Melbourne’s residential development sector rapidly rising out of slump

The Savills Blog

Melbourne’s residential development sector rapidly rising out of slump

We are experiencing resurgent confidence in Melbourne’s residential development market, after a prolonged period of stagnation 

The previous 12-18 months have seen undeniably challenging conditions throughout Melbourne’s residential development market, leading to a significantly reduced level of development site transactions and even the failure of some prominent development companies.

However, a sudden surge of transactions over the past two months has been indicative of an abrupt confidence boost amongst the city’s development sector from early August onward. 
 

The reasons behind the revitalisation

Three recent interest rate cuts, a shortage of projects being delivered across Melbourne, very tight rental markets, 75%-80% weekend auction results, and record ongoing population growth, are all factors putting immense pressure on the housing sector and giving developers the confidence to snap up sites, and ready themselves for a new wave of construction activity.

The ABC reported that, “The biggest winners from low interest rates will be those taking out a mortgage to buy a home,” with Savills Melbourne having already experienced a significant uplift in residential development site sales, coinciding with the return to 80% weekend auction clearance rates.

Over the past eight weeks or so, the market for development sites right across Melbourne has completely rebounded with developers again scrambling to secure high quality sites with or without planning permits.

Melbourne’s population is set to continue its remarkable growth of well over 100,000 people per annum, requiring in excess of 40,000 dwellings to be constructed each and every year.  With construction activity falling off a cliff last year, pressure within the housing market has built up incredibly quickly, and the market has roared back to life since the first week of August.

What are the most popular types and locations of property?

Sites suitable for boutique development, catering to owner-occupiers and empty nester buyers, are in highest demand, followed by infill townhouse sites. We’ve sold 27 development sites during the past eight weeks for a total of $145 million, with many others currently in negotiation.

The leafy inner eastern municipalities of Boorondarra and Stonnington remain firmly at the top of the list for developers, followed by bayside areas in and close to Brighton.  

Asian developers, especially those from China, are back in the market in a very big way and actively scouting for suitable purchase opportunities. Box Hill and Glen Waverley are particularly popular within these groups, and our recent sale in Burwood saw the top 11 bidders all being of Chinese background.

According to Savills research, approximately 60 percent of Savills Melbourne development site sales in 2019 have been to either local Asian or off-shore Asian developers, with the highest demand being for smaller projects of 10-50 units. 

Smaller projects are more easily sellable and there is more likelihood of construction funding being readily available.

A demand for student housing and accommodation within walking distance of the major universities, particularly in Carlton and the northern CBD, remains at fever pitch with a significant lack of housing to cater to the fast-rising international student population. There is an acute shortage of sites available to this market sector, resulting in escalating land values.  

And it’s not just student housing that’s seen growth. Aged care developers are increasingly active in their pursuit of large suburban sites suitable to fully integrated aged care facilities. Ryman from New Zealand is the most active player, with multiple recent land purchases in the middle suburbs.

On average land values have jumped 10-20% in just 8 weeks in inner and middle ring suburbs as developers again compete to secure high quality sites.

Melbourne’s residential development sector is leaping out of its short slump!

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