Marshall White Projects Newsletter Edition 13

Projects Review Edition 13. 2018

ustralian A construction costs under massive pressure

What render companies consider and what resonates in the market place

Market outlook: what developers can expect for 2018

5 mistakes to avoid on your first residential development

Adele Bates' insights on: new design trends

Contents

Projects

1 Notes From The Directors

3 3 4 4 4

2 Spotlight ustralian Construction 6 A Costs Under Massive Pressure 10 What Render Companies Consider And What Resonates In The Market Place?

12 M arket Outlook: What Developers Can Expect For 2018 16 5 Mistakes To Avoid On Your First Residential Development 18 Adele Bates' Insights On: New Design Trends and Layouts Based On BADS and ESD Requirements, and What Developers Can and Should Be Doing.

Malvern Residences Anderson Park The Mailhouse Luar The Kent

Past Project Profiles 20 Arcadian 20 Pelham 21 Walpole 21 The Foundry

20 Past Project Profile

Contributors 6 A ustralian Construction Costs Under Massive Pressure – Andrew Heaton 10 What Render Companies Consider And What Resonates In The Market Place?

– Michael Thomas, Director of Stab, (PH) 0423 493 498 12 M arket Outlook: What Developers Can Expect For 2018 – The Urban Developer And Development Finance Partners 16 5 Mistakes To Avoid On Your First Residential Development – Michael Hermans 18 Adele Bates' Insights On: New Design Trends and Layouts Based On BADS and ESD Requirements, and What Developers Can and Should Be Doing.

– Isobel Loschiavo, Account Manager, Reymond Communications, (PH) +61 (0) 3 9510 4124

Notes from the Directors With the 17/18 financial year drawing to a close we begin to get a real sense of where the remainder of 2018 will take us.

There’s evidence to support that the level of enquiry is approximately the same as this time last year with Marshall White Projects receiving on average 35 buyer leads per day, slightly down on 37 leads per day during 2017.

With a selection of as yet unsold product carried over from February/March about to clash with the new mid year offerings, the volume of stock within our wealth belt of Metropolitan Melbourne, namely Boorondara, Stonnington and Bayside will increase by volume of approximately 17%. As a result a typical projects days on market (DOM) will extend, advertising investments will increase and new opportunities will then be lost to some of our developer clients.

Correct pricing has never become more important.

Evidenced in the current market place is that overpriced development will always sell a few but rarely enough to get you to where you want to be, namely financial close or allowing you to start construction during a forecasted quarter.

Crucially, when a buyer has the luxury of choice, the tolerance between market value and an asking price needs to be zero. When your price accords with market (not your competition) its only then will you move through product at an acceptable rate.

Now price growth opportunities during a selling period are often deferred to the last third of stock remaining or in an increasing number of occasions, not at all.

Escalating building costs are currently very topical with the cost of raw product such as steel and concrete passed on by the builder to the developer. Alarmingly its become an all too common trend for tendered build prices to be 5-10% more than a forecast figure our clients place into a feasibility chart prior to selling commencing.

Our article on page 6 from Icon Construction tells us more.

2017 was the “rise of the empty nester” predicated by the enduring strength of the residential market, where baby boomers increasingly cashed in their two decades of capital growth , put money into super and were able to then downsize to single level low maintenance living.

During this time the number of purchasers Marshall White Projects assisted into apartments in excess of $1.5 million rose by a staggering 315 % in relation to 2016.

Today’s residential market has steadied, with weekly success rates at auction consistently in excess 65 percent displaying a balanced market where residential supply now meets buyer demand.

We’re consistently introduced to potential new developments post planning with product already permitted but with stock that often fails to accord to current markets demand.

We understand configurations and product mix are often determined by the town planning process, however with secondary consent no longer a straight forward procedure, it’s crucial we’re invited into review any project at the concept stage.

If we all get it right the first time, we then minimise days on market, maximise the gross revenue and move the money quickly into the next opportunity.

As always we are ready to speak when you are.

The Kent 382 Burwood Road Hawthorn

Every effort is made to provide accurate and complete information in Marshall White’s (trading as Marshall White Projects) technical and regulatory newsletters. However, Marshall White cannot guarantee that there will be no errors. Marshall White and its contributors to the newsletter make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of the newsletters and expressly disclaims liability for errors and omissions in the contents of this newsletters. Neither does Marshall White and its contributors to the newsletter assume any legal liability for any direct, indirect or any other loss or damage of any kind for the accuracy, completeness, or usefulness of any information, product, or process disclosed herein, and do not represent that use of such information, product, or process would not infringe on privately owned rights.

