Growing sentiment on the ground is telling us that the Capital City Apartment boom has reached its peak.
Finance is tightening, unit sale prices are stagnant at best, and there are a smaller number of new apartment projects being brought to market.
But it’s not all doom and gloom.
The market is as busy as it has ever been and overall apartment approvals continue to tick along. So what does all this mean for costs and how does it impact your project?
Headlines demand that we are facing over-supply, and that developers are pulling back on apartments. However, vacancy rates remain manageable and rents are holding up in most markets. What is happening is an increase in cost per apartment at the same time as demand, and sales prices reducing.
This is then leading to some projects not stacking up and a tapering of growth and reduction in the number of projects forecast to come on the market. Many blame this on increases in construction costs and point toward EBA rates or specific examples of rises in core materials such as concrete. The reality is that material and labour prices have had a minor impact on the overall increases in cost per apartment.
Current market impacts on construction costs
Changes in product mix, changes in quality, and labour and materials will all impact costs. The table below shows changes in costs per apartment over a number of periods.
The biggest impact on costs has been the shift from one bed/one bath/no car park stock, to two bed/two bath/one car park. Also significant in the cost mix has been the change in quality and increase in amenity provided by developers in the race to differentiate their offerings and cater to a more discerning market. For example, if your apartment doesn’t have high quality appliances, an elegant façade, and a ‘block’ style roof-top common area, then it isn’t going to sell.
Labour accounts for 35 per cent of overall construction costs on a large project. A five per cent increase across all trades on an EBA site would account for an approximate 1.75 per cent increase in the overall construction cost. In many cases material costs are flat, if not negative. Increases in quality have been offset by lower product prices or offshoring.
Rethinking mid-large size projects
The scenario in many markets is that mid-large size projects, of the style and quality demanded, cannot be delivered at a price point sufficient for the projects to go ahead. This is causing some projects to be shelved or reworked, or on-sold.
For the first time in a long while, contractors and sub-contractors in this space are starting to feel like they have more work currently on their books than they do in the pipeline and are keenly competing for new work. This causes downward pressure on profit margins and ensures tenders are competitive.
It is important to understand that while the apartment market gets a lot of attention, it is only a subsection of the whole industry. The overall residential market – picking up low-rise and sub-divisions – is buoyant.
A number of developers are shifting their focus to these markets and land banking apartment projects for the next cycle. One of the most active sectors across Brisbane, Sydney, and Melbourne are low-rise and townhouse projects outside of the CBD. Owner builders in particular are wallowing in this space and are capitalising on the reduced layer of margin.
Forecast escalation for the six-month period from July 1 to December 31, 2016