Marshall White Projects Newsletter Edition 9

Projects Review Edition 9. 2016

Downsizing with Style

Emerging Trends in Building

The Devil is in the Detail The Reality of FIRB Real Estate Data

5 Minutes With...

Predictions for the Next Financial Year

Avoid Hitting Rock Bottom

Contents

Projects

1

3

A Word From the Directors

The Cromwell

2 Spotlight

3 Claremont

6 Downsizing with style

4 Modus

8

Emerging trends in building

13 Avoid hitting rock bottom 14 5 Minutes With...

17 The devil is in the detail 20 Where size matters

A Word From the Directors

4 Altus 5 Turner 6 Ballantyne

A common dilemma for the majority of developers today is not only when to launch but to whom do you launch to? Is it firstly to a group of first and second tier wholesalers or is it directly to the buying public via a strong retail launch?

Past Project Profiles 10 Holly 11 Charlemont 12 281 Tooronga 18 Gramercy

At Marshall White Projects we have seen first hand a strengthening retail buying group through a direct correlation to a rising residential market. This in turn gives a greater degree of certainty to any retail launch, and a significant reduction of the cost per sale, when commission and advertising expenditure are taken into account.

19 Autun Apartments

Contributors 6

8

Studio Tate Alex Hopkins P +61 3 9576 1332

Cover Photo: MAGNOLIA Hepburn Road Doncaster

Project Group Tim Farrell - Director P +61 3 9428 8336

13 B DS GROUP Ed Waters P +61 402 338 883

Since our inception in 2013, we have successfully worked through fifty developments averaging 11.2 weeks on market per development and getting our clients to a stage that triggers construction.

Interestingly 85% of our retail sales are to the local market and initially 85% will be owner occupiers. Only 11 % of these projects have utilised the services of wholesalers, usually through the selection of certain apartments within a building or apartments that typically won’t be the retail markets first choice, namely mid level, infill apartments.

14 Chun Group Matthew Chun P +61 3 9081 1611

M etro Property Development David Steele P +61 3 9804 5049 Buxton Group Nolan Stevens P +61 3 8527 7100

Within the wealth belt of metropolitan Melbourne, namely Boroondara, Stonnington, Bayside and Port Phillip, the activity demonstrated by the resurgent empty nester, gives the retail market all the social proof they need, that high quality boutique developments will readily be seen through to construction.

Marshall White Projects continue to focus on retail sales and are gratefully removed from the challenges facing the much hyped oversupply within the CBD, where wholesalers are a necessity rather than an option.

Within 14 projects left to launch to a retail market between now and years end, ranging from 12 townhouses in Huntingdale Road, Mount Waverly to 44 apartments in High Street, Prahran, we continue to appeal to a local buyer, looking to scale down without compromising standards or amenities.

For a confidential discussion on your project, we would welcome your call on the number below.

Bensons Property Group Elias Jreissati P + 61 3 8602 0800 SMA Projects Robert Murphy P + 61 3 9529 8855 18 Secret Agent Paul Osborne P +61 3 9349 4333 20 Charter Keck Cramer Jonathan Mayes P +61 3 8102 8823 Every effort is made to provide accurate and complete information in Marshall White’s (trading as Marshall White Projects) technical and regulatory newsletters. However, Marshall White cannot guarantee that there will be no errors. Marshall White and its contributors to the newsletter make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of the newsletters and expressly disclaims liability for errors and omissions in the contents of this newsletters. Neither does Marshall White and its contributors to the newsletter assume any legal liability for any direct, indirect or any other loss or damage of any kind for the accuracy, completeness, or usefulness of any information, product, or process disclosed herein, and do not represent that use of such information, product, or process would not infringe on privately owned rights.

+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143

Leonard Teplin Director

Mark Dayman Director

T: 03 9832 1191 M: 0402 431 657 leonard.teplin@marshallwhite.com.au

T: 03 9832 1193 M: 0409 342 462 mark.dayman@marshallwhite.com.au

Disclaimer: Information provided is believed to be accurate as at the date of printing, no responsibility is taken for any errors or omissions.

It is your responsibility to obtain independent, professional advice.

1

The Cromwell 6 Cromwell Road South Yarra thecromwell.com.au

Spotlight

Rod O'Grady

Will Russell

Ross Hams

Rod is an accomplished sales professional and leader. With more than 15 years in the property industry, specialising in sales and marketing, as well as having owned his own real estate business, giving him excellent foundations for his current role within the Marshall White Projects team.

