2017 saw a year of record high housing prices in some of our major cities, strong development in technologies that will impact the way with live, the launch of major retailer Amazon in Australia and over $70 billion worth of infrastructure project funding committed by the Federal Government. The New Year is well underway, so we decided to look at what are shaping up to be the hot property opportunities for 2018.
Growth in second-tier cities
We’ve seen strong property price growth in the major cities - particularly Brisbane, Sydney and Melbourne - and this has coincided with strong employment and population growth. Now it’s time for the second-tier cities to get some of the action.
From a cyclical perspective, the second-tier cities have always lagged the east coast capitals, but we know there is a ripple effect which emanates out from the big three to the other capitals and regional cities.
As the big metro property markets reach the top of the cycle, the second-tier cities are now well positioned for a period of upswing. The fundamental driver is pricing and particularly east coast arbitrage opportunities. For example, residential properties in Sydney are almost twice the cost of those on the Gold Coast, and when there is a 100% pricing differential, it becomes compelling for people to move.
We are seeing the highest levels of regional interstate migration since the GFC. People are again starting to flow out of the major cities to places like the Gold Coast, Sunshine Coast and Geelong.
At the same time a number of these cities have reached a critical population mass which brings the further benefits of job diversification and economic stability, making them less vulnerable to economic shock. The Gold Coast for example traditionally reliant on tourism and construction, and Newcastle an industrial city, have in recent times continued to diversify and are becoming more resilient.
Other elements are buoying these second-tier urban centres. These include major infrastructure spending, such as the light rail projects and investment in health, as well as the livability of the local environs. You can enjoy a lifestyle and amenity not available in the major cities where you may have to commute through heavy traffic and long distances to work.
Medium density growth in the suburbs
As the major CBDs have grown on the back of the apartment boom, sites for new apartment supply have become scarce and incredibly expensive. Inevitably this is leading to developers to expand their acquisition focus from inner-city locations to areas which are up to 10km further out, and from high-density to lower rise products.
We’ve seen a lot of media coverage about high rise apartment towers, but less so about the medium density market opportunity - duplexes, triplexes, two- and three-storey apartments etc - which actually make up a significant market segment. Over the past five years there’s been over 25,000 medium density approvals per annum on the east coast. That’s a huge market in the middle to outer rings of these cities.
On a per-square metre basis, construction costs for these dwellings are a lot cheaper than for high rise apartments because you typically don’t need to dig for car parks or put in lifts. And from the consumer perspective, this product satisfies ‘the missing middle’ - people who don’t want to live in an apartment but are locked out of buying a house. Maybe they are downsizing retirees or perhaps they would like a small courtyard. Councils and neighbours are usually more amenable to medium-density buildings than tower blocks.
Demand for new retirement models
It’s well known that Australia’s population is ageing rapidly and that there’s a huge unmet demand for housing options tailored for older people. That demand will only grow over the next decade.
The current basis for seniors’ housing product, the Deferred Management Fee (DMF) model, has come in for a great deal of negative media attention for both its complexity and perceived lack of transparency. Peculiar to Australia and NZ, the model requires an exit fee to be paid to the operator which can be as hefty as 40-50% of your incoming contribution.
We are seeing resistance from many potential buyers, and with an increasing number of baby boomer reaching retirement, many of whom have made strong wealth gains based on capital growth, we would suggest that growth in the traditional DMF model will remain low and continue to under deliver on seniors living requirements.
What we are seeing is a growth in alternative options, such as the land rent model and non- DMF villages. Land rent models are where you own the dwelling but not the land. Technically, the home has to be transportable, and in the past, this has usually meant it is a caravan or a mobile home. These days, developers are pushing the boundaries in product design (some mobile homes are two-storey!), enhancing the product quality so that many look just like other residential estates and providing additional customer amenities.
There are big growth opportunities for developments offering a right retirement model that both works and appeals to the end user.
The tourism factor
China is now the second largest source of our international visitors and that growth is forecast to continue rising from around one million to over three million per year in the next 10 years. It’s driven by a huge increase in wealth and a burgeoning middle class which will soon see China deliver 250 million outbound visitors around the world, annually!
It’s a big year for Australia with the Commonwealth Games and the expansion of the Gold Coast airport which will be a tourism boost, not just for the region, but for the country generally.
We have to continue to deliver new accommodation product to capture this market and that’s where Australia has lagged in some areas. One of the impediments has been that residential developments in recent times have delivered a lower risk, higher and better use than hotels, but we’re seeing that start to shift.
Apart from building accommodation capacity, we also have to offer new experiences. This means planning for and building new tourism products such as integrated resort developments, casinos, and dining/entertainment precincts like Barangaroo, in Sydney and Queen's Wharf in Brisbane These will continue to provide opportunities for growing Australian tourism.
Technology disrupts the status quo
Property has long been a tech laggard, but we are seeing a big shift as technology impacts our industry. Autonomous vehicles and Artificial Intelligence are already being considered in long-term planning decisions, but there are other technologies that are affecting the sector right now.
There has been a major increase in the collection and use of Big Data. Our clients in the retail market, for example, incorporate traffic and pedestrian movement data in development plans. Automation and streamlining of online platforms have allowed for digital contracts and peer-to-peer real estate.
Over the next 18 months, a continued major focus for property will be e-commerce. With entrants such as Amazon and China’s Alibaba, shopping patterns are changing, which is driving a shift in freight and logistics. What type of warehouses do we need and where should they be placed? Some warehousing is required close to population centres where land is scarce and expensive, so there will be increasing pressure for innovative solutions such as multi-level warehouses like the massive logistics towers already operating in SE Asia.
Growth in service jobs and the knowledge economy
Over the past 10-15 years, there’s been a move away from traditional blue collar work and a decline in the manufacturing sector. Most of the jobs growth has been in the service sector as Australia continues to shift to a service based economy.
This transformation to services and knowledge intensive activities is having major implications for the economic development of our local areas. Collaboration and the free flow of ideas underpins many of the service industries with significant benefits in clustering these jobs in employment nodes.
At a policy level, government is encouraging this agglomeration. We are seeing it in the Gold Coast University Hospital development and in Monash University’s Clayton Innovation Cluster.
There is a substantial opportunity to increase the density of employment in suburban business districts, particularly at key sites which meet the specific location requirements for clustering of high value-add, fast growing economic activities
It is highly significant that some of the fastest growing industries in the region – now and into the future – exhibit the least locational preference for the inner city. Their rapid future growth is likely to drive further opportunity across non-CBD locations.
Major infrastructure investment
Around the country we are seeing significant property opportunities around major government infrastructure investment.
The private sector has only just begun to take up the charge, and it’s going to get red hot in areas benefiting from the Gold Coast light rail corridor, Sydney Metro and Westconnex and Metro Tunnel in Melbourne.
There are proven benefits in being co-located with infrastructure. Empirical evidence illustrates local economic growth and property price increases associated with key infrastructure projects.
Governments are keen to leverage their infrastructure investment by up-zoning property to increase densification along transport routes. In NSW, we’ve seen this along the Parramatta road corridor and out along the Pacific Highway corridor to Hornsby. That delivers immediate land uplift value.
There’s so much investment in infrastructure spending that we would advise clients to map where it is taking place and look for key growth areas and sites. Not all infrastructure projects are created equal.
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