+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143

Mark Dayman Director

Leonard Teplin Director

T: 03 9832 1193 M: 0409 342 462 mark.dayman@marshallwhite.com.au

T: 03 9832 1191 M: 0402 431 657 leonard.teplin@marshallwhite.com.au

Disclaimer: Information provided is believed to be accurate as at the date of printing, no responsibility is taken for any errors or omissions.

It is your responsibility to obtain independent, professional advice.

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Spotlight

Liam Adey

Kierra Hagedorn

Nathan Aron

Personable, positive and hardworking, Liam strives toward helping people achieve significant life goals.

Maintaining open channels of communication, Liam easily develops a natural rapport with his clients, inspiring confidence in buyers and sellers alike. Liam finds the industry to be incredibly rewarding as it revolves around making connections with people and perfectly suits his positive mindset. Combined with his strict time management, perfectionist nature and a refined attention to detail, Liam is well suited to his role at Marshall White One. Liam has an innate understanding of the property market. From a very young age, Liam developed a fascination with real estate, attending auctions to experience the excitement and to watch people bid for their dream homes.

A driven and compassionate sales executive, Kierra has grown a stellar reputation for outstanding results and exceptional customer service. Kierra’s process-driven approach and excellent communication skills complement an innate attention to detail and genuine care for each person she encounters. A firm believer in spending as much time as necessary to gain a comprehensive understanding of what her clients seek in a new home, she is well-positioned to achieve tailored outcomes.

A firm commitment to achieving outstanding results has seen Nathan succeed as a leading sales agent specialising in off the plan sales.

With over half a decade of industry experience, Nathan is dedicated to achieving remarkable results for his clients through expert knowledge and hard work. Drawing on his training as a former professional athlete, playing baseball for the New York Yankees, Nathan brings this determination and goal oriented focus to deliver an exceptional experience.

Kierra relishes the opportunity to forge strong relationships and connections with clients and colleagues alike. Having spent several years of her career as an integral part of Australia’s top performing real estate team helping with over 800 sales and settlements, Kierra has an enviable depth of knowledge of the real estate industry.

Kierra has an appreciation for property, architecture and the ability to change someone’s life that her chosen career entails. Kierra is an empathetic individual and an active contributor to the Marshall White Foundation charity committee.

Outside work, Kierra embraces every available opportunity to travel abroad and engage with different cultures.

Malvern Residences 1188 Malvern Road Malvern

Well regarded for his supportive and personable nature, Nathan guides clients seamlessly through the sales process and is passionate about establishing genuine connections with everyone he encounters.

Nathan loves Melbourne’s diverse culture, sports and impeccable family lifestyle and particularly enjoys spending time with his twin daughters at his local park.

Anderson Park 585 Burke Road Camberwell / Hawthorn East

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Current Projects The Mailhouse 185 Rosslyn St West Melbourne

The Kent 382 Burwood Road Hawthorn

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Luar 22 - 24 Pakington Street St Kilda

Emerald Green

Lawson

66 Stanley Road Keysborough

39 Lawson St Hawthorn East

Arden 141 Arden Street North Melbourne

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Australian Construction Costs Under Massive Pressure According to WT, the outlook for tender prices and costs by state is as follows: New South Wales Significant cost and tender price pressures will be evident in New South Wales, where ongoing robust levels of activity across all sectors will continue to drive a busy marketplace.

Leading the way will be infrastructure, as work associated with the new Western Sydney Airport joins a list of other major civil works projects already on the go. New commercial projects including Quay Quarter, ATP, 60 Martin Place and Paramatta Square will keep the office building sector busy with a pipeline of 550,000 square metres worth of stock in the pipeline.

Added to that, there is a massive pipeline of new hotel developments and redevelopments (The Ritz Carlton, Star City Casino, Crown Sydney Barangaroo and the W Hotel Ribbon and Residences) whilst a pipeline including the upcoming redevelopment of Moore Park and Olympic Park as well as the current works at Paramatta Stadium will create a busy period in the building of stadiums and entertainment venues.

Developers and builders throughout Australia are being warned to allow for cost blowouts on major construction projects the likes of which we have not seen in several decades

This, WT said, will add pressure to the cost and availability of labour, materials and equipment.

“Nationally, the growing demand from the infrastructure sector is pushing up costs of personnel, plant and equipment, and base materials such as aggregates, cement and steel,” WT said in its report. “As resources become more stretched, these pressures create an industry wide challenge.”

Others issue starker warnings.

Auction activity and employment soar to record highs, pressures are emerging as prices of steel and concrete rise and the cost and availability of some trades is drawn into question.

