Residential Development Update – July 2019
After a long period of sustained growth a flattening of both demand and values across residential development property had become evident by late 2018.
The first six months of 2019 saw a continuation of the stubborn issues that had been compromising residential development and construction including, continuing construction cost increases, additional costs and delays with infrastructure provision and long difficult planning and consent processes. Early in the new year saw reduced market demand for residential development property and evidence began to emerge that values had come off the peak.
Vincent Capital Limited (VCL) has had significant involvement in this category of property lending over the last 12 months. It is evident to us that well designed, priced and managed horizontal residential developments in desirable locations continue to be supported by both purchasers and non-bank funders.
A cautious approach to funding residential subdivision and construction by the mainstream banks prevails and in some instances the requirement of developers to achieve the required levels of dwelling and vacant land presales has not been achieved or proven difficult.
Where developers purchased land at or near peak prices and significant costs remain to get the sites or superlots to market a reassessment of financial viability of the projects is prudent. This may take the form of reducing the development margin and pressing ahead or pausing expenditure that does not add value and extending the projects development timeframe.
We remain optimistic about residential growth as many of the fundamentals required are still in place. Downside risk remains however and it may be prudent not to rely on significant price growth in the next 1-2 years.