Determined, focussed and loyal, he understands the commitment that business success requires.

Focused, driven and dedicated, with an intrinsic passion for property and design, Will is perfectly suited to his role within the Marshall White Projects team. With a proactive attitude, Will is committed to ensuring his clients consistently receive the best outcomes when purchasing off the plan. Always honing his ability to understand the needs and requirements of his clients, Will strives to deliver impeccable customer service.

A new breed of real estate agent, his intellect, market knowledge, passion and dedication impresses both new and existing clients who are rewarded with his uncanny ability to consistently negotiate hundreds of sales a year whether on or off market with local and international clientele. Specialising in projects throughout Melbourne each year, he assisted over 180 buyers acquire off the plan properties.

Specialising in premium boutique offthe-plan developments throughout Melbourne, Rod is equally passionate about contemporary architecture and delivering excellent outcomes for his clients. His ethical approach is unwavering and extends across both his personal and professional life.

A family man, married to wife Rebecca, together they have two young daughters, Charlotte and Allegra. They love spending time down at the coast, relaxing with family and friends, and traveling as much as possible.

With fresh ideas combined with an education from Melbourne Grammar School, a background in architecture and a thriving past career in the technology sector, Will is equipped with a broad set of versatile skills.

In his down time Will makes most of every opportunity to escape to the countryside. He loves photographing and exploring new destinations, visit local wineries or simply to spend time recharging.

Ross has managed the sales campaigns for some of Australia’s most successful residential apartment and townhouse developers. Displaying an intimate understanding of consumer trends Ross utilises this knowledge advising clients on how to create a superior product to suit the ever changing buyer demands.

In his spare time, Ross enjoys spending time down the coast with his wife Jo and three kids and supporting his beloved Cleveland Cavaliers and Melbourne United.

Claremont 172 ProspectHill Road Canterbury claremontcanterbury.com.au

2

3

Turner 1561 - 1565 Malvern Road Glen Iris turnergleniris.com.au

Modus 254-258 Burwood Highway Burwood modusburwood.com.au

Ballantyne 1693 Malvern Road Glen Iris theballantyne.com.au

Altus 260-262 Burwood Highway Burwood altusburwood.com.au

4

5

Downsizing with Substance & Style As the property market continues to boom, downsizing has emerged as an undeniable trend and a significant cultural shift in the way many Australians are choosing to live.

Whether due to children leaving the nest, a desire to live closer to the city, or a simple yearning for an easier way of life, downsizing offers a multitude of benefits for homeowners.

Downsizers have become an increasingly important part of the Studio Tate practice, and as with all projects, we strive to deliver a balance of substance and style, down to the smallest detail.

Designing for downsized living requires specific considerations, however ultimately your home must be a reflection of your personality and your lifestyle.

Whether commencing a new build or undertaking a modest renovation, one of the most important considerations is to design with flexibility in mind, allowing rooms and spaces to serve multiple purposes.

6

Clever furniture and storage solutions mean a study can easily be transformed into a spare bedroom at short notice, a hallway nook can become a small workstation, and dining tables can be instantly extended to accommodate 12 guests or more.

The chosen colour palette also assists in creating flow between zones, in maximising light, and creating a feeling of air or moodiness as desired. In planning your own move, it will also have an impact on the furniture you choose to bring with you, and what you leave behind.

On a recent project within The Melburnian on St Kilda Road, we were tasked with improving the internal spatial layout of the penthouse apartment.

Downsizing may mean living with less, however it's also an exciting opportunity to reflect on your lifestyle requirements and edit accordingly, and that's an undertaking we could all consider.

Major reconfigurations included transforming the second bedroom into a study-meets-den , reconfiguring the interface between the dining and master bedroom to allow for extra storage and a more luxurious master ensuite and walk-in robe, and integrating outdoor cooking and dining on the terrace.

Alex Hopkins Suite 4, 726 High Street

Colour was also particularly important, as it is a simple but powerful determinant in how a room feels, particularly when space is limited.

White walls can create a feeling of expanse, metallics can add warmth, and muted colours can create a feeling of calm. In this instance we opted for a sophisticated and bold palette to evoke a sense of understated luxury.

