Investment Boom

Melbourne is haven to another domestic boom according to DTZ research.

According to a new DTZ research report, $2.6bn was invested into Melbourne residential developments in the CBD and inner-Melbourne markets.

In 2014 a total of $2.6bn was invested in residential development sites in the CBD and inner-Melbourne fringe market across 171 transactions. Offshore investors committed a little over $1.0bn (40%) across 47 transactions. Consequently average deal size of overseas investors, at an average of $22m for the year, was consistently larger than their domestic counterparts who registered a volume of $1.5bn at an average of $15m. Pricing of CBD sites increased strongly in the second half of 2014, while pricing of sites in non-CBD locations was largely flat over the year.

"Over the period 2015-21 it is estimated that there will be demand for between 20,000 and 47,000 units, with an expected demand of 35,000 under the medium scenario (Figure 1). Demand is forecast to increase in the decade to 2031 as the transition to smaller households intensifies, with forecast demand of approximately 54,000 units under the medium scenario," said Dominic Brown, Head of SEA/ANZ Research.

"If investors can secure sites with recurring income, they can ride out the current supply pipeline until they find an appropriate niche in the market. Alternatively, they can look to non-CBD locations where land prices are lower and population growth is expected to be greater than the CBD," DTZ capital markets director Patrick O'Callaghan said.

While underlying factors such as cheaper cost of debt and lower required return may well be playing a role in the more aggressive pricing of sites, there are other more visible factors. Overseas investors were considerably more focussed on CBD locations, with half of their purchases located in the CBD and near-CBD markets. Furthermore, the average land size of the CBD purchases was also larger than for domestic investors at 2,850 sq m compared to 2,250 sq m respectively.

Despite the current pipeline, there appears to be no weakening in demand for development sites from investors. Therefore, developers will need to investigate innovative strategies to position their projects within the market. These include timing of development, location of site selection and exploring alternative product types to meet different markets’ needs.