Metropolitan development sites values, which have surged in recent years on a wave of Chinese money, are showing the first signs of correcting after developer Nicholas Smedley secured two sites at discounts of 30 per cent or more after vendors rejected his original off-market offers, thinking they would get more through a public campaign.
Chinese buyers have quit the market in droves, and off-the-plan sales rates have slowed drastically in Sydney and Melbourne meaning the building boom is starting to wane.
Mr Smedley, the boss of private developer Steller, which has a $1.9 billion pipeline of projects, said he paid in August almost $10 million less for a warehouse on Wells Street in South Melbourne than he had originally offered.
“I made a $33 million offer for the property, but ended up paying only $23.6 million after the vendors elected to offer it to the market via competitive process,” he said.
He snapped up another development site in Rosebud on the Mornington Peninsula for $4.7 million after originally offering $7.2 million. The vendor had originally sought $8.5 million.
“The Chinese have gone away, so there are now great buying conditions,” Mr Smedley said. “There are still vendors out there with unrealistic expectations, but I see those also levelling out.”
A slump of more than 70 per cent
Recent data compiled by real estate data company Real Capital Analytics showed a more than 70 per cent slump in Chinese transaction in Australia over the first nine months of the year, most of this being development sites and projects, as Beijing clamped down on riskier outbound investing.
“Chinese investors were the biggest purchasers of development assets in 2016, but this year there has been a massive drop in development site purchasers as those [Chinese] buyers have not been here,” Perpetual Corporate Trust head of sales and relationship management Glen Dogan told an investor forum last week.
Speaking at the Property Council of Australia congress in Cairns last month, Mirvac boss Susan Lloyd-Hurwitz also noted the reduced competition for development sites.
“There is no longer a counter party willing to take very uncertain planning outcomes and pay cash for a site and hope it’s going to be alright,” she said. “That’s disappeared and it’s created more opportunity for developers like us.
“What we are seeing is that landowners who could have previously sold, for cash, a site with uncertain planning outcomes can no longer do that.”
“Definitely less competition”
Australian Financial Review Rich Lister Tim Gurner told the Financial Review there was “definitely less competition for development sites”.
“I have been saying for a long time that, if anything is overvalued in our market, it’s development sites, and I think with a large reduction in the number of overseas developers buying, prices will hopefully come back to reality again,” Mr Gurner said.
“There is no doubt they are now pulling back and new entrants have slowed if not stopped from China.”
Melbourne commercial agent Clinton Baxter from Savills Australia said Mr Smedley’s comments were accurate to the extent that the competition and demand from Chinese developers through Steller’s favourite areas – bayside suburbs – had decreased slightly.
“The number of Chinese buyers in the market has decreased somewhat due to capital controls,” he said.
“But in areas like Box Hill – where Savills has sold more than $100 million in sites in 2017 alone, all to Chinese buyers – local developers simply need not apply,” Mr Baxter said. “They just don’t stand a chance against the highly agile, cashed-up and market-savvy Chinese developers.”
Outside areas such as Box Hill, Mr Baxter said there was a short-term opportunity for more local investors and developers to secure assets.
Two significant trends
“Longer term, absolutely nothing will stop the sheer weight of Chinese and Asian money from having an ongoing, profound, inflationary impact upon all Australian property markets,” he said.
He said prices for sites in places such as South Yarra and Collingwood on the city fringe and in high-rise locations such as Box Hill had doubled in the past three years, hitting more than $11,000 a square metre recently in Box Hill.
Nick Materia, a director at online development site developmentready.com.au, said two significant trends had emerged over the past six months “as a result of the shifting priorities of Chinese investors in Australian real estate”.
“Firstly, there has been a marked increase – in the magnitude of 15 to 17 per cent – in interest from local development groups for well-positioned, predominantly townhouse and greenfield development opportunities across three major metropolitan markets in Melbourne, Sydney and Gold Coast.
“Secondly, we’ve noticed a major re-emergence in interest from off-shore development groups, particularly from Malaysia, Japan and the UK, who are seeking to enter into joint venture projects with Australian-backed partners.”
Disappointing clearance rate
Reflecting the reduced competition, a recent CBRE portfolio auction of four development-ready sites in suburban Melbourne generated a disappointing clearance rate of just 50 per cent.
“It’s not the first time that we have seen slight fluctuations in the level of demand, from Chinese developers in particular,” said CBRE national director Mark Wizel.
“I think what many forget is how what we previously described as off-shore-based developers are now absolutely ingrained Australian-based developers with the strongest possible links back to Chinese capital when a deal requires it,” he said.
Mr Wizel said there was still strong demand for sites of decent quality, as evidenced by three suburban sites selling for a combined $30 million last week.
“We’re predicting a solid end to the year, inquiry is healthy across the board,” he said. “We would love more sites with townhouse approvals.”
Keep up with Commercial Real Estate news.
Keep up with Commercial Real Estate news.