Rezoning for high-density residential development has become the magic pudding in Sydney for listed Australian property trusts and private individuals.
Three large city agencies -- Jones Lang LaSalle, CBRE and Colliers International -- have sold some $6 billion of rezoned development sites in Sydney over the past 18 months.
Sam Brewer, JLL national and head of metropolitan sales and investments (NSW), says the firm listed $1bn of rezoned sites in the first quarter of 2015. He expects this year to achieve sales in excess of last year’s $2bn.
As Darren Steinberg, chief executive of Dexus Property Group, sees it, Sydney is undergoing a cultural shift that will change the character of the city in years to come.
He says the move away from quarter-acre blocks to apartment living started in Melbourne years ago, and Sydney is now catching up as time-poor Australians accept apartment-living to free themselves of house and garden maintenance.
The change has coincided with an influx of Asian developers seeking to diversify out of their home markets. They are prepared to compete aggressively for land or buildings earmarked for residential conversion.
To date, the biggest beneficiary has been the Sydney-based Goodman Group. Goodman foresaw the trend more than five years ago when it started making plans to seek rezoning of under-utilised or ageing industrial sites in the inner suburbs of Sydney and Melbourne.
The group declined to comment for this article, but Sholto Maconochie, a real estate analyst with independent broking firm CLSA, notes that Goodman has already contracted property sales of $900 million this financial year.
These sales will generate gross profits of between $400m and $600m for Goodman over the next two financial years, he says.
Maconochie believes Goodman could use the profit to pay down debt, fund development or issue a special dividend of up to 14c per share, based on land sales up to December 31, 2014.
The group has potentially rezonable land for 35,000 apartments across Australia. This, says a senior industry executive is bigger than the combined land bank of Australia’s three largest residential developers Stockland, Mirvac and Meriton.
“We estimate that the value creation based on net present value of the uplift of all residential urban renewal is 50 cents per share (to Goodman),” says Maconochie.
This analyst points out that Goodman is by far the largest landlord of industrial land in Sydney. Based on his calculations, one Goodman site -- located at Olympic Park in Sydney’s west -- could be worth $1.2bn.
Goodman last month sold a quarter of this site to Meriton, Australia’s largest apartment builder, for around $250m.
Another site, located between Erskineville and St Peters railway stations, falls into what is known as the Ashmore precinct, targeted by Sydney City Council for rejuvenation to create a new growth area.
Goodman last year sold the site to a Hong Kong-based developer for $350m. Industry sources say Greg Goodman, the group’s founder and chief executive, purchased the 6.9-hectare site for just $16m more than two decades ago.
The industrial landlord also sold a block in Epping, in Sydney’s northwest, to a Chinese developer last December for $110m.
Dexus Property Group expects to generate profits of around $90m, principally from the sale of rezoned industrial land in Sydney, in the next two financial years.
Darren Steinberg says the company last August sold two sites at Rosebery in Sydney’s inner west (held in its books at $96m) to Meriton for $190m after seeking rezoning and development approval for the sites.
For landowners, industrial land is now seen as the lower hanging fruit.
Offices and suburban homes are also being targeted for a change in land use under the NSW state government’s urban activation program (now known as priority precincts) to 'infill' established suburbs to maximise use of existing infrastructure, like transport and services.
Tim Grossman, CBRE’s Director, capital markets, metropolitan investments, says there are eight urban activation precincts in Sydney -- all of which revolve around transport hubs.
CBRE has a team of agents who cold-call home-owners in areas planned for rezoning, hoping to create potential redevelopment sites.
“We are also targeting strata-titled offices in the city to convince individual owners to sell the building for conversion to residential or for redevelopment,” says Grossman.
Steinberg says Dexus, which is Australia’s largest listed office landlord, is reviewing its portfolio to identify older buildings for better and higher-return uses. Residential conversion is one option.
Dexus is seeking development approval for 500 apartments on an existing car park at 32 Flinders Street in Melbourne, and is progressing with residential rezoning of the southern end of its Lakes Business Park in Botany, Sydney.
Industry sources say other large A-REITs like Stockland, GPT Group and Mirvac, would also have property, which could lend itself to rezoning for residential development.
Other owners, including listed and private companies, local councils and government agencies, have also started to cash in on rezoning.
The US private equity group, Blackstone, in 2014 sold Gold Fields House with panoramic views of Sydney Harbour, to the Chinese group Dalian Wanda, for $415m -- more than double what it would fetch as an office building. The site has been rezoned for residential development.
Rezoning is transforming Sydney suburbia.
Eight homeowners have made a collective sale of their homes in Epping, an epicentre of rezoning, in Sydney’s north, for more than $30m -- three times what their homes were worth individually -- to a developer.
And JLL’s Sam Brewer is working with nine homeowners in St Leonards, on Sydney’s north shore, to create a development lot for up to 200 apartments. Brewer expects the site to fetch $55m. (These homes are worth between $1m and $2m individually.)
The sale, he says, will be subject to further certainty and an appropriate planning outcome from Lane Cove council, expected in the coming months.
Homeowners in suburbs such as Sydney’s Canterbury and Kensington -- inner-city suburbs with good infrastructure -- are keeping a watching brief on the progress of their councils’ rezoning plans.
They too hope for a slice of the magic pudding.