Welcome to Property Development Insights Summer 2020 review of the 2019 property markets and thoughts and opportunities for 2020.
In the face of the continued low interest rates and yields in the Australian real estate market, Investors/developers remain on hunt for alternative ways of deploying capital and securing better returns. But what type of development opportunities does 2020 present? We are pleased to present you with a concise overview of New South Wales and Sydney property markets and comments for potential development options.
What Opportunities Does 2020 Hold?
Residential – Largest Correction On Record But Strong Recent Recovery
The year 2019 saw the Australian residential market experience the longest and largest correction on record. The sales volumes In Greater Sydney residential market tallied 38,837 houses (11.6% decrease) and 23,620 apartments (20.9% decrease) over the year to quarter 3, 2019 (Knight Frank, 2019). The median dwelling values decreased 1.6% to $1,079,500 for houses and significant 5.0% to $695,000 for apartments in the year ending quarter 3 2019 in Greater Sydney. Meanwhile, rents for houses and apartments fell 4.5% and 4.6% to a weekly median rent of $525 for houses and $520 for apartments (Knight Frank, 2019). The overall building approvals for both houses and apartments fell significantly by 27% in the same time period, which is the lowest approval numbers over a year period since January 2014 (JLL, 2019).
However, the continued interest rate cuts along with “a fear of missing out” as the prices recover, has encouraged both investors and owner-occupiers into the Sydney housing market, resulted in a price increase in final quarter 2019. Since the trough in mid 2019, Sydney residential prices have increased 4.9% and 5.5% for apartments and house respectively, which are now both only slightly lower (House prices: 4.6% lower; Unit prices: 6.2% lower) than their 2017 peaks (JLL, 2019).
Office – Very Strong 2019 And Set To Continue?
Supported by tenant demand, scarcity and high-quality assets, commercial office property remains the preferred income and capital appreciation asset. The buoyant Australia office sector annual returns recorded a strong 11.6% growth in the 12 months to June 2019. Benefiting from infrastructure space, Parramatta has recorded the best performing market over 12 months to July 2019, with the market total returns of 16% and capital growth at 9.8% (Savills, 2019). Sydney office markets vacancies (Sydney CBD: 3.7%; North Sydney: 7.9%; Parramatta: 2.7%; Macquarie Park: 4.9%) declined in 2019 and are all below the 10-year vacancies averages. With the rent increasing due to the declining vacancies, the CBD Fringe and Parramatta will continue to be attractive markets for developers (Savills, 2019). North Sydney is poised to benefit from the 2019 valuation uplift and rental growth, backed by the new Metro rail infrastructure project.
Industrial – The Powerhouse Of Property Continues Full Stream Ahead
Benefiting from an ever decreasing industrial land supply and increasing population from Newcastle to Wollongong, the Sydney industrial market is experiencing densification and strong value increases of both development sites and investment property. E-commerce and B2B continue to contribute to logistics assets demand growth, which further strengthens the demand for higher and better alternative uses. The western precincts, which are Sydney’s main market, experienced annual land value growth of 7.4% and capital value growth 20.8% at the end of Q3 2019 (Savills, 2019). Moreover, the remarkable capital value growth areas over the three years to September 2019 are “South Sydney (78%)”, “Northwest (68%)” and “Out South West (56%)” (Savills, 2019).
The influence of Western Sydney Airport continues to attract strong investor demand into Sydney’s South West, as the residential population becomes denser in Central West and Outer West The proximity to the WSA and associated new infrastructure significantly increases the highest and best use of the industrial development land, supported by continuing favourable FOREX and low interest rates.
Retail – Some Light At The End of The Tunnel?
During January 2020, more than 150 bricks-and-mortar stores have been announced for closure across Australia, including Harris Scarfe, Jeanwest, Bardot and EB Games. Due to the recent high-profile retail collapses, tough times are likely to continue for retail .
Despite the challenge from e-tailing and constrained consumers, the retail market in Sydney remains supported by modest population growth and aboveaverage employment growth. The confidence in retail development projects has increased 15.6% over the year end to August 2019 in NSW (Savills, 2019). Moreover, some new concept such as fulfilment centres (a physical space that processes customer orders from e-commerce retailers) to maintain with online, converting retailer stores into the mini-fulfilment store (return or exchange) can be considered as a cost-effective way to expand the distribution network, which is achieved by adopting existing facilities that are close to where customers reside.
Hotel – Strong Trend To Upmarket Accommodation in 2019
In order to capitalise the expanding luxury travel market, 49% of Australian hotel development pipeline containing luxury and upper-upscale hotels, seen as the increasing trend for developing high-end products in hotel market (Colliers, 2019). The occupancy rate in the Sydney hotel market fell marginally 1.5% to 83% over the 12 months to September 2019, resulting in the hoteliers dropping room rates 2.3% and the RevPAR by 3.7% (Colliers, 2019). On the other hand, the high tourist volumes (4.1 million international tourists to Sydney for the year ending September 2019 (DestinationNSW, 2019)) and global reputation of Sydney, ensures that the lower occupancy rates will be short-lived as the new supply will be absorbed in the medium-term. The serious impact of the East Coast bush fires and emerging Cononavirus will impact this trend in the short term.
All aspirant participants in the property development industry are encouraged to register for the introductory Property Development Insights seminar on the 18th February which considers in depth the profitable residential, mixed-use commercial and industrial property development projects opportunities in the 2020 market cycle.
Disclaimer and Qualifications: This information is general in nature is understood to be from reliable sources and is not to be construed as property investment or property development advice. Expert investigation and independent due diligence should be undertaken by all parties prior to any agreement to purchase. develop or dispose of property.
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