In its Construction Market Conditions 2018 report, quantity surveying firm WT Partnership says it expects tender price escalation of between four and five per cent for civil infrastructure developments and between three and four per cent for building projects throughout 2018.

It said infrastructure would drive activity as New South Wales and Victoria undertake significant investment in road, rail, water, ports, airports and telecommunications Meanwhile, there are a substantial number of residential towers yet to be completed notwithstanding declining levels of foreign investment. Aging and population growth, meanwhile, is driving activity on healthcare, aged care and education projects.

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Peter Clack, director of construction cost consulting firm Ralph Beattie Bosworth and the immediate past president of the Australian Institute of Quantity Surveyors, warns of tender price escalation in the realm of six per cent by the end of the year.

Cost pressures, Clack says, are evident in proportions which the industry has not seen for 35 or 40 years.

Whilst he acknowledges that stronger conditions are welcome overall, Clack warns of a ‘big risk’ of cost blowouts on major projects. Workers in structural trades such as concreters, steel workers, formworkers and fixers will be in shortage as a massive volume of infrastructure projects pulls these trades away from buildings.

In materials, the sheer volume of major infrastructure projects will push up prices of concrete and steel. Prices of steelworks, Clack reckons, could go from around $5,500 to $6,000 per tonne now to around $8,000 or $9,000 over the next 18 months.

The degree of shortage, Clack says, can be seen through talking to Tier 1 and Tier 2 builders – many of whom have order books which are close to capacity for at least two years. He relates one story of a Melbourne contractor who was invited to tender for a project worth more than $1 million but refused to even consider tendering on the basis of the company’s order books being full for two years and not being willing to accept the risk associated with new clients.

Whilst mature developers are likely to heed warnings from quantity surveyors and cost planners about likely increases, Clack warns that inexperienced ones may get hit with blowouts which send them to breaking point.

Builders who fail to allow for this within their tenders as well, will find themselves holding the can as subcontractors renege on promised prices and amid more attractive offers elsewhere.

“You are going to go from a saturated market to an overheated market,” he says. “There will be considerable cost pressures on major projects.

“I don’t mean to be doom and gloom. I think it is really good that the industry is busy. But these are some of the risks to be wary of through an overheated market phase.”

In its report, WT warned of price escalation in New South Wales and on infrastructure projects in Victoria.

In New South Wales, it issued warnings of price rises in demolition, joinery, formwork, plasterboard trades and well as partitions and ceiling pricing.

Meanwhile, funds released through asset sales are driving record investment in road, rail, healthcare and education over the forward budget estimates period. This will be a natural trigger for new retail, office and residential amenities, especially in areas such as the tight commercial market in Paramatta and further afield in areas which expect to derive an uplift from the new Airport project.

All this is not forgetting the residential sector, which is peaking but is expected to remain in the grips of record activity levels at least for 2018 following year-on-year growth in already elevated levels of residential approvals in 2017.

The amount of activity is placing massive pressure on trade availability and costs. Courtesy of the commencement of demolition works across 16 commercial office sites to make way for the Sydney Metro project, significant shortages and pricing pressures are anticipated from demolition contractors.

Meanwhile, formwork trades are returning pricing well above benchmark rates and joinery trades are nearing capacity.

Contractors in are reporting difficulty in obtaining subcontract quotes, WT says, as large joinery packages are being tendered interstate. Partition and ceilings pricing has been under pressure in 2017 and will continue to be so in 2018. Labour rates are also rising and this will place pressure upon supply chains which need to pass on the increase.

As of yet, significant growth in copper and iron ore prices has not impacted prices of steelworks and hydraulics trades, but WT expects costs to rise in this sector in 2018. Building Services trades in 2019 and 2020 will come under pressure as metro projects move into construction and the Western Sydney Airport moves into procurement.

Because of all this, WT expects tender prices increase of four per cent in calendar 2018 and 4.5 per cent in 2019.

In Victoria, it warns of pressure on the availability of specialist consultants, subcontractors, suppliers and plant and equipment.

With a large number of infrastructure projects running in parallel, it warns of rising prices for concrete, aggregates, reinforcement and steel.

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Australian Construction Costs Under Massive Pressure Victoria

South Australia

Substantial cost pressures are expected in Victoria especially in civil construction but also in buildings as well.

Although modest pricing pressures are evident for South Australia overall, signals from the market about how this will play out vary.

In civil, we are seeing major government work including the widening of CityLink and the Tullamarine Freeways as well as Melbourne Metro Rail and the level crossing removal projects.