Armadale VIC 3143 +61 (0) 3 9576 1332 studiotate.com.au

6

7

Emerging Trends in Building Emerging Trends & Leading in the Building Industry Changes in the housing market tend to be incremental rather than sudden. But some housing trends are taken up relatively quickly while other trends remain 'in the wings' for a few years. We are often the first to witness these changes, working with some of Melbourne's leading architects.

We see a number of trends from changes in apartment sizes to finishes and materials that are becoming stronger.

Apartment Sizes We see a number of apartment developments that receive a second life. An initial sales survey may reveal the need for larger and fewer apartments being offered. We might find the initial scheme is for 25 apartments.

But after further market research, that number is reduced by 20 to 30 per cent resulting in the remaining apartments being 20 to 30 per cent greater in size. When the apartments mix is finalised, we are seeing a greater diversity of apartment types. In some cases, people are combining two apartments to create one home.

Below: Leopold 18-20 Leopold Street, Glen Iris

8

This ability to join apartments at the marketing phase has also become more pronounced in the market. It's obviously more cost effective to have the apartment's plans altered du ring the detailed design than moving into a finished apartment and trying to remove an adjoining inset concrete wall. As with the trend of a second kitchen or butler's pantry in homes, a number of apartments, particularly the larger ones, sometimes include these features from the outset.

Style A few years ago, apartments sold in some of Melbourne's 'blue-ribbon' suburbs meant 'beige on beige.' However, apartments and townhouses with a more architectural edge are getting stronger. Project Group regularly work with leading architects. The New Yorkstyle loft with exposed concrete ceilings, has become more enticing, along with matt black fixtures and finishes. We have also seen a change in the way certain items are now detailed. Frameless shower screens, for example, popular throughout the 1990s and into the new millennium, have been replaced with fine steel-framed screens. There's been a change to more industrial finishes, as well as

much finer detailing when it comes to bench trims for example. Timber floors, timber feature walls and stone benches attract the owner-occupier market. European appliances have been integral to the better-end apartments for some time, now occasionally entire European kitchens are being installed, from the appliances to sometimes even the kitchen bench.

Flexibility Whether it's a studio-style apartment or a spacious 200-square-metre abode, the word 'flexibility' comes into the equation. A sliding door to a study/ guest bed room can be left open when not in use to form part of a larger open plan kitchen and living area.

The New Luxury Ensuites to every bed room was a 'given' in the 1990s. But now, when apartment size permits, the focus is on a sumptuous walk­in dressing area, with customised timber ward robes and shelves for accessories an d shoes.

We see that people have become more discerning when it comes to the walk-in robe.

They often prefer a larger robe and slightly smaller bathroom.

Above & Right: Tooronga 281 Tooronga Road, Glen Iris

"A few years ago, apartments sold in some of Melbourne's 'blue-ribbon' suburbs meant 'beige on beige.'

However, apartments and townhouses with a more architectural edge are getting stronger."

Townhouses

Location

Going forward, town houses have become an important alternative to apartment living, attracting not only empty-nesters wishing to scale down from their family homes, but also families with young children.

Families are looking at these town houses as an alternative to those priced out of the detached home in the suburbs. But they are also reluctant to give up the convenience of having the amenities that come with inner-city living. The nature of town houses has also evolved over the last 12 to 18 months. Previously, a typical town house was relatively modest in size and came with two bed rooms. The town houses we are building now are often three bed rooms and come with a double garage. They vary from 160 to 200 square meters and above.

When the apartment market started to move in the 1990s, there was a trend to head to the St Kilda Road precinct. There has been a greater emphasis on people wanting to scale down, but still remain in their neighborhood. It could be to an apartment or town house on a relatively busy road. With improved technology in the areas of acoustic control and thermal double glazing, you aren't conscious of the traffic, who sees the is trend to living where you are familiar only becoming stronger as we move forward.

