26 Nov 2019
BF Money’s George Karam talks the latest property trends
As the commercial property ecosystem continues to shift in its post-boom phase, BF Money’s George Karam shares his views on the trends driving commercial and residential capital demand – and where the opportunities lie for developers and investors ready to make their next move.
The RBA has yet again lowered interest rates, now hitting a record low of 0.75 per cent, while the housing market recovery appears to be gaining momentum. In early October, CoreLogic’s national home value index recorded its third consecutive month of gains, contributing to a cumulative 1.7% rise1 in the national housing values.
For some residential developers, this is the go-ahead nod they need to feel assured about positive movement in the market again. And according to Karam, developers are starting to gain back their confidence.
“It’s about anticipating your clients’ future needs and responding to those.”
“There’s definitely residential developers and investors out there, ready to activate particular sites,” he says. “But to secure funding from the mainstream lenders, pre-sales remain as important as ever.”
Stamford Capital’s 2019 Real Estate Debt Capital Markets report found 62% of bank, private and non-bank lenders require a minimal level of presales of between 60 to 100% before funding construction – however 34% of non-bank lenders said their presale requirement was zero2.
“For non-banks and private lenders there is plenty of willingness to lend to developers,” says Karam. “But projects will still need to satisfy a sound business case for undertaking that level of debt.”
Sydney North Shore and fringe office market in high demand
There is a price war between the banks in the commercial office development space, according to Karam.
There is a lot of opportunity out there, especially in Sydney’s fringe locations. “Due to the high prices and limited availability in Sydney CBD, top tier businesses are looking elsewhere and seeking A-Grade office space in North Sydney and Parramatta,” he says.
North Sydney and Macquarie Park have seen record development activity, and according to Savills North Shore Office Briefing for Q2/2019, over 130,000sqm of additional stock will enter the North Shore market by 2022.
Macquarie Park is sitting at 4.8% vacancy, and with the New South Wales Government’s plans to diversify its presence, Savills Research predicts an increase in pre-commitment leasing volumes in the government and community sectors3 for fringe locations.
Is build-to-rent all it’s built up to be?
Build-to-rent is a relatively new asset class in Australia where residential developers lease rather than sell their stock. Following success with this model in the United Kingdom and United States markets, it appears to be gaining traction here in Australia.
Given increasing numbers of Australians are renting their homes and residential developers are struggling to make presales, is build-to-rent the obvious answer?
“Build-to-rent schemes are starting to look more attractive as an asset class in Australia, but there’s still a long way to go before they become a truly viable option,” says Karam. “The international models are more sophisticated than what we see in Australia, and we’re yet to see large amounts of capital from institutional investors being deployed, although they are all looking very closely into it.”
Compared with these northern hemisphere models, project delivery costs are also significantly higher according to Karam. “In Australia, build-to-rent projects are expensive to deliver, so the resulting yield is not as attractive,” says Karam. “It’s certainly something people are looking into, but this hasn’t quite translated into applications or purpose-built developments yet.”
The Queensland Government launched a build-to-rent pilot project in late 2018, offering $70 million in subsidies to participating developers.
“Economically, build-to-rent makes sense. We need more affordable housing,” says Karam. “It’s definitely something the government needs to get their head around to make it an attractive asset class for developers to consider.”
Identify your unique value
In the face of a post-boom property market and recent changes to regulations, Karam says commercial brokers who want to keep growing their business may need to be more adaptable.
“Various industry participants have made so many changes at the same time, leading to confusion around compliance,” says Karam.
He points to a series of changes that even the most switched on operator could find it hard to keep up with, including the Australian Banking Association’s new Code of Banking Practice, the external dispute resolution scheme merging into the Australian Financial Complaints Authority and new regulations from The Australian Prudential Regulation Authority (APRA).
So how do commercial brokers find opportunities in a market that’s so challenging for developers and investors?
“It’s actually an interesting market for commercial brokers right now,” he says. “For us, it’s been an opportunity to fully articulate our value proposition to lenders and borrowers.”
He’s spent time deepening relationships with existing clients, reading the market, helping them seek out opportunities, or making sure they have access to the best and cheapest capital.
“It’s about anticipating your clients’ future needs and responding to those,” says Karam. “And it also helps to find your niche in how you want to compete – whether it’s price, delivery, specialised asset classes or advisory.”
Macquarie is here to help you get your clients’ projects over the line – talk to your BDM to find out more about our financing options.