Headwinds Building for Developers

Headwinds Building for Developers
November 22, 2018 Andy Kennard

Residential developers in Sydney that purchased sites under option in recent years have benefited from favorable conditions.

Several years of strong price growth in the value of their sites prior to settlement has resulted in easy finance upon settlement due to increased levels of equity in the property, historically low interest rates and strong market sentiment.

Development profit has been good due to strong levels of demand for residential accommodation with high levels of presales, rising sale prices for end product including vacant land and house and land packages.

Consequently, developers continued to purchase sites with the expectation that sale prices would keep rising during the development period.

But market conditions are now turning sour.

Levels of presales have reduced significantly with purchasers now preferring to see a finished product prior to committing to a purchase resulting in increased selling periods and holding costs.

The growth in sale prices has either slowed or prices have fallen with a number of recently completed subdivisions experiencing high levels of resales upon completion as purchasers aim to jump ship from the falling market.

This is particularly evident with investors purchasing vacant lots that cannot provide a holding income to ride out the storm.

Rising development costs are also in the pipeline as seen through the impact of the most recent amendment to the Section 94 contributions which has impacted some development feasibilities.

In July 2017 the Minister for Planning introduced the “uncapping” of the Section 94 Contributions.

From the 1st January 2018 to the 30th June 2018 the maximum amount for each dwelling or residential lot increased from $30,000 to $35,000. From the 1st July 2018 to the 30th June 2019 this amount increased to $40,000. From the 1st July 2019 to the 30th June 2020 the sum will again increase to $45,000 and from the 1st July 2020 an amount determined in accordance with the applicable contributions plan.

If the contributions plan is a specified contributions plan as in force at the date on which the 2017 amendment direction takes effect or an IPART (Independent Pricing and Regulatory Tribunal) reviewed contributions plan. Specific contributions plans have been established for The Hills Shire, Blacktown, Wollongong, Rockdale, Liverpool and Camden.

Out of cycle interest rate increases have resulted in rising financing costs, combined with higher levels of caution by financiers is reducing loan to value ratios and requiring higher levels of equity contributions in order to settle on the purchase of a development site.

Recent changes to lending including APRA limiting interest-only lending to 30 per cent of total new residential mortgage lending and restrictions on loan to value ratios (LVRs) above 80 per cent has reduced interest only lending and lending in general.

Housing market conditions have shown signs of softening in response to the tightening of restrictions on housing purchases and loan-to-value ratios over the past year; prices are now stabilising with some negative growth in pockets of Sydney.

Despite the increasing headwinds and costs for developers the underlying fundamentals for residential property in Sydney remain good. With strong population growth and increasing housing affordability, high levels of infrastructure investment and a number of apartment developments being placed on hold which may reduce the current high levels of supply.

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