Tim Farrell Director Project Group P +61 3 9428 8336

9

Past Project Profile

Past Project Profile

10

No. 281

Charlemont

281 Tooronga Road, Glen Iris 281tooronga.com.au

90-92 Hawthorn Road, Caulfield North charlemont.com.au

Apartment Type

% of Total

Average Size per m2

Average Price per m2

Average Price

Apartment Type

% of Total

Average Size per m2

Average Price per m2

Average Price

1 Bed, 1 Bath

22

48.2

$8,885

$428,625

1 Bed, 1 Bath

4

60.9

$9,360

$570,000

2 Bed, 2 Bath

44

75.2

$9,043

$680,313

2 Bed, 1 Bath

22

57.9

$9,917

$574,000

3 Bed, 2 Bath

22

87.0

$9,746

$847,500

2 Bed, 2 Bath

70

75.5

$10,167

$774,625

3 Bed, 2 Bath

11

128.0

$10,100

$1,292,500

2 Bed + Study, 2 Bath

4

174.7

$9,267

$1,619,000

11

How to Avoid Hitting Rock Bottom The property industry in Melbourne is still in very good shape and performing exceptionally well. Many local and offshore developers in our opinion are more concerned about buying an opportunity than undertaking reasonable due diligence prior to investing in ‘the next hit’. Successful developers are opportunistic and courageous, but most have a sense of experience and practice which puts them in good stead to remain profitable. But it’s not just people in the industry who are developers, we have clients who are Doctors, IT geniuses, Banking & Finance Managers etc. It seems everyone is a developer these days, but is it an ‘easy’ way to make a quick buck?

Development is not easy and there are countless things that can go wrong, but if you surround yourself with the right team you are half way there! Try building a deck, like most home owners might do and see if you succeed without any problems. When the problems arise, multiply by 1000 and you might get a sense of how a residential or commercial development might unfold.

For every successful developer, we would imagine there is almost as many who have failed. Take this site above as an example of what might be an unsuccessful development.

The site, to remain anonymous, is located within 15 km of Melbourne CBD. They have a permit for several apartments in an optimal location, i.e. next to train station and within walking distance of shops.

4. During tender, examine closely the builder’s allowances to remove rock. In the interview push them hard and squeeze them as tight as possible and include a pre-determined market rate for the different methods of removal.

What could go wrong?

• Cash to purchase site • Sales • Profit • Construction finance

5. Have an estimate of the amount of rock worst case scenario – ask the Geotech for their opinion. A gauge by an industry professional is better than nothing. Remember dirt or rock in the ground can be 1.8 times bigger out of the ground = greater costs to remove in terms of number of excavator moves and truck loads.

It is normally at the point of project inception or receiving the town planning permit that a Project Manager (PM) is engaged to manage design and construction and protect the client against the many

6. Set up an appropriate contingency given the known conditions. Don’t let the client dictate the contingency, rather we like to tell clients to assume we have spent the contingency and what we hand back is profit.

threats that can be present in each project. Good Project Management will minimise client’s exposure to potentially expensive hazards and in a lot of cases negate the risk entirely.

The project has come to a grinding halt and we can’t help but feel for the developer. Although assuming hitting rock is the reason, here’s possible impacts hitting unanticipated large amounts of rock may have had:

It’s similar to a Doctor administering an injection rather than a passer-by on the street. The passer-by has a fair chance of missing the vein altogether given their lack of expertise and experience in completing a task that requires such precision.

I am not saying if you engage a PM, the rocks will disappear, but what a PM will do is leave no stone unturned and ensure you are properly informed to adjust the development at the front end to suit.

Underground rock is one of Melbourne’s largest profit thieves and will keep winning the battle against the stacker/basement! So how would we recommend you manage this specific aspect, refer below: 1. Before you commence schematic design, select the right Geotechnical Engineer – there are several Geotechs and as all companies they have their sweet spots.

2. M eet the Geotech on site, or at least guide them on where you want your boreholes to get a sophisticated reading of the entire site. Too many boreholes is expensive, but I would imagine 6-7 on this site is absolutely required.

3. Confirm how far they should be boring – allow for pile depth.

12

1. Delays – construction is slow when breaking rock.

2. Over excavating where pooling has caused soft spots.

Allow for blinding and excavation of wet soil.

3. Cost of delays in extensions of time will add up – builder’s overheads.

4. Variations - Builder’s costs to remove rock by cubic meter are not cheap. They would most likely always have good profit in the rate, but it’s risky and they need to cover themselves if it is not easy to remove – why should they pay for the extra work?

5. Banks & quantity surveyors may not allow you to borrow more funds, so you may need to find cash to pay for the difference.

It may be possible that from 1-2m down this site was hard rock. It's hard to even start to imagine the costs associated with the removal and it may well be hundreds of thousands of dollars.

The question has to be asked, was there another design the site could have contemplated? My guess is yes. The basement is designed assuming no rock! It would appear the site needed car stackers, like most do, to allow the developer to ‘cram in’ as many apartments as possible.

