The day when the median price of a two-bedroom apartment in Sydney reaches $1 million is not too far off.
Sharply rising construction and land costs, aided by a devalued dollar and strong demand for apartments, have combined to nudge prices inexorably closer to six figures. And when you look at land and development costs for a new crop of apartments planned for some 20 ageing office blocks in the heart of the city, $1m may not even be enough for a one-bedroom unit.
Some 3,000 new apartments are either under way or proposed in what is being described as the ‘Manhattanisation’ of Sydney.
The analogy to Manhattan is apt in more ways than one.
Manhattan is legendary for expensive and small apartments, with a record current average price of $US1.87m ($2.5m), according to a report by US appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.
Sydney is not quite there yet, but the cost of redevelopments, or indeed replacement costs, will set new price records, challenging the ability of many Australian buyers to afford an apartment.
Justin Brown, chairman of CBRE Residential, believes penthouses atop James Packer’s proposed casino at Barangaroo on Sydney’s foreshore could fetch as much as $100m.
The current record Australian price for an apartment is $25m. Agents have offers of $30m for a sumptuous penthouse in the Bennelong Apartments complex on East Circular Quay, with the owner reportedly holding out for $40m.
Ben Stewart, director of CBRE Residential, says the highest price yet paid for an apartment in Sydney is $44,000 a square metre.
Apartments in the planned Barangaroo residential tower could go for $50,000 a square metre or more. So will those planned for 1 Alfred Street (Gold Fields House) at Circular Quay.
Michael Pallier, principal of Sotheby's International Realty, says that at $50,000 per square metre, a two-bedroom apartment in Gold Fields House will cost around $5m.
Given the price ($415m) paid by Chinese developer Dalian Wanda for Gold Fields House, leading industry figures say the asking price for apartments could be as high as $60,000 a square metre to meet expected development profit and risks associated with the project.
Mr Pallier cautions that developers can only price apartments to what the market will bear, irrespective of their development costs.
Mr Stewart says 40 per cent of all of his apartment sales are already priced above $1m, and that that percentage is moving towards 50 per cent and, inexorably, will reach 60 per cent.
Already, according to Andrew Wilson, senior economist with Australian Property Monitors, the median price for a two-bedroom apartment in central Sydney is $830,000, $50,000 higher than the next most expensive areas; Haymarket and Waterloo on the city’s fringes.
Dr Wilson says the median price of a two-bedroom unit at Haymarket rose 32.6 per cent in the 12 months to April, to $780,000. This sharp increase was due to the availability of bigger and more upmarket apartments in the precinct but, despite this price spike, he believes the median price of Sydney apartments is some way from reaching $1m.
Some developers see it differently. They say new projects must reflect the high cost of land, including rapidly-rising construction and material costs.
Iwan Sunito, chief executive of the Sydney-based Crown Group, says building costs have risen 20 per cent in the last two years, and he is bracing for further increases in coming months.
His 80 square metre two-bedroom apartments in Waterloo, an inner city suburb, are priced from $1.2m. Crown Group is selling two-bedroom apartments in its Parramatta project, some 20km from the Sydney CBD, at over $1m.
Similarly, Meriton -- the nation’s biggest apartment developer -- is marketing two-bedroom apartments at Zetland, in Sydney’s inner west, from $1.1m. The average price of Meriton apartments in its Parramatta project is already at $960,000 -- a whisker shy of the million-dollar mark.
Two years ago, Crown Group’s building cost for a two-bedroom apartment in Sydney was around $385,000. That same unit today will cost between $410,000 and $430,000 to build.
While land content cost was on average $200,000 per unit two years ago, it has since doubled. So the $1.1m to $1.2m two-bedroom apartments being built in Sydney today are priced on historical land costs that were 50 per cent lower than the current market rate.
One leading developer told Business Spectator that, given the prices being paid for redevelopment sites in Sydney’s central business district, the per apartment land cost in the CBD has now risen to $1m.
Nick Collishaw, chief executive of Centuria listed property funds, says land costs in Sydney have risen by 30 to 40 per cent in the last three years. In most popular Sydney suburbs land costs per unit currently range from $200,000 to $250,000.
Developers also claim that the devaluation of the Australian dollar means imported building materials, fittings and fixtures cost at least 30 per cent more today.
Michael Manikas, chief executive of the Australian Institute of Quantity Surveyors, says the latest round of industry enterprise agreements has increased labour costs by 7 to 8 per cent without any corresponding increase in productivity.
“It is about supply and demand,” says Rodney Hills, chief executive of Property Development Corporation. “There has been a huge rise in demand for trades, and people are paying silly prices for some trades, like plumbers.
“Two years ago, you could have 10 plumbers on a site. Today, you might have three -- and that is adding 10 to 20 per cent to the time taken to complete a project.”
Mr Hills says trades demand has been exacerbated by the many apartment projects, including large developments like Barangaroo, currently under way.
Another factor adding to costs is an expectation by buyers for quality fittings and finishes.
Developers also blame cost increases on building regulations which set minimum apartment sizes and natural light requirements, along with cumbersome planning processes.
Ever-mindful of price barriers, developers are trying to contain costs by shrinking apartment sizes.
Two-bedroom apartments have gone from an average 90 square metres to as low as 70 square metres, with 80 square metres now on the ‘high’ side. Studio apartments are being squeezed into less than 45 square metres and one-bedroom apartments into 50 square metres.
As Mr Collishaw puts it, floor plans are being ‘refined’ to maximise use of floor space. He says the price of apartments in Sydney is still within the realm of affordability, but pressure is building.
The reality, though, is that given the multi-million dollar price tags of some of the more luxurious apartments, especially those offering views of Sydney Harbour, only the wealthy can afford to live in them.
Anecdotally, those who now buy in the city are said to be mostly better off empty nesters from suburbia seeking a cosmopolitan lifestyle with city amenities or high net worth foreign investors seeking a holiday bolthole away from the smog and hustle and bustle of their Asian metropolis.
They might also be young, highly-paid professionals happy to compromise space for a city lifestyle in a studio or one-bedroom apartment. Though, even these now start from $685,000 to $725,000 in some projects.
It seems that apartment living in central Sydney is increasingly out of the reach of the so-called average Australian, and that, perhaps unwittingly, Sydney may become an enclave for the rich and for single professionals.
Welcome to Little Manhattan.