Site acquisitions in the current economic environment

As the residential market heads into uncertain times due to the increase in interest rates, what does this mean for Developers and purchasing quality development sites?

2021 saw a record increase in price growth across the residential sector within Victoria. Due to this, most quality sites were taken to large competitive market campaigns, mainly run by large real estate firms, and offered to the market under Expression of Interest (EOI) or Auction campaigns. These types of campaigns make it difficult for Developers to secure sites with purchase terms that allow appropriate investment hurdles to be hit, particularly around longer settlement periods and Equity IRR return metrics.

As the market has cooled, vendors have transitioned their appetite to be willing to consider private sales and off-market campaigns when selling their sites. This has translated to more appropriate opportunities becoming available for developers to secure sites, particularly unpermitted sites to appropriate and competitive terms and conditions.

However, while vendors have shifted their appetite on campaign type, their pricing expectations have not yet transitioned to reflect the lower confidence levels of the current economic environment. A common tool we use at Hub, commonly used and referred to at the major valuation firms, is the ‘property clock’. In simplest terms, noon represents the ‘peak in the market’, with 6 o’clock representing the bottom of the market. Based on our interactions with industry-leading experts, Melbourne is considered to have peaked and is in the early stages of a downturn led by rising interest rates and the higher cost of living.

Within the current rising interest rate environment, along with construction costs at an all-time high, the next 6-12 months offer Developers an opportunistic window to acquire sites at more appropriate prices and terms through private sales and off-market campaigns. Predominantly, this period should also offer opportunities to purchase unpermitted sites subject to longer settlements, to allow for a market correction before developers’ sales campaigns post the 14-18 months acquisition date.

With this considered, we here at Hub believe we are approaching a unique time to acquire development sites in quality locations subject to more competitive and appropriate terms, that offer a great opportunity to fill the pipeline of our clients and developers alike. We are currently actively monitoring the market and providing our clients with both acquisition and site identification services and key market updates to help position their acquisition mandates to achieve their desired results.

By David Walker (Head of Transactions & Advisory)