Melbourne’s land market in a downfall, however future confidence is strong - RPM Reports

Melbourne’s land market in a downfall, however future confidence is strong - RPM Reports

December 2018
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Melbourne’s land market in a downfall, however future confidence is strong - RPM Reports

The recently published RPM Real Estate Q3 Report has revealed that Melbourne and Geelong’s vacant land market has accelerated downwards through the September quarter amid weakening buyer sentiment and tighter credit conditions.

Supply has begun to outstrip demand with total lot sales for the quarter falling 15.3% to 3,588 lots – the lowest recorded total in three and a half years – and 41% down from the same period 12 months ago.

Median lot price also declined 1.4% to $320,500 – the first price fall in three years – and the average time of stock on market is 3.4 months.

Despite this steepening, confidence in the market’s stability and future growth remains strong.

Developers change tactics to prevent price fall

RPM believe that given the recent highs, the Melbourne land market is rebalancing, or rather, ‘taking a breather’.

While demand is expected to continue to soften over the coming two quarters, particularly given the seasonal Christmas slowdown, RPM don’t foresee a huge price reduction to coincide.

“Developers are reducing their pricing margins and introducing a number of value add incentives to help stimulate sales in the current market,” said RPM Real Estate Group head of Communities Luke Kelly.

“They’re also continuing to increase the amount of more affordable medium density stock on smaller lots to satisfy price sensitive buyers.”

The attractive medium-density evolution that buyers are looking for

RPM buyer analysis reveals the average first home buyer household income in Melbourne’s new estates is $85,000. With tighter lending conditions, a detached home on a 400sqm block priced at around $550,000 is unattainable for many would-be buyers.

Developers are now presenting to the market attractive townhouse designs that still provide three-bedroom, two-bathroom, double garage configurations, albeit on a smaller block of land. This evolution of medium density product in greenfield corridors is a growing market trend that buyers are embracing and is changing the development landscape.

RPM estimates there is up to 10% of medium density housing throughout greenfield estates in the growth corridors, which will continue to rise.

Restrictions in lending leads to private funding and a shift in capital

As the market adjusts to new restrictive lending parameters, a wave of private capital is providing alternative development funding, which is more nimble, flexible and can move more quickly.

The market is experiencing the increasingly common emergence of second tier lenders (family offices, investment houses and funds) established to specifically meet this new demand. On the whole, this means developers are negotiating different deal structures and remodelling deposit and settlement criteria to secure funding.

Head of RPM’s Transactions & Advisory team, Christian Ranieri, said “despite softening retail demand, development site activity remains strong, with developers still eager to acquire large-scale, strategic landholdings on which to capitalise for the next upswing.”

There remains strong demand for quality leased assets too (e.g. commercial assets) particularly those with long term upside potential.

The future remains bright

RPM have recognised that despite the current market, developers remain confident in Melbourne’s long term property outlook. As the market correction continues, it is predicted that small shifts in supply and demand will be experienced, however this is expected to stabilise over the short to medium term.

Vendors who are unwilling to adapt to the change in values, RPM warns, might result in a small or short term restriction of supply of new sites.

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