Development Site & Commercial Property Update | Q3 2022
Transaction levels have fallen when compared to the high levels observed throughout 2021, as the rising cost of debts and financial market volatility continues. Q3 has seen development activity slow, with many small to medium developers taking a more cautious approach, as lending tightens, and development margins are compressed. Larger, institutional funds with access to deeper pools of equity continue to seek opportunity for larger “value-add” assets and development sites in premium locations. Properties with strong lease covenants and properties with ‘value add’ opportunities continue to attract interest from a wide range of buyers.
Purchasers have shifted their interest to quality income producing assets and well-located apartment and townhouse opportunities, with higher demand for DA approvals. Key considerations in the development space include, product timelines, stabilising of construction costs, end value development yield and vacancy rates.
Fortunately, supply is at an all-time low, triggering vacancy rates to reach the lowest point in a decade and the climbing of both commercial and residential rents. Developers should continue to be able to pass higher construction costs onto users in FY23. As a result, there has been an increased demand for BTR (built to rent) developments. The speed in which BTR dwellings can be delivered to a market, as presales of individual dwellings are not required to commence construction, creates a ripple effect which helps to alleviate rising unaffordability.
The 2022 budget set by the Albanese government will see a $4.7 billion investment into childcare subsidies over the next 4 years, driving demand for the development of new facilities across NSW, benefiting the construction sector tremendously. A heightened investment to healthcare facilities and assets by the government will also see a need for the development of new spaces.
Inflation to the global economy will see slower economic growth throughout Australia, directly impacting businesses and the spaces they employ. Commercial real estate investors will shift their approaches toward recession proof assets, essentially diverging the performance of the commercial real estate sectors.