominately groups from Malaysia, Singapore and China. 80% of apartments by foreign developers are in the Melbourne City precinct (CBD, Docklands, and Southbank), where development activity has been most concentrated. Their projects tend to be high-rise towers and average 450 apartments per project. These types of developments will particularly feel the impact of subdued investor demand and strict development lending. Increasingly, foreign developers are entering the greenfield market for projects of scale.

ASX listed
Australian listed developers comprise just 9% of the apartment pipeline. Their activity is relatively low given their diverse exposure to commercial property, apartment and land development. Their exposure to the Melbourne apartment market is largely in the form of major mixed-use projects or urban renewal sites. Both Mirvac and Lendlease have a strong presence in the Docklands, Melbourne’s largest urban renewal district.

Other Entities
A range of other groups are present in the Melbourne market such as superannuation funds, corporates and joint-ventures (JVs). These groups are behind a variety of projects, many of which have a significant mixed-use component. An example of this is One Queensbridge, which is to contain a new Crown hotel and over 700 apartments. This is a JV between entertainment group, Crown and local developer Schiavello.

So why is this important? The scale, reputation and market knowledge of these groups will influence their ability to overcome the discussed challenges. Developer characteristics to consider are:

  • Proven track records and familiarity to lenders
  • Knowledge of the local market and owner-occupier needs
  • Financial capability to extend land holding period and/or for major project alteration

These are some of the factors that will determine their ability to maintain their stake in the Melbourne apartment market.

It’s clear that the heated Melbourne apartment market has seduced a variety of groups, but it remains to be seen who will survive the current development cycle.

[1] Inner Melbourne: covers 5km radius from CBD
[2] Inner Sydney: covers 10km radius from CBD

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