A development on a site such as this should go through the appropriate due diligence and be managed by professional Project Managers to help ensure the complexities are foreseen, risk is mitigated and the project is successful.

We are professionals at mitigating risk in the construction industry for and on behalf of our clients. We are experts in the industry and act as insurance whilst bringing value into projects from concept to completion. We strive for successful project outcomes to ensure our clients are successful.

We sincerely hope this project is reinvigorated in the short term and the owner has some sort of satisfaction after completing the project.

Ed Waters Director BDS Projects P +61 402 338 883Ent

13

5 Minutes with...

At Marshall White Projects we're privileged to work with a selection of some of the best people in the project space, both locally and offshore.

Our quarterly newsletters contain snapshots of their first hand view of the market place and importantly what direction we're all heading towards for the remainder of the 2016/2017 financial year.

The comments below are a response to two questions; namely, 1. Do you believe the value of development sites have peaked?

2. What areas of Melbourne do you think will perform both over and under perform?

Robert Murphy

Matthew Chun

Elias Jreissati

Development Manager SMA Projects

Director Chun Group

Group Chairman Bensons Property Group

David Steele Nolan Stevens General Manager General Manager Metro Property Development Buxton Group

1.

1.

Not sure if it has peaked but it its certainly between 11 and 1 on the property clock.

Nonetheless the market has been surprisingly strong this year and due to the continued population growth, low interest rates, volatile stock market and low $A it is likely it will remain at around 11-1 for some time yet.

1.

1.

We are seeing extremely strong demand in owner occupier downsizing product in locations with strong amenity particularly transport, shops and recreational outlets.

We also focus on suburbs that have a median house price > $1m so there is meaningful differential between houses and apartments.

In addition to this we apply a check list of amenities that we think will provide sustainable returns throughout cycles.

Items on this checklist includes train I tram stops within 400 metres, shop I restaurant amenities within 500 metres, school and medical centres within km and a walkscore rating > 75 (walkscore is a website application that provides a score out of 100 based on a locations ability to walk to various amenities such as public transport, schools, shops etc.)

We will avoid locations that have unusually high levels of supply of similar type of product, < than $1m median house price, > 20kms from Melb CBD,or not within our checklist as outlined previously.

2.

2.

14

I think every site needs to be considered on its individual merit and if you do so there will always be something available that contains intrinsic value depending on your circumstances for acquiring such.

With that said those who have purchased sites purely for development purposes would want to be or be surrounded by very experienced people.

Property located close to or on areas of particularly quality amenity will be the strongest performers by far.

Amenity includes a hierarchy consisting of convenience, retail, entertainment, transportation ,employment opportunities, open space and attractions.

2.

We thought it peaked three years ago. We think that almost every development site sold over the past three years has been grossly overpriced. We did not participate in that market and we are just now starting to see some good land coming into the market without silly price tags.

Our view has not changed. We continue to see the CBD and other highly concentrated clusters as the most susceptible to rapid change.

Architecturally significant developments with access to parks, schools, transport and lifestyle facilities will, in the medium to long term, continue to be in higher demand. This is where our money is.

2.

I believe that there will always be strength in the values of development sites in A Grade locations, however the B & C grade locations are likely to be most affected by market sentiment and funding constraints. We've seen many sites transacting at figures that would never stack up in a feasibility with even ve ry optimistic revenue projections.

For capital growth, I believe townhouses located in the west within 15km of the CBD will be the strongest, however product that genuinely satisfies the needs of the owner occupier will be popular no matter what suburb. The weakest part of the market is likely to be investment grade apartments in the CBD and Docklands, given the very large amount of supply.

1.

It has looked that way for the last 5 years, but Buxton Group and others we consider to be smart Developers continue to buy good sites.

2.

We have strong belief in small projects in established suburbs which are targeting the downsizing baby boomers or young families priced out of traditional housing.

We are cautious on large projects as that market has run for a long time and we donâ&#x20AC;&#x2122;t believe the owner-occupier demand for it is as strong.