Going forward, these will be joined by the West Gate Tunnel project and North East Link.

Having endured several years of subdued conditions, Tier 1 contractors are no longer willing to tender with nil margin to win cashflow projects and are now tendering with more sustainable margins. The market at this tier is also suffering from a reduced pool of qualified trade contractors and a lack of labour in key trades for Tier 1 work.

All this is expected to add pressure to already tight areas in specialist consultants, subcontractors, suppliers and plane and equipment. The pipeline of large projects will place enormous pressure upon material availability including concrete aggregates, reinforcement and steel. Already, WT says, there is ‘inconsistent’ pricing results in reinforced concrete trades, precast concrete, structural steel, mechanical services and electrical services. Both contractors and subcontractors are enjoying greater choice in the work which they accept.

Accordingly, WT expects tender price escalation for infrastructure projects to surge by between four and five per cent in 2018 and by between 4.5 and 5.5 per cent in 2019.

Whilst this is not anticipated to flow through into building sector costs, tender price increase of between 2.75 and 3.25 per cent are expected in buildings for 2018 followed by a modest increase in 2019 on the back of continued (though peaking) work in apartment construction as well as a good number of office projects.

ACT Reasonable pricing pressures are expected in the ACT, although the report from contractors is that subcontractors are keen for work and tenders remain competitive.

Although office vacancy rates remain high, participants in the most recent Property Council of Australia/ANZ Property Industry Confidence Survey report improving levels of confidence in respect of forward work schedules.

Queensland Modest cost pressures are expected for Queensland notwithstanding an easing in inactivity amid greater competition for construction labour, plant and materials from NSW and Victoria.

Whilst there has been a decline in investment, the residential market will remain busy throughout 2018 courtesy of Queens Wharf and other developments such as Herston Quarter, 300 George and No 1 Brisbane. Detached home building and townhouse development will continue in new communities such as Aura Caloundra South, Springfield Lakes, Northlakes, the Brisbane South West corridor and the Gold Coast region.

Added to this, shortages in scrap steel from China have driven price rises of 15 per cent in steel reinforcement whilst concrete supply costs are also rising. Hungry for a ‘catch-up’ after several lean years, Tier 1 Adelaide and National Tier 1 contractors are forecasting price escalation of up to four per cent.

A different story emerges, however, at the Tier 2 and Tier 3 end of the market where tenders remain extremely competitive, EBA labour cost increases are being absorbed in pricing and tender submissions with limited or no margins are common.

Reasonable levels of activity are expected, driven by projects in areas such as hospital and aged care, student accommodation, defence and retail as well as the new $330 million Adelaide Casino. Around $679 million worth of work will also go toward the South Australian government Building Better Schools program in 2018/19.

Tasmania

Northern Territory

Cost pressures are also evident in Tasmania as a strong pipeline of work keeps the market at capacity.

As the massive INPEX LNG gas project moves from its construction to operation phase, cost and pricing pressures in the Northern Territory construction market are expected to remain modest.

In its forecasts, WT says it expects tender prices increases of 3.5 per cent per annum over the next three years. But it warns that these assumptions are based on developments in the pipeline coming online with a relatively even spread. Should a number of these come online concurrently, it warns the market could be saturated and that spikes in prices and costs are possible.

Thanks to projects such as the Royal Hobart Hospital Redevelopment, UTAS Hedberg Performing Arts Project, Myers Stage 2, Parliament Square State 2, the Mona extension works and the Hyatt Hotel development (expected to start in first half of 2018), current conditions in Hobart are strong.

This is being complemented by smaller scale developments from private investors, the Department of Health and the Education Departments which are either underway or expected to start over the next 12 months.

All of this, WT says, is keeping both Tier 1 and Tier 2 contractors busy.

Going forward, activity will be supported by larger projects in planning stages such as Kangaroo Bay Hotel and Hospitality Training School, Federal Hotels Port Arthur Resort, several Fragrance Group Hotel developments and a number of other hotel developments.

In the north, contractors are at capacity thanks to large projects in Launceston, whilst there is significant work happening in regional developments.

Though small in comparison to INPEX, commercial projects either planned or underway will support the sector for several years.

These include the Darwin City Waterfront development, a $500 million upgrade of the HMAS Coonawarra and Larrakeyah Barracks and the $250 million Westin Hotel development at the Darwin Waterfront. Two gas projects worth a combined $3.5 billion are awaiting approval.

Western Australia Modest price pressures are re-emerging in WA as the state’s economy and construction sector emerge from their post-mining boom slump.

Excess capacity still exists, but WT expects much of this will be absorbed throughout 2018.

