The development site space is the most talked about sector in our market at the moment. With development margins either being squeezed or non-existent, the conundrum that a project has strong underlying demand for the end product, but the financial viability of the project simply doesn’t stack-up is a common narrative. The result of this is downward pressure on site values as developers look to offset project costs with no short to medium-term relief in sight regarding the cost of financing and construction.

Developers are looking for price softening to offset their risk-adjusted returns and project delivery challenges. There is a flight-to-quality approach when assessing sites, with well-located sites with existing development approvals where high demand for the end product are preferred. Developers are looking for adaptive sectors or submarkets where there is strong tenant or buyer demand for the product they are building. We see that residential sites for build-to-sell, build-to-rent, student accommodation and senior living are highly sought after. Well-located retail and industrial sites also continue to be in high demand. We have also seen a number of traditional developers pivoting to more value add opportunities by acquiring existing buildings to refurbish, repurpose or build additional floor areas where possible.

With construction and finance cost blowouts we are seeing a number of institutional groups divesting assets in order to redeploy capital into existing development projects, instead of taking on more project debt. For developers sitting on sites, putting the site in the freezer and bringing it out to defrost in one or two years’ time only works for a small portion of the market. If there is no income to cover the holding costs, the project returns will be quickly eroded.

A large portion of developers are sitting on the sidelines to see what takes shape in 2023, with the expectation that development site pricing will soften. Nevertheless, we have seen continued transaction activity for CBD and CBD Fringe sites, in particular those which are nearby major infrastructure and Olympic venues.

The underlying issues of labour and material shortages, weaker dollar making imported material and goods more expensive, and increasing finance costs cannot be ignored. There are many moving parts to the puzzle and there is no one solution that works. By the time a developer acquires a site, conducts due diligence, settles then obtains development approval, we could potentially be in a different cycle where the project is financially more viable.

It’s hard to see when the rebalancing of the market will happen. By the time it does rebalance, the ship may have already sailed, and the competition to acquire sites will be immense. There is still a significant level of demand and transaction activity, and when Australia’s largest apartment developer is rumoured to be acquiring a significant CBD site, we know the outlook is promising.

For further information contact:

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au

+61432560589

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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Driven by significant population growth, major infrastructure investment, and a 13-year low in unemployment, the immediate future looks bright for our CBD. However, there is still a considerable risk to this outlook.

A stubbornly high inflation figure and the ongoing conflict in Europe are dampening the outlook to a degree. In addition, the elevated cost of construction materials and the shortage of trades are also significant.

Prime Gross rents have increased by 3.40% year-on-year, but incentives offered remain incredibly high at circa 40%. Vacancy has fallen to 14% across the sector as the uptake of Prime office space continues to strengthen, primarily due to significant pre-committed leases being secured by major tenants.

New supply will be limited between now and the back end of 2024, with only refurbished space coming available. Brisbane tenants absorbed 44,000m2 of office space from January to July this year, which put our absorption rate well above historical averages. Given the lack of new supply coming online in 2022 and 2023 and the fundamental economic tailwinds at play, demand should remain strong.

“Despite the ongoing impacts of the pandemic and trend towards greater workplace flexibility, quality office space in Brisbane remains in high demand.” (Jen Williams, PCA)

We have seen subdued sales activity and a slight softening of yields, albeit based on very few recent transactions. As a result, investors are taking a cautious approach until the top end of this interest rate cycle becomes evident.

The rapidly rising interest rate is putting pressure on many investors. Traditional “set and forget” landlords are faced with the decision to either complete major works to bring their asset up to standard or endure significant vacancy and offer even larger incentives to meet cash-flow requirements as tenants flock to prime offerings. This has led to a significant increase in discussions around value-add and repositioning opportunities as cashed-up investors look for distressed assets to add to their portfolio.

Construction headwinds have drawn many developers back into refurbishing/repositioning existing assets to keep their pipeline active. The major developers are still in the market for office development sites but are taking a more long-term view regarding their construction schedules and development programs.

For further information contact:

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au

+61432560589

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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With the Reserve Bank of Australia (RBA) raising the Official Cash Rate on Tuesday by 25bps to 2.6%, commercial property investors and developers will be looking to reassess where they see real value and how much risk appetite they are willing to accept. The rate hike marks the sixth rise from the RBA since May this year, with most economists predicting further rate rises over the coming 6-12 months, with the Official Cash Rate potentially reaching circa 3.5%.

The higher debt financing transaction cost creates challenges and opportunities for investors and developers. Investors continue to take a flight to quality approach, with the tenant covenant and WALE being the two major considerations. Essential services-themed properties hold their value and remain a hotly contested asset class. Sub $10m commercial properties continue to be well received, with cashed-up investors taking conservative levels of debt with some paying all cash. Most institutional investors have been reassessing their acquisition requirements to maintain their historic target distribution yield and total return hurdle.

With most ASX-listed real estate stocks being hit hard over the last 12 months, some investors are moving out of equities and into hard assets. These investors are looking for long-term passive income and value-add opportunities to extract a higher yield and valuation upside upon repositioning.

Traditional developers have narrowed their focus to premium development sites where they can secure a higher level of pre-committed leases or sales. Developers are seeking higher returns to offset the higher costs of financing projects and construction cost challenges. Residential developers are starting to become more active due to the supply crunch, historically low vacancy rates and increasing demand from investors.

Investors will keep a sharp eye on the Australia 10-Year Bond yield and look for opportunities with an appropriate risk premium to justify their investment decision. The 10-Year Bond yield currently sits at circa 3.72%, well above the 1.77% level we saw in January this year.

The weaker Australian Dollar (AUD) will likely spur foreign investment from some countries. With the AUD at a 2½ year low to the USD, cashed-up investors will likely take advantage of our weaker dollar, slightly higher property yields and increasing deal flow. Active investors from Singapore and Hong Kong, whose currency has strengthened against the AUD, will likely lead the charge. We have seen this story play out many times before.

The shift in the market will see most investors and developers reset, reassess and move forward. Whilst some will adopt a sit-and-wait approach, savvy investors and developers will soldier on looking at the current market as an opportunity, not a risk. The fundamentals of the Brisbane market are solid; the infrastructure boom, population growth and transformation underway in preparation for the 2032 Olympic Games is creating an enormous real estate opportunity for investors and developers.

For further information contact:

Hugh Menck MRICS

Head of Capital Transactions

hmenck@bne.mcgees.com.au m:

+61432560589

For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.

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Samford Commercial Investments purchased the three-level property at 281 Brunswick Street for $6.45 million despite its being approximately 40 per cent vacant.

Jacob Fong, the director of Samford Commercial Investments, highlighted the building’s potential, citing its strong holding income and the value-adding opportunities it presents within a tightly held area known for its robust growth fundamentals.

“We are excited to implement our strategy in line with the other revitalisation projects taking place in the area,” Mr Fong stated.

The surrounding area has witnessed a multimillion-dollar wave of development, including the construction of an A-grade office tower at 31 Duncan Street and two build-to-rent projects—Frasers Property’s tower at 201 Brunswick Street and Pellicano Living’s development at 60-70 Berwick Street—both currently underway.

Additionally, several office, apartment, and retail projects in the vicinity have received development approval.

Hugh Menck from McGees Property, who facilitated the deal on behalf of a Victorian-based vendor, noted that “the Valley is experiencing a resurgence,” with the Fortitude Music Hall’s significant role in revitalising the precinct.

“There is a wave of new developments planned or already in progress around Brunswick Mall. As more people move to the area for work or to live, the demand for retail and services will only increase,” Mr Menck explained.