Resilient developers await market rebound

As recently as 2011, the overarching theme in Perth's land development sector was one of red-hot demand as developers battled to keep up with supply.

In 2019, Perth's vacant land market continues to reel from the impacts of Western Australia's economic downturn, with the number of lots sold in Perth consistently falling over the past five years.

And according to the WA chief executive of the Urban Development Institute of Australia, Tanya Steinbeck, developers may be waiting a little longer for an anticipated rebound in demand for new housing lots.

"UDIA has undertaken detailed research into historical market cycles in Perth, and we have noted that there has been a distinct two-year lag between an uplift in mineral exploration expenditure and a corresponding uplift in dwelling commencement figures in WA," Ms Steinbeck told Business News.

"Therefore, based on current mineral exploration expenditure figures, UDIA estimates the next market uplift will occur in the next 12 to 18 months."

A market recovery from 2020 was also the consensus call among developers interviewed recently by Business News, with major players across the state preparing for increased levels of activity.

National developer Mirvac Group is one company already banking on a WA recovery, acquiring a large parcel of land in Perth's north-eastern corridor late last year that will be launched as a new estate before the end of 2019.

"We are believers in Perth, and we are putting money where that belief is," Mirvac WA residential general manager Paige Walker said.

"Everyone is aware that the economy continues to show signs of recovery and there are definitely signs that the residential market is recovering.

"We are seeing improved sentiment in the market and more consumer confidence. Enquiries at our sales centres are a lot higher and a lot more qualified.

"We're also seeing rental stock is continuing to clear and supply levels are continuing to decline. Having said that, there is still a backlog of stock which is driving prices down in certain areas."

While Ms Walker said the recovery in Perth's land market would not be rapid, slowing markets in other states had increased WA's attractiveness. 

"In terms of where Perth is compared to where Sydney and Melbourne are at the moment, Perth definitely offers the opportunity for growth in a recovering market," she said.

Peet managing director Brendan Gore was cautiously optimistic regarding Perth's potential recovery, saying he expected current conditions to
bound remain for the entirety of the 2019 calendar year.

However, he said if it weren't for the tightening of lending criteria by Australian financiers leading up to the banking royal commission, 2019 would likely have been a rebound year in Perth.

"The changes to banking and lending were pretty quick and sharp and took the market quite by surprise in terms of how fast it was changing and how fast it was evolving," Mr Gore told Business News.

"It seemed like every month there was another change, leading into the commissioner's report in February.

"It was almost like the banks were pre-empting the report, trying to get ahead of the curve.

"Changes in lending are now not occurring, so we are dealing with more balanced requirements and the market will understand and adapt to it.

"It will take a bit of time. This is a new paradigm so it will take a bit of time to get that critical mass and it will probably be around 12 months before the market adjusts."

Mr Gore said the challenges of Perth's downturn had given Peet the opportunity to diversify its offering, not only in terms of the markets it operated in across Australia, but also in terms of product type.

Late last year, Peet was announced as the state government's preferred partner for a 20-level, $45 million apartment tower in East Perth, leveraging
expertise developed through a series of apartment projects the developer has rolled out in Canberra.

"Our strategy is really to ensure that we can have a product offering that straddles the majority of the residential sector," Mr Gore said.

"That's effectively trying to cover from a five-kilometre radius of the CBD and a 50-kilometre radius of the CBD.

"Densification requirements of governments are growing and demand from the consumer in terms of wanting to be closer to amenities, the CBD and transport hubs and so forth, all of that drives different types of product, whether that be townhouses, detached housing or apartment living. That's something we have to adapt to.

"We've been working on it for a number of years and really the key is to have the balance sheet and the expertise to be able to do it, and we've been building that.

"Now we're starting to roll out that strategy and implement it."

Fellow ASX-listed developer Cedar Woods has been focusing its efforts on growing its operations in other states in recent years, but managing director Nathan Blackburne said the company was starting to pivot back to its home state.

