The residential development and construction space has endured some incredibly challenging times over the past year, but things are looking up for 2023, according to the latest research from Knight Frank.
The Australian Residential Development Review Q1 2023 found that while demand for new homes encouraged price escalation over 2022, the majority of developers were impacted by construction obstacles while delivering new homes.
These obstacles included the availability and cost of materials, with delays in both planning and construction, with the recent Knight Frank Australian Residential Developer Survey revealing over half of developers found these issues the most challenging for their business in 2022.
But moving forward, many challenges – except for ongoing planning delays – should ease in 2023 as the focus will turn to restoring buyer confidence, said Knight Frank National Head of Investment Sales Scott Timbrell.
“The issues in the development and building industry predated the higher interest rate environment and dampened buyer demand from mid 2022, but we expect demand for apartments will improve this year,” he said.
“Over the past few years many developers have pushed ahead with their less risky projects, which tend to be designed more for owner-occupiers in low and mid-rise developments.
“High-rise projects require higher committed sales to proceed, and in uncertain economic times low-rise projects were a more viable venture.
“There is currently higher demand for low-rise owner-occupied stock, but the preference by developers towards these projects has already started to create an immense shortage of investor rental stock for the growing Australian population.”
Knight Frank National Head of Investment Sales Scott Timbrell
The Knight Frank Australian Residential Development Review Q1 2023 found 12,000 new high-rise homes were built in Australia in 2022, with 6,500 due in 2023 and 26,000 in 2024, all of which are well below the five-year annual average. In comparison 2018 saw 42,000 high-rise homes built, with 40,000 in 2019, 34,000 in 2020 and 24,500 in 2021.
At the same time new apartment prices in high-rise developments across Australia rose by 2.1 per cent over 2022, compared to 3.2 per cent in 2021.
Knight Frank's Head of Residential Erin van Tuil said there remained strong demand for owner-occupied apartment stock in Australia, but with the current rental crisis there would need to be an increasing focus on investor stock moving forward.
“The rental vacancy rate in Australia is well below equilibrium, sitting at 1.7 per cent at the end of 2022, with annual rental growth of 14 per cent,” she said.
“As interest rate rises slow and economic uncertainty eases we expect to see an increase in high-rise apartment projects over 2023, with investor appetite likely to improve despite higher mortgage costs.
“With the residential rental market tight, investors can expect good returns and low vacancy from apartments, especially as our population continues to grow with the return of migration.
“International investors are also expected to slowly return, with developers planning to allocate 11 per cent of their projects towards these buyers in 2023 on average, slightly higher than the 10 per cent share in 2022 and edging closer to the 14 per cent allocation in 2019, before international border closures.
“We expect that the demand for amenity-rich, oversized, owner-occupied projects will also remain strong over 2023 and beyond, with the rightsizing and downsizing trends continuing, and developers will respond to this by building appropriate stock.”
Knight Frank's Head of Residential Erin van Tuil
Knight Frank’s Australian Residential Development Review Q1 2023 found the total value of sites purchased for residential development across Australia fell by 20 per cent over 2022 to $7.2 billion, while land values for high-rise projects fell by 5.2 per cent following growth of 6.8 per cent over 2021.
New South Wales recorded the highest proportion (58 per cent) of residential development site sales over this time, followed by Victoria (27 per cent) and Queensland (10 per cent).
There was a larger share of site sales that took place in greater cities (78 per cent) than regional areas (22 per cent).
Knight Frank’s Australian Residential Development Review Q1 2023 found the five factors to watch in 2023 are planning delays, buyer sentiment, material costs and availability, cost of labour and the local economic outlook.
For a copy of Knight Frank's Australian Residential Development Review Q1 2023, click here.