15

Past Project Profile

Past Project Profile

Apartment Type

% of Total

Average Size per m2

Average Price per m2

Average Price

1 Bed, 1 Bath

6

55.0

$9,545

$525,000

2 Bed, 1 Bath

6

62.0

$10,476

$649,500

2 Bed, 2 Bath

50

76.0

$10,424

$787,125

2.5 Bed, 2 Bath

13

91.5

$10,875

$995,000

3 Bed, 2 Bath

16

6

116.0

$10,302

$1,195,000

3 Bed, 3.5 Bath

13

162.0

$10,304

$1,670,000

3 Bed, 3 Bath

6

206.0

$13,107

$2,700,000

Gramercy

Autun Apartments

70 Wattletree Road Armadale gramercyarmadale.com.au

72 Serrell Street Malvern East theautunestate.com.au

Apartment Type

% of Total

Average Size per m2

Average Price per m2

Average Price

1 Bed, 1 Bath

36

51.7

$

9,722

$

502,900

2 Bed, 1 Bath

5

67.2

$

9,219

$

619,500

2 Bed, 2 Bath

29

76.4

$

9,958

$

759,890

2 Bed + Study, 2 Bath

5

107.3

$

9,304

$

998,150

17

Inner Melbourne's Smallest and Largest Apartments Inner Melbourne's apartments are getting tinier with each new development. But, how small is small? Secret Agent's updated apartment index reveals that the average size of a 1 bedroom apartment is only 47sqm, and for the more popular 2 bedroom apartment the average size is 73sqm.

East Melbourne has the largest two bedroom apartments. At almost 90sqm on average, this was a standout with the second largest 2 bedroom apartments being 10sqm smaller at 80sqm in Port Melbourne. These suburbs are generous with the size of their apartments, most likely due to the properties occupying the top end of the market. Buyers here are much more willing to pay for additional space and are not as price sensitive. This means a developer in these areas may be able to sell bigger apartments and still get a similar profit to what they would if they sold more smaller apartments.

These figures are frustrating for many homebuyers looking for an apartment that they can actually live in comfortably. Our index, which is based on 870 apartments in inner Melbourne which have sold between the 1st January 2016 and 30th June 2016, offers some insight into where buyers can find apartments with larger than average floor plans.

demographic is attracted to these suburbs and thus they tend to be more price sensitive.

Developers here have designed smaller floor plans and perhaps would be penalised if they built apartments too large in size. The investor market is also more prevalent in these suburbs.

Av. size of 2 Bed Apt

Style

Average size

49.1

89.6

Art Deco/Period

79.1

Collingwood

55.0

79.9

Post-90s*

69.3

Port Melbourne

51.0

79.4

60s-80s brick

58.7

Clifton Hill

43.2

77.8

Warehouse conversions

97.4

Kensington

49.0

77.1

Student accommodation

34.1

Carlton North

39.2

76.6

North Melbourne

51.8

76.5

* Apartments built from the 1990s onwards with at least 1 resale.

Does not include off the plan sales.

Docklands

51.4

76.3

Abbotsford

43.9

76.1

Richmond

45.6

75.0

West Melbourne

57.0

74.9

Albert Park

-

74.2

Southbank

55.2

73.9

Fitzroy North

39.7

73.7

Bed

Car*

Average size

South Yarra

43.1

72.4

4

2

202.8

Brunswick East

57.1

71.5

3

2

141.5

71.0

2

2

102.1

1

99.7

Table 3: Average size of Central apartments by accommodation size

Melbourne

50.7

71.0

3

Brunswick

45.3

70.0

2

1

71.2

1

57.0

Middle Park

41.1

69.9

1

South Melbourne

42.5

69.8

Studio

0

28.3

69.7

2

0

56.3

0

45.8

45.1

37.1 sqm

Flemington 1 bedroom units

57.0

sqm West Melbourne 1 bedroom units

Table 2: Average size of apartments by building style

Av. size of 1 Bed Apt

Hawthorn

Brunswick East 1 bedroom units

AVERAGE SIZE OF MELBOURNE’S APARTMENTS

East Melbourne

54.4

57.1 sqm

89.6

Suburb

Carlton*

57.6

sqm Travancore 2 bedroom units

sqm East Melbourne 2 bedroom units

On the other hand, Travancore and Prahran have the smallest 2 bedroom apartments at 57.6sqm and 60.9sqm respectively. A younger

Table 1: Average size of apartments by suburb

MELBOURNE’S SMALLEST AND LARGEST APARTMENTS

Parkville

41.9

69.5

1

Flemington

37.1

66.7

* Carspaces not included in calculating the apartment size.

