What the residential headwinds mean for Australian residential development sites
$1.3 billion worth of Australian residential development sites were bought by Chinese developers in 2018, representing 31% of all development sites purchased throughout the year.
While this is significantly less than the $2.02 billion in 2017, it represents only a slight decrease from 33% to 31% of all site sales – reflecting a wider, slower-paced market.
Over the past five years Chinese developers have significantly ramped up their presence building residential towers around the world – including along the skyline of the Australian east coast.
However, there is no denying Chinese developers have been met with challenges throughout this time. From the Chinese government attempting to moderate capital outflow, to locally, the impact when major domestic banks restricted lending to offshore borrowers which limited the ability to rely on deep databases with clients familiar with projects in their hometowns.
Additionally, changes to Foreign Investment Review Board (FIRB) rules and the Australian Prudential Regulation Authority (APRA) encouraging stricter lending practices for investors has cooled off-the-plan presales. Not to mention, the introduction of state-based surcharges. All current challenges local developers are also facing.
The majority of Chinese developers who have entered the Australian market are settling in for the long haul and are now looking to diversify their portfolios in order to adapt to local trends. This includes the likes of Zone Q, China Poly Group, Yuhu Group and Aqualand, who all increased their exposure to office assets in 2018 and are expected to continue to do so this year.
We have also seen a shift towards lower-density residential sites, with 41% of sites purchased in 2018 suited to low density (single dwellings or land properties). This marks a significant increase from 29% in 2017 and only 2% in 2013.
The current residential headwinds mean the likelihood of all projects proposed by Chinese developers going ahead over the next couple of years is diminishing, except those delivering an exceptional product.
We have seen that projects submitted for development, and even those already with approval but have not yet started marketing campaigns, tend to taper off substantially for Chinese developers. As a result, Chinese developers are behind less than 6% of total projects in the pipeline each year beyond 2023.
Given the residential market is in correction mode, following a lengthy period of significant growth, both Chinese and local developers must hold realistic expectations. It will be imperative they allocate proper time to strengthen their position in the market, so they are ready for when the time to proceed arrives.