In the first half of the 2019 financial year, operations in four states contributed to Cedar Woods' revenue for the first time.

"Our business has been very fortunate in that it's a diversified business geographically," Mr Blackburne said.

"Each of the markets that we operate in is at a different point in both the economic and property cycles.

"We saw good opportunities in both Adelaide and Brisbane, so we chose to focus on those markets.

"We have Melbourne, which has arguably passed its peak, we have Brisbane where we are expecting price growth, Adelaide which is steady and Perth, which is expected to pick up.

"Fortunately different states have been at different points in the cycle and that has served our business well."

And like Peet, Cedar Woods has been evolving its product offering beyond housing lots, moving to meet market demand in each of its estates.

"It's actually difficult to draw a consistent theme because some projects are calling for a greater proportion of smaller lots, and some estates are calling for a larger proportion of big lots," Mr Blackburne told Business News.

"It's fair to say that because of the reduced borrowing capacity of many purchasers that several estates have seen a greater focus on smaller lots.

"Around one third of our portfolio is built form and predominantly residential; we are actively trying to diversify our operations in Perth and undertake medium-density residential projects.

"If you look at the proportion of Perth housing that is apartments or townhouses, it is very small when compared to Sydney and Melbourne, where it is more than 20 per cent of the housing stock.

"In Perth, less than 10 per cent of the housing stock is apartments or townhouses, and while I don't think that we will get to the level that is evident
in Melbourne or Sydney, there is certainly opportunity to increase our current proportion."

Okeland Communities managing director Adam Shephard said his company's diversification strategy had also largely insulated it from the impacts of the housing downturn.

Okeland, formerly known as Amex Corporation, operates in Perth, Brisbane and Melbourne.

"We specialise in residential land division and we specialise because we are passionate about creating these neighbourhoods and these communities," Mr Shephard said.

"We diversify by operating in three states. Typically markets around Australia don't operate in sync, they operate differently. So it means when you've got a prolonged downturn in WA, we've been able to maintain our vision on our projects.

"We haven't had to take shortcuts to try and survive in the downturn and we haven't been forced to divert from the visions for our projects.

"One of the advantages we have as a patient family company which is diversified around Australia is we have the ability to stay true to our vision in our projects, regardless of whether we are in good times or in bad."

Unlike Peet and Cedar Woods, Mr Shephard said Okeland wasn't likely to dabble in higher-density product. The developer was instead focusing on delivering larger lots than its competitors as its point of difference.

"The project we're launching in Bullsbrook will have an average lot size of 500 square metres, which is significantly larger than the average lot in the Perth metropolitan area," he said.

"We truly believe that people want that additional land area and if you can provide it on an affordable basis that will be a big drawcard."

As developers evolve their product offering to secure a share of a shrunken market, competition has been ramping up.

Qube Property Group managing director Mark Hector said the Perth market was as competitive as he'd ever seen it, but nonetheless the developer was pursuing fresh opportunities.

"On a scale out of 10, it is 11," Mr Hector said.

"New estates are starting to come on; we've just started construction of the first lots at Apsley and we are probably one of the few developers delivering new stages at our estates.

"But I would like to say vendors have adjusted their prices to reflect the current market, but that's not the case.

"You've got to work very hard with your team to find value. It's challenging, but we are doing that."

Ms Walker said Mirvac's approach to Perth's heightened levels of competition was to ensure the developer rolled out community amenity such as
public open space before residents moved into its estates.

"You've got to make sure that your projects and your developments present really well and you actually commit up-front to spending money on the open space and the landscaping and making sure it's a community that people want to be a part of," she said.

"Generally, to remain resilient in these types of times you need to develop in desirable locations, understand who your purchaser is and make sure
you're developing open space and the community amenity to suit them.

"It's very competitive and on face value there is not a lot of differentiation, so you have to do what you can to make your product as different as possible to meet the needs and wants of purchasers in the area."