A number of retail projects such as Forest Chase Redevelopment and Karringup Shopping Centre are expected to come online in 2018. Though oversupply continues, WT says the hospitality sector is showing signs of recovery.

Resource sector activity is also increasing and there are a number of road, rail and port projects such as Metronet in the pipeline.

There are also a decent number of projects in the longer term pipeline for defence, student accommodation, aged care, private health care and the Department of Justice.

ANDREW HEATON Industry Journalist Sourceable

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What Render Companies Consider and What Resonates In The Market Place?

The dynamic character of Melbourne’s architectural landscape is reflected in the diversity of projects that we work on. For us, visualisation is about highlighting the unique character of each project. Through our creative process, we ‘see’ the designs before they are built.

What excites us about our work is capturing the essence of an unbuilt work through powerful imagery.

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Uniqueness of the design.

Space and detail.

Realism.

Bringing out the building’s individual identity is our key concern with every project that we work on. The character of a project reads through the entire design, and creates an integral relationship with the location. Being unique and distinctive is what resonates in the marketplace. Our goal is to show design elements in the most eye-catching way that evokes a sense of ownership for potential buyers.

When we receive a project, we first consider selecting the right cameras that highlight the design’s space and quality. A detailed, even minimal design element can evoke so much about the concept and intent of the architect. The right camera accentuates these exclusive details, and intensifies the unique character of space within each project’s design.

Ultimately, our aim is to create realism in our images. Conveying information about the property through high quality imagery builds trust in and understanding of the architecture. We create views in the same way as an architectural photographer. We consider proportions, lighting, contrast, colours and space to render images that show realism, excitement and wonder.

MICHAEL THOMAS Director PH 0423 493 498 michael@stabstudio.com stabstudio.com.au

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Market Outlook: What Developers Can Expect for 2018 The development market has undergone some significant shifts over the past 12 months, and 2018 is expected to see these changes solidify with constraints on liquidity and changing buyer demographics becoming the norm over the next 12 months.

Although growth figures may appear to be slowing (with the three months to December 2017 seeing a 0.3 per cent fall in national dwelling values), the 2018 market will likely begin evening out from the unsustainable growth period of the last three years.

Coming in to 2018, developers can expect similar market conditions to what was experienced in Q3-4 2017 – specifically more run-on effects from the APRA constraints and stable interest rates (with the RBA’s cash rate to remain in the proximity of 1.5%).

However, the market is likely to be impacted by shifting buyer demographics and limited geographic oversupplies.

APRA Constraints In March 2017 the APRA macro-prudential measures came into full force tightening lending on "riskier" projects, and left the development industry to figure out how to fund their projects – and 2018 is going to play out in much the same way.

Throughout 2018, we can expect APRA to continue constraining liquidity, and developers who are accustomed to borrowing 80 per cent with 20 per cent equity are going to feel these constraints the most. Typically, developers are going to need more equity with the APRA regulations – which means they’re likely to be down to 60 per cent borrowing capacity.

A common breakdown of market risk and pricing for developers’ finance options in this market will look similar to this:

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Market Risk and Pricing Developers are quick to lash out at banks for their new lending policies, however it is not the banks that are to blame – they’re just adhering to the APRA constraints. Banks will also see some more regulations come into play as the proposed BASEL IV guidelines may further alter the banks approach to risk-weighted assets.

These regulatory changes will see a lot of secondary development funders emerge, and developers will continue to seek out alternative finance options for their projects in 2018 – such as joint ventures, mezzanine lenders or private funds – to ensure their project gets to market.

The APRA constraints are going to take some of the steam out of corporate developers, however it is the smaller, independent developers (that are generally borrowing up to 80% with equity) that will need to amend their financial processes throughout the year to ensure they maintain their viability under the tougher lending criteria.

Hot Spots As with any market outlook for the residential property market, people are searching for the next "hot spots", and 2018 will definitely provide certain pockets with high growth and rental yields for developers to capitalise on.

Where these hot spots are located is going to be determined by whether the area has a relatively strong economy, strong migration

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Market Outlook: What Developers Can Expect for 2018 levels and a relatively low available housing stock – and developers should be looking for geographic areas that meet all of these criteria.

The industry must also bear in mind that there are geographical oversupplies where developers may see further compressions on rental yields – and vacancy taxes (like what we are seeing in Victoria with the Vacant Residential Property Tax) may begin having a severe impact on developers trying to push investor stock in oversaturated markets.

Interest Rates

This is the lowest quarterly value of new originations since the March 2009 quarter – showing us that buyers are now taking a more prudent approach to purchasing and investing.