Fitzroy

48.9

66.4

Northcote

40.8

62.7

Prahran

44.1

60.9

Burnley

-

60.7

Travancore

-

57.6

Cremorne

-

-

Princes Hill

-

-

47

73

sqm 1 bedroom

sqm 2 bedrooms

AVERAGE SIZE OF MELBOURNE’S APARTMENT TYPES

34

sqm Student Accommodation

59

sqm 60s-80s Brick

69

sqm Post-90s

79

sqm Art Deco and Period Apartments

97

sqm Warehouse Conversions

* Carlton average excludes student accommodation.

18

19

The Devil is in the Detail The Reality of FIRB Real Estate Data Published June 2016.

The Foreign Investment Review Board (FIRB) is currently considered the most accessible and comprehensive indication of the quantity and origination of international investment into Australian assets.

Foreign investment into real estate assets attracts a disproportionate level of attention, but is perhaps understood the least.

This is the third insight in a series relating to foreign investment in Australian residential real estate. The previous Insights discuss the relativity of market fundamentals underpinning investment and the impact of currency fluctuations on off-the-plan apartment contracts.

It is important to understand that the prescriptive nature of data tracked by FIRB, as well its accounting methodology, implies that published FIRB figures will differ from actual realised offshore capital flows. This is especially true for residential real estate.

While the figures and values will differ from actual realised capital flows, FIRB data still serves as a reasonable representation of the broader market narrative.

The most recent FIRB data (FY15) outlines the general state of approved foreign investment into Australian assets. The realities of this data must be properly understood to appreciate the true impact upon the Australian real estate market.

National FIRB Approval Figures In FY15, there was a record of $96.9 Bn in approvals for Australian real estate from foreign purchasers (inclusive of residential and commercial assets). By value, 63% of these approvals involved residential real estate ($60.8 Bn).

Of the residential real estate FIRB approvals, $28.7 Bn (47% of residential approvals by value) related to Advanced Off-The-Plan (AOTP) approvals, which, as outlined below, overstate the reality of residential real estate capital flows.

Advanced Off The Plan (AOTP) Approvals AOTP approvals are sought by developers to allow them to sell up to 100% of their project overseas without purchasers requiring individual FIRB approval (the developer essentially receives FIRB approval on their behalf, prior to the sales campaign). However, there are conditions on this sale process.

AOTP approvals can only be granted to developers for permitted projects of 50 or greater dwellings and are limited to $3M of aggregate sale value per purchaser (in a specific project). The project must also be marketed locally.

Reported AOTP data relates to the total gross potential sale value of all apartments in projects and not the aggregate of actual contracted sales to offshore purchasers. This is important as not all off-the-plan sales from these projects will be to overseas purchasers.

Significantly, AOTP approvals data is not attributed to any individual country and are assessed independently within the FIRB data.

While the value of real estate FIRB approvals attributed to China is significant, it will understate the reality when considering the likely quantum of dwellings from AOTP projects sold to Chinese purchasers.

The China Narrative The major discussion point with regards to the FIRB figures has concentrated around the value of approvals to purchasers originating from China. According to FIRB data, approvals originating from China (for both residential and commercial assets) increased from $2.42 Bn in FY10 to $24.35 Bn in FY15 with the most significant uplift recorded since FY13 ($5.93 Bn).

While the current value for FIRB approvals originating from China is significant, it would appear these figures only consider approvals granted to individual purchasers (where purchaser origin is specifically identified) and do not consider the proportion of AOTP approvals directed to purchasers from China.

AOTP approval is granted before sales commence and therefore no purchasers are known or origins specifically identified.

Victorian FIRB Approvals While the value of approvals in Victoria is high, it is not unexpected given how the off-theplan market has evolved in Australia (more specifically Melbourne and Sydney).

Of the $28.7 Bn in FY15 AOTP approvals across Australia, 72% related to projects in Victoria and New South Wales, with Victoria accounting for $12.85 Bn in AOTP approvals (NSW recorded $7.77 Bn).

There were AOTP approvals granted for 152 projects through Australia in FY2015 of which 62 projects (41%) were in Victoria.

In FY15, Victoria recorded $25.58 Bn in total resident real estate FIRB approvals, this compares to $19.75 Bn recorded across NSW. The primary difference between the two relates to the difference in relative AOTP approvals.

Staging Is Important While these numbers may appear large (especially in reference to their historically modest base), the impacts of increased capital flow and potential settlement risk may not be as simple as it initially appears due to the staged completion of these projects.

