Purchasing to demolish is on the rise

In a property market with tumbling property prices, collapsing buildings are rising in popularity.

From sites earmarked for building demolition in Sydney’s CBD to knock-down rebuilds and small redevelopments, demand for sites with existing buildings that can be cleared for more modern offices or homes is strong.

New data released by the ABS this week on demolitions suggests that residential knock-down rebuilds are around 25 per cent of the market for house and townhouse builders in New South Wales.

Nick Ward, Senior Economist at the Housing Industry Association (HIA), said it was encouraging this segment of the market appears to be growing rapidly, creating new opportunities for the industry.

“An unusually sharp rise in the price of residential land indicates the supply of land is not keeping up with new demand that has emerged during the pandemic,” Mr Ward said.

“Over the year to the March quarter 2022, median lot prices increased by 19.7 per cent - this is not a normal increase, it is the strongest annual growth rate since 2004.

“Constrained supply of land will limit housing activity in greenfield areas from mid-2023 onwards,” he added.

CoreLogic Economist Kaytlin Ezzy said the scarcity of available residential land continues to be a driving factor across Australian land markets, with land prices surging at a time when the number of lots sold is declining.

“While increasing interest rates, rising construction costs and increased uncertainty, particularly across the building industry, has likely smothered some land demand, the surge in land prices suggests that those that want to build are finding it difficult to secure lots.”

“With land often taking more than a decade to move though the development pipeline, it’s unlikely we’ll see any material change in land supply for some time.” Ms Ezzy said.

Demolition offices

Demolition stock refers to office buildings that have been unlocked for ‘higher and better use’ through redevelopment, and accounts for 6.9 per cent of total office space in Sydney CBD.

Commercial realtors JLL assert that demolition office blocks primed for development offer a higher degree of flexibility and are appealing to tenants seeking a cost-efficient CBD location.

JLL’s Office Leasing (NSW) Senior Executive Jenny Co said these buildings are largely A and B-Grade assets and often provide great amenity.

“The term ‘demolition stock’ paints an unattractive picture but the reality is far from this,” Ms Co said.

“The most common characteristic between demolition buildings is their premium locations, surrounded by public transport, food and beverage and retail options, and this is one of the most attractive features for occupiers.”

“These sites tend to be extremely well-located, which is supported by the fact that these buildings have been selected and acquired for redevelopment that can be residential, hotel, office or for other public infrastructure,” Ms Co said.

It seems construction costs have plateaued and developers are starting to get re-energised and commencing projects again.

- Eddie Mansour, Managing Partner, Ray White Projects

Han’s Group, which owns and develops commercial, hotel and residential properties globally has acquired a number of CBD buildings with plans to deliver a landmark building in the heart of the Sydney mid-town precinct.

“A unique characteristic of a site that is identified for development is the timing of when you can unlock the development project value, normally referred to in the market as ‘vacant possession’,” Andrew Lau, General Manager, said.

“Therefore, WALE (weighted average lease expiry), although still an important metric for us, generally works against our ability to unlock the development potential of the site. 

“As a result, we can look to accommodate more flexible lease tenures with our tenants, which in turn provides the flexibility that most tenants are seeking, in an environment that is still clarifying what the next phase of the workplace holds.”

No pain, no gain

Residential developers are facing a conundrum.

Interest rates are up, supply is down, construction costs are up and there’s labour shortages, but residential vacancies are really low, migration is helping the re-emergence of CBDs and rental yields growing by the week in almost every state and territory capital.

Managing Partner of Ray White Projects, Eddie Mansour, said while he was seeing the projects space gaining momentum, there was still some uncertainty around house and land as prices were perceived by buyers as having peaked. 

“When construction prices started increasing it really started throwing a lot of developers' feasibility into question and whether the project could pull through, but I think we’re past that period now,” he said during a live webinar. 

“It seems construction costs have plateaued and developers are starting to get re-energised and commencing projects again. 

“With house and land we’ve seen a lot more people nervous - if they’re starting with a certain price, it’s being blown out by the end of it. 

“I’m seeing a return to one contract with the land and house being built together, which is giving buyers confidence there’s a set price.” 

Speaking at the same forum, Residential Development of Ray White Valuations, Peter Wiltshire, said he was still seeing his more experienced clients purchasing sites and getting projects underway. 

“There’s some short-term pain with interest rates and construction costs but they can see in 18 months there’s going to be an undersupply,” he said. 

“They know if they can get through the short-term pain there’ll be huge demand there.” 

While the national apartment market had seen a consolidation in prices but a decline in turnover, the off-the-plan market was contending with tougher borrowing conditions but was “gaining momentum”.

“A majority of the construction finance was coming from the banks but now it's a lot of the non-banks doing finance these days,” Mr Wiltshire said. 

“The banks have taken a step back which has given these non-bank lenders the chance to get a bigger market share. 

“It costs a bit more in rates but you can get started a lot quicker, it's easier to sell off-the-plan when you can see activity on site.” 

Mr Mansour said the off-the-plan market was gaining momentum in Australia. 

“We’re seeing a lot of parent-assisted buyers and, looking at the market now, you need some kind of assistance,” he said. 

“I don't mind when we’ve got parents who come along because they ask questions, and it's all about confidence when you’re buying off the plan. 

“There are some great questions being asked – ‘who was the developer?’ was the biggest question, but it’s now ‘who is the builder?’. 

“We want to give them that transparency they want when it comes to off-the-plan. 

“Australia is still pretty new to off-the-plan when in some Asian markets apartment living is the norm.”