Coming into 2018, it appears interest rates are going to remain steady with the RBA’s cash rate set to stay near 1.5 per cent for at least the next 12-18 months. This is in line with the lack of growth (with inflation stubbornly remaining below 2%), and the lack of wage growth (at only 2.0% over the 12 months to September 2017).

In Victoria alone the Vacant Residential Property Tax (VRPT) is a 1 per cent tax on the capital improved value of the taxable property, and is expected to raise approximately $80 million for the government in a bid to free up currently vacant properties and lower average rental prices.

Instead, in 2018 we may begin to see smaller geographical bubbles occur where there is a systemic oversupply of stock in an area that is seeing low interest. These bubbles are likely to only have a microeconomic impact.

But, on the opposite side of the spectrum, developers should bear in mind that rental rates did increase by 2.7 per cent nationally over the 12 months to December 2017 – showing that there is still growth in the market. Combined capital city rents are 2.6 per cent higher, and combined regional market rents are up 3.0 per cent – showing us that developers, when they focus on delivering the right stock to the right demographic, can be extremely successful in this coming market.

There is also an increased infrastructure spend that is helping connect new suburbs to large city centres.

With wage growth remaining slow (only 0.1% away from the historic low of 1.9%), it doesn’t make sense for there to be a rise in interest rates. Especially when a 5 per cent increase in interest rates amounts to a 25 per cent increase in mortgage repayments – heavily impacting household cash flow across the board.

Owner-occupiers and first home buyers are the growing demographic of buyers to watch, and they now take up close to 40 per cent of the market. The number of first home buyer housing finance commitments is now the greatest since December 2009 (accounting for 18% of all owner occupier finance commitments) due to reduced associated costs like stamp duty.

Looking at the macro-prudential guidelines it’s clear to see that we’re not in bad shape economically, but we’re not in great shape either. Businesses are increasing their profitability (with the Australian economy growing by 0.8% over the second quarter of 2017) but they seem to be spending the majority of their extra cash on automation and processes instead of increasing wages. Making it seem clear that interest rates aren’t going to move much over the course of 2018.

Alongside the first home buyer, another demographic that can’t be ignored is the baby boomers (those aged around 55 – 64).

According to McCrindle research, the average Australian household aged over 55 have a net worth exceeding $1 million, and due to rising property prices over the last few years they are also seeing the fastest wealth increases of any demographic in Australia.

Buyer Demographics Buyer demographics are expected to continue shifting toward cash based buyers (baby boomers or those sitting on large windfalls) as interest-only lending reaches an all-time low at 16.9 per cent in the September 2017 quarter.

Alongside their primary residence, baby boomers’ parents are now beginning to transfer their net wealth to their children – giving the baby boomer demographic an even larger boost in cash/net wealth to draw upon when purchasing property.

The ‘Bubble’ The "housing bubble" is the buzz word the media is throwing around when it comes to the residential market, but don’t let the sensationalist headlines fool you into believing the "doomsday" is upon us in 2018.

Another demographic to keep an eye on for 2018 is the 2+1: two young executives with a baby. These buyers are looking to take advantage of stamp duty savings as first home buyers, and they want houses with a bit of space while still remaining affordable. This demographic is generally what’s pushing growth in house and land packages in outer suburbs.

This is mitigating the risk of an over-hyped macro housing/property bubble, and providing more opportunity for buyers to come in at entry.

What Developers Should Do Based on the economic and financial outlook for 2018, developers need to shift their thinking toward catering for baby boomers, first home buyers and other owner occupiers. The mentality of building projects and assuming buyers will come is not going to be a successful strategy for 2018.

The best thing that developers can do in 2018 is move away from investor stock and begin thinking about how to create unique and different projects that will appeal to both future buyers and financial lenders.

Not a lot of banks are looking to lend for development sites – given that they’re concerned about the stock coming online in approximately 2 years – but that doesn’t mean that developers have no options. Financing is available for developers, but they just need to ensure that their project is positioned correctly to be successful in this shifting market.

Draw inspiration from developers that are offering spacious, highquality apartments that are catering for the demands of the baby boomers and owner-occupiers as a benchmark of success. Also, look at locations that are still experiencing positive growth, and vehemently avoid any areas that are experiencing a geographical oversupply.

So, this shows us who developers should be targeting, but what buyers shouldn’t developers be thinking about?

Generally, developers should avoid targeting foreign investors (specifically the Chinese market with Chinese capital restraints heavily slowing this buyer segment) and self-managed super fund investors – since these buyer groups have the most barriers to enter the market and represent only a small segment of buyers.