It is critical to remember that AOTP approvals, along with aggregate individual approvals, in any single year will have staged settlement over multiple years (typically 2-5 years from the granting of AOTP approval to the developer).

Projects of significant scale, most notably within Melbourne’s Central City Region (CCR) receive FIRB approvals alongside comparatively modest projects, each of which will have significantly different settlement timeframes.

Staging limits the major component of existing market risk to the tranche of projects settling in the existing environment and not the entirety of the portfolio approved by FIRB (or any Authority).

The Current Context Within the current environment, most FY16 (and similarly FY17) settlements for off-theplan residential dwellings from international purchasers will originate from FY13 and FY14 FIRB approvals.

Projects that received recent FIRB approval should not necessarily be considered strictly against the backdrop of current financial and banking conditions.

Recent approvals (FY15) will be delivered over a 3-5 year period due to the distribution of projects to be completed, including those of significantly greater scale, pushing out settlements and capital transfers further into the future for some projects (Figure 1).

Future Delivery Of Current Approvals If we assume the year of a project’s launch as a proxy for the period in which FIRB approval would have been sought for a project, we can better appreciate how the individual FIRB approval years will translate into actual capital flows.

Considering the highest proportion of these projects are likely to be located within Melbourne’s CCR (across Victoria), this submarket will be analysed with reference to FIRB approvals to give an idea of how these approvals are incorporated into the market (there is recognition, however, this base is increasingly expanding outside of the CCR).

Charter’s proprietary apartment database provides some clarity around the expected completion of these projects and may act as a proxy for the anticipated timing of financing requirements.

According to Charter’s database, current FIRB approvals (FY15) are anticipated to be delivered over a 5-year period, commencing in FY17 (Figure 1).

The completions of apartments within the CCR (likely encompassing a component of the FY15 FIRB approvals) will be primarily located within Docklands, in the near term (FY17 and FY18), and delivered predominantly by local developers.

Apartment completions delivered by international developers will commence in FY18 and will be more evenly distributed across Docklands and St Kilda Road. Those delivered through the peak year (FY20) will be highly concentrated across the CBD North and CBD Grid precincts.

Across the CCR, there will be more significant completions and settlements commencing in FY19 (local developers) and FY20 (offshore developers), while FY16 and FY17 are comparatively restrained (Figure 2).

Looking into the future, the majority of FIRB approvals through FY16 are likely to remain elevated with the greatest component of these completions due in FY19 and FY20.

Importance of FIRB Data While the data produced by FIRB is the most comprehensive and easily accessible, it also relates only to, and has meaning within, the strict parameters and methodologies applied

by FIRB. It is of increasing importance to look beyond the simple headline figures reported by the FIRB and understand the market context that these figures fit within. The figures in isolation are of little meaning unless they are considered with regards to the functioning and understanding of the broader real estate market within which they exist.

The Take Away The recent increase in global Chinese capital investment is an important issue for the Australian real estate market to understand.

The FIRB approvals are unprecedented but they are not unexpected given the evolution of the Chinese economy and increased willingness of Chinese capital to invest offshore for multiple reasons, including the greater sophistication of Australian real estate markets and the commoditisation of new apartments as a form of financial instrument for investors.

Jonathan Mayes - Charter Research P +61 3 8102 8823

Although this phenomenon is comparatively recent, it is one that is likely to remain. It should be understood that the quantum of capital flows does not carry risk in itself, but it is how the increased capital flows are managed and staged that is of increasing importance to settlement risk, notwithstanding the broader lending conditions. Current settlements are less exposed to international purchasers (from FIRB approvals) than those anticipated to commence in FY17 and FY18.

These 2013 and 2014 figures will include the individual approvals for new apartments as well as advanced off the plan approvals aggregated.

In total this relates to $4.2 Bn and $10.4 Bn (FY13 and FY14, respectively) of FIRB approvals for residential development in Victoria. Of this, AOTP approvals account for a significant proportion ($6.7 Bn in FY14, FY13 AOTP figure cannot be isolated).

*Data as of June 2016.

The Charter Insights have been prepared by Charter Keck Cramer (Charter). The information provided is not intended to provide a sufficient basis on which to make an investment related decision. It is intended to provide observations and views of Charter for information purposes only. Observations and views expressed may be changed at any time and without notice to you. Any reliance placed on this material is at your own risk. If you require specific advice or information, please contact Jonathan Mayes Consultant, Charter Research at Charter Keck Cramer.

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