Today’s market is telling the large listed developers to invest in apartments, that demand for traditional housing in Australian cities is changing.
Approvals for high-rise apartments are higher than for single dwellings in Sydney and rising rapidly in other capital cities.
Eager buyers are committed to apartments worth billions of dollars, many of which are still under planning and long before the first sod of soil will be turned.
But these are early indicators. Will this be a permanent structural and cultural shift? The answer will be evident over the coming years as more baby boomers retire and more lifestyle-focused Gen Ys decide to settle down and start a family.
Baby boomers and Gen Ys are the biggest drivers of the housing market. And right now, an increasing number of them are opting for inner-city apartment living.
If both groups continue to shift to apartment living, then the jury will be able to say that Australia’s housing market has been transformed by a cultural and structural change.
The trend has prompted some serious rethinking in the boardrooms of some large listed property groups, as apartment sales are already making a big difference to the balance sheets of those already in the sector.
Two listed companies alone -- Lend Lease and Mirvac Group -- were holding pre-sale contracts valued at around $3.6 billion and $1.6bn respectively at the end of April –-- a total of $5.2bn! Just two years ago, their combined pre-sales stood at around $500 million.
Lend Lease, often regarded as a contractor and infrastructure developer, has seen its apartment presales soar from less than 300 in June 2012 to around 5,600 in June 2016.
Mirvac is expected to release 2,300 apartments this financial year - well in excess of 500 last financial year – as it accelerates the launch of several projects to ride a wave of buyer frenzy.
Grant McCasker, head of real estate research with UBS, estimates that Lend Lease's earnings from apartments could grow more than tenfold over the next four financial years.
McCasker says apartment sales will make up just three per cent of Lend Lease's earnings in the current financial year. Depending on the number of settlements achieved, that proportion will rise to close to 40 per cent in the 2018-19 financial year.
Apartments are moving into the mainstream of the Lend Lease business model. Earnings from apartments by 2018-19 will make up almost as much as the group’s construction activities, now accounting for one third of its total earnings.
Richard Jones, REIT analyst at JPMorgan, estimates that revenue from residential, mostly apartment, sales will account for about 25 per cent of Mirvac earnings this financial year, with the potential of rising to 30 per cent by 2017-18.
Apartments can be a profitable business.
Based on Mirvac sales at its Harold Park project on the Sydney city fringe, CLSA real estate analyst Sholto Maconochie expects Mirvac to achieve “above average margins” as evidenced by the 24.9 per cent gross margin achieved in the first half of this financial year.
Despite the profit margin, few listed developers have a share of this market segment. Private companies, and a surprising number of small to medium sized development companies dominate what is a fragmented market.
More large players could now be attracted to apartment building as their own research also shows the current apartment boom is not cyclical, but indicative of a longer-term shift in housing preference.
After exiting apartment-building five years ago, Australia’s largest listed residential developer, the Sydney-based Stockland Group, with a market capitalisation of more than $10bn, is set to re-enter the sector. Stockland has hired Gavin Tonnet, a key executive of Leighton Properties with two decades of experience in apartment buildings, to head its national apartments division.
Andrew Whitson, Stockland’s chief executive, residential, told Business Spectator: “We obviously recognise the mega-trend -- demand for apartments in the inner and middle rings of capital cities.”
Stockland has moved to broaden its product range from house-and-land packages and medium-density dwellings to high-rise apartments. It is planning 500-1,000 apartments on a large site at Schofields, in Sydney’s north-west growth centre, which it acquired for $103.5 million in February.
Stockland is well positioned to plug into the shift to develop high-density housing around existing infrastructure such as shopping centres. It is one of the largest owners of shopping centres and has land around some of these suited for eventual further development.
Stockland is not a newcomer to building apartments. It built some of Sydney’s high-profile high-rise apartment blocks, including the 34-storey The Hyde in the CBD, which sold apartments worth $100m within five hours of release in 2006.
The group withdrew from apartment building under previous chief executive Matthew Quinn. Quinn said at the time that the company had incurred high holding charges (said to be $36m) during the nine years it took to get approvals and community consent to proceed with its apartment/retail project at Balgowlah, on Sydney’s northern beaches.
Since then, Stockland has focused on developing communities on large greenfield sites in growth corridors around major capital cities. It has successfully targeted the affordable segment with its well-priced house and land packages. This sector is (and will remain) a key part of Stockland’s residential business.
As Whitson sees it, this type of housing appeals to about half of the buying public, with the other half opting to live in the inner-city rings.
This is especially true in Sydney where development sites come at a price, so a logical option is high-density apartment blocks. The price pressure is considerably less intense in Melbourne or Brisbane, where geography allows for urban sprawl.
Some listed companies, even those not involved with residential development, have become beneficiaries of the current boom.
Having profited handsomely from selling rezoned sites for apartments, Dexus, Australia’s largest office landlord (with a market cap of $7.3bn) is thinking about going into apartment buildings with joint venture partners.
While the industrial property giant Goodman Group is expected to generate gross profits of between $400m and $600m over the next two financial years, according to analysts, from selling industrial sites rezoned for apartments. It has a potential landbank able to provide for some 35,000 apartments.
Further afield, the Westfield Group is also poised to benefit from a strong demand for London’s apartments.
Westfield is exploring (with partners) redevelopment of its key shopping complexes, including Westfield London and Westfield Stratford City, to unlock potential for residential developments.
JPMorgan has identified about 4,000 potential apartments in Westfield’s development pipeline, with more than 3000 across three key London projects.
British realty firm Cluttons says in its latest residential report that two-bedroom flats in areas such as St John’s Wood and Pimlico are currently within reach of the £2-million threshold.
Given the price of London flats and the choice locations of Westfield shopping centres, it is a fair bet that Westfield will soon be smiling all the way to the bank.