Although we may be seeing growth even out in 2018, the market is still strong and developers with the right approach and the right financing can still capitalise on the market conditions.

According to CoreLogic research, investors on variable mortgage rates are now starting to pay 60 basis points more than owner occupiers (with higher premiums for interest-only loans) – which is a significant contributor to the slowing investor market.

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Leppington (approximately 50km southwest of Sydney’s CBD) is one example of this, where the government has invested in a train line, local amenities and schools (an investment in excess of $1.8 billion) to help ensure the location is ripe for growth (especially with the 2+1 demographic discussed above).

You can read more of our in-depth thoughts on the "bubble" here.

But, economically speaking, there can’t actually be a property bubble – we simply don’t approve enough dwellings nationally to create the large bubbles that the media is hyping.

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The Urban Developer is proud to partner with Development Finance Partners to deliver this article to you. In doing so, we can continue to publish our free daily news, information, insights and opinion to you, our valued readers.

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5 Mistakes to Avoid On Your First Residential Development The general consensus is that owning and developing residential property is the safest way to financial independence, but things can get complicated very fast for those that are inexperienced and lack clear understanding of the most important elements of a successful project.

As a property development advisory firm, we’ve seen it all before. A few mistakes can be easily avoided with a bit of due diligence and guidance.

2. Getting the product mix wrong There are a range of competing elements in design that can dictate the product mix of a project, that is, the spread of different types of dwellings such as apartment sizes and attributes. The most common example is the allocation of one-, two- and three-bedroom apartments within a project.

Nowadays, it is common for projects to have a mix of townhouses, apartments, retail and commercial space, so agreeing on this mix is crucial to the project’s revenue potential and the timeframe it takes to pre-sell.

The site itself will dictate the most efficient floorplate design, and then subsequently, the size and aspect of apartments can naturally be concluded. It is typical for developers to try and maximize the sellable area in each level to increase building efficiency, and this is achieved through minimizing common areas and internalising as much space as possible.

However, the building envelope alone shouldn’t dictate the size and mix of dwellings. It is important to know exactly who the target market of the project is and the price points and areas they demand.

There is no benefit in increasing apartment sizes and subsequently apartment end values, if there is a price ceiling that purchaser’s can’t afford. For example, if your project is targeted at first home buyers and investors, prices would typically be classified as entry level.

Therefore, if you design 120sqm apartments that have an end value of $1.2 million, the target market will not be able to afford them.

1. Building the wrong consultant team around you Property development requires input from a vast range of consultants, all who boast different expertise in relation to their craft. It is critical to build a well-rounded team of consultants that are appropriate for the project you are undertaking.

Prior to purchasing a site, there should be some detailed thought and strategy around who is appropriate to appoint when the project becomes live.

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By engaging the entire team during the town planning stage and seeking early engineering and geotechnical advice, it’s less likely that you will need to continually amend the design and as such, avoid multiple town planning submissions.

It can be costly and time consuming to formally amend a planning permit and it is important that first time developers understand the permit they are buying, and feasibility implications of improving and amending existing permits.

Development feasibility models can vary substantially due to the assumptions of the author, some of which are objective rather than an exact science. It is not uncommon for inexperienced developers to leave entire cost line items out of their models or have calculation errors.

The saying “time is money” could not be more relevant to property development. It seems obvious that there are project holding costs such as rates, interest and land tax, all of which accumulate the more a project is delayed; many developers, however, don’t understand the “daily cost of time.” This relates to the financial cost of a single days delay for the project. For medium density projects, this cost is typically $1,000–$5,000 per day. Therefore it’s important to have this front of mind when strategic decisions to save money come at the expense of the project’s program.

It is critical to know the cost of time when making strategic decisions and looking at avenues to accelerate your program. Secondly, it is important to not lose sight of ever changing market conditions and how these will impact your project. Unnecessary delays can cause your project to spill into the next property cycle, increasing execution risk on your projects’ profit.

3. Buying a site with a permit that isn’t valuable

Architects, in particular, have different styles and design personalities, so it is important to choose an architect whose design style will match with the buyer profile of the projects’ end-product.

5. Not knowing the impact of time

Proceeding with a site acquisition with limited data can often lead to a misinformed view of land valuations, resulting in much less profit for the developer than initially thought.

It’s imperative to know and understand the unique attributes of your site and your target market, alongside the preferred apartment mix, sizes and price points. There is no substitute for research, understanding your buyer and designing specifically for them.

