Sydney’s housing conundrum: luxury city center or bust

Nothing outside the 10km inner city ring of Sydney adds up.

It’s a grim reality for land developers, but when factoring in labor, construction and finance costs, the odds are stacked against multi-residential projects.

Speaking at a recent industry lunch with MaxCap Group, JLL head of residential valuations Bill Fatouros said that anywhere in Sydney a box costs at least $500,000.

“This means that you must supply the product at a price of at least $15,000 per square meter. If you then figure out where you can inexpensively pay $15,000 per square meter and get sales, you’ll usually end up within a 10-kilometre ring,” says Fatouros.

“Anything within the 10-kilometer ring is what we see in our estimates generally adding up.”

Projects outside this ring are much more complex, Fatouros said.

MaxCap Group chief investment officer Bill McWilliams said that while debt coverage had fallen, which should help activate sites, it did not necessarily “translate into operational feasibility.”

▲ JLL’s Bill Fatouros said project assessments often failed to support feasibility beyond a 10km radius in Sydney.

Price increases are necessary for the future of projects

McWilliams says in the current market, lenders and developers need to consider whether there will be demand and price increases once the project is completed.

“Where they probably work the most is in the luxury homeowner market. However, it is difficult to exclude pre-sales from this plan and sentiment needs to be taken into account,” says McWilliams.

“Projects that are starting to be implemented have lower debt coverage, and we are ready to do a supply and demand analysis to say that by the time the project is completed, there will be demand.

“We have several land banks on our books that the developer thought would be activated three years ago, but they still haven’t been activated, which is a shame. There are maintenance costs, there are land tax costs.”

Lower interest rates could help unlock some properties outside the 10km radius as it would allow buyers to increase their borrowing power.

Fatouros said it was unlikely that construction costs would fall, so interest rates needed to be lowered or “incomes would have to increase, and at the moment, because of borrowing costs, people can’t afford to pay much more for apartments.”

“So we’re not building anything for the next 12 to 18 months and therefore we’re under more pressure on demand and by then interest rates will have fallen and people will have to commit to buying into the market and we’ll have to pay a little more high price. – said Fatouros.

▲ David Milton from CBRE believes that the downsizer market will recover the fastest due to strong pent-up demand.

CBRE managing director of residential projects David Milton says that while the number of people able to deliver large-scale projects has decreased, the sub-$1 million market has “not missed a beat”.

While buyers in the $1 million to $3 million range were heavily leveraged and hit hard by interest rates and tighter lending terms.

“The empty nest market is probably the most cautious, but that’s probably where the most future demand is,” Milton says.

“More empty nesters than ever are entering this stage of life. But they don’t work. I think the market will be one of the fastest to recover from interest rate cuts.

“If you asked me what market to go into, I would say 10 to 20 apartments in well-located areas. I think this market will be extremely strong because there has been very little demand and very little supply. and they are less sensitive to price when it starts to move.”

Luxury apartments at reasonable prices

The luxury market in central Sydney is as strong as Milton has ever seen.

“In the last 10 days we have made five sales at One Circular Quay from $16 million to $33 million. We traded an off-plan apartment in Manly Beach for $22 million and two more pending apartments, one in Bondi Beach and one in Manly Beach for about $20 million,” he said.

“The sales volume of this high end is incredible.”

Sydney and Gold Coast developer Allen Sammut said prices would have to rise for projects to pan out, but that would not help solve housing affordability issues.

“I haven’t seen anything on my desk in the last two years that justifies the risk,” Sammut said.

“If I want to develop something at this point, I’m going to have to set sales rates (high) because it just doesn’t work and there’s a limit to what people are going to pay even if interest rates do fall.

“A 1 percent cut in interest rates will not change the affordability crisis. I don’t see the solution to this housing crisis that we currently have in the next 10 years.

“A lot of developers have lost confidence and confidence will be key.”