Buying a site with a permit can substantially reduce the project’s risk profile and program; however, some permits can be more valuable than others. Where permits have approval for the wrong product mix, have onerous conditions or design elements that are unrealistically expensive, there can be significant additional work required before you are ready to take your project into marketing.

4. Not knowing the numbers

Understanding market risk, and avoiding potential downside timing is critical to every project.

MICHAEL HERMANS Managing Director PH 0411 406 117 michael@hubpg.com.au hubpropertygroup.com.au

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Adele Bates' Insights On: New Design Trends and Layouts Based on BADS and ESD Requirements, and What Developers Can and Should Be Doing.

1. C onsider the development as a whole and engage a designer in the early stages

3. O ptimise spatial planning outcomes by engaging your design team’s knowledge

The Adele Bates studio employs a strong collaborative approach in all projects, working closely with our clients, architects, creatives and sales teams to ensure a design objectives and strong outcomes are achieved. Our design process intends to create unique design that conceptually aligns with a project’s architecture, and balances livability, function, marketability and aesthetic. This holistic design approach involves viewing the development as a whole, ensuring end-to-end thought and consideration throughout the project.

To ensure that space can be utilised to its maximum potential, an in-depth awareness and understanding of spatial function is crucial. The layout of an interior, placement of communal spaces and relationship with the environment strongly influences the experience of a space’s inhabitants. Planning for optimal space outcomes involves preparing zoning plans to explore spatial function, circulation and potential furniture layouts. These processes are essential to apartment design and should always be employed by developers and designers.

2. Collaborate with your designers prior to council approval Space planning is a key component of design, as well as a major component of the Better Apartments Design Standards. It’s more beneficial to all parties and the final project if designers collaborate with developers and architects as plans are evolved, prior to seeking council approval. Early stage collaboration enables designers to ensure optimal spatial planning methodology is applied from the beginning. Therefore, necessary consideration is given to important elements such as room sizes, natural light, flow of spaces, orientation, privacy and noise, and undesirable design outcomes such as saddleback bedrooms and borrowed light can be avoided. In cases where we are provided with council-approved plans with suboptimal space planning, we work within intertenancy envelopes to maximise livability and efficiency of space.

As a studio that specialises in multi-residential projects, leading design firm Adele Bates has designed across a broad range of projects, including boutique townhouses, medium density apartments and large scale high-rise buildings.

Director of the eponymous design studio Adele Bates provides her insights into what developers can and should be doing to create intelligent design that aligns with Better Apartments Design Standards and Environmentally Sustainable Design requirements.

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4. Environmentally Sustainable Design is here to stay Environmentally Sustainable Design is intrinsically linked to good apartment design and livability. Best practice planning produces space-efficient residences, saving on construction materials and ongoing resources, as well as reducing physical and environmental footprints.

ADELE BATES Director PH 03 9686 0852 adelebates.com.au

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Past Project Profile

Past Project Profile

Arcadian 511-513 Dandenong Road, Armadale arcadianarmadale.com.au

Pelham 54 Wattletree Road, Armadale pelhamarmadale.com.au

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Apartment Type

% of Total

Average Size per m2

Average Price per m2

1 Bed, 1 Bath

6

56.0

$9,196

$515,000

2 Bed, 1 Bath + PR

17

72.3

$9,839

$711,667

2 Bed, 2 Bath

33

90.5

$10,024

$906,667

3 Bed, 2 Bath

44

128.9

$10,136

$1,306,250

Average Price per m2

Average Price

Apartment Type

No.

% of Total

Average Size per m2

2 Bed, 2 Bath

6

29

99.8

$12,028

$1,200,833

3 Bed, 2 Bath

15

71

136.1

$12,377

$1,685,000

Average Price

Walpole 40 Walpole Street, Kew 40walpole.com.au

Townhouse Type

No.

% of Total

Average Size per m2

Average Price per m2

Average Price

3 Bed, 2 Bath + PR

5

63

249.6

$8,700

$2,167,000

3 Bed, 3 Bath + PR

2

25

238.0

$9,412

$2,240,000

4 Bed, 3 Bath + PR

1

13

238.0

$9,412

$2,240,000

Apartment Type

% of Total

Average Size per m2

Average Price per m2

Average Price

1 Bed, 1 Bath

6

50.5

$9,657

$487,700

2 Bed, 1 Bath

17

62.2

$10,616

$659,983

2 Bed, 2 Bath

56

78.6

$10,370

$814,275

3 Bed, 2 Bath

22

116.8

$11,437

$1,332,150

The Foundry 185 Rosslyn Street, West Melbourne www.westend.melbourne/buildings/the-foundry/

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Celebrating over 100 Successful Sell Outs

+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143