Land sales price pressure likely

Residential land developers are cautiously optimistic about future sales in Western Australia, as the sector stabilises after years of volatility.

Major players are reporting lower demand for new land than in 2020, when COVID-19 stimulus packages prompted a flurry of buying activity, but are confident the appetite for their product remains strong.

Favourable economic conditions in WA led to 8,960 new lot sales during 2021, compared with 10,870 the previous year, recent Urban Development Institute of Australia WA data shows.

Last year’s lot sales remained well above pre-pandemic levels of less than 7,000 in 2019, when demand was falling from a 2013 high of 13,700.

Cedar Woods Properties WA state manager Ben Rosser described the level of demand in the second half of 2021 as moderate compared with the first half.

“Demand has come off but it’s still at or slightly better than the demand we were seeing in the industry prior to the onset of COVID,” Mr Rosser told Business News.

“Moderate demand is still good, [it means] we are building new stages in every trading project that we have at the moment.”

Demand was strongest last year in the December quarter, when 2,552 lots were sold in WA, a 15 per cent increase on the prior corresponding period.

Urban Development Institute of Australia (WA) president, Tanya Steinbeck, said this reflected the state’s strong economic growth and affordability relative to the other parts of the country.

“Despite the end to stimulus measures and ongoing border restrictions, the WA economy has continued to experience growth and in turn, demand for residential property has remained high,” she said.

Cost pressures

Ms Steinbeck said the industry was bracing for increased lot prices for developable land in coming months.

“The average price has been kept fairly stable over the past 12 to 18 months and I think developers have been able to absorb some of the increasing costs of civil construction up to this point,” she said.

“We have seen significantly escalating costs of construction [and] I think land developers are not going to be able to continue to absorb this cost escalation.

“We are going to start seeing increased price pressure on land sales.” Satterley Property Group chief executive Nigel Satterley, who topped Data & Insights’ land developers list for the second consecutive year, noted the considerable increase in land values in other states.

“In WA, land in the growth areas has hardly increased in value,” Mr Satterley told Business News.

“In Melbourne, the rate per square metre went up about 23 per cent last calendar year and about 20 per cent in Brisbane. Sydney also had a jump.”

Mr Satterley said while house prices in Perth’s growth areas had recovered by about 15 per cent last year, land values in those areas had remained at about $600 a square metre.

Mr Rosser said revenues across the sector were stabilising after a long period of stagnant prices and high incentives, including buyer settlement rebates, builder referral fees and COVID-19 building bonus grants.

“Up until COVID and the introduction of the building bonus grants, we had been trading in WA for too long on low price growth and high incentives; that had plagued Perth developers for three or four years,” he said.

“The price growth achieved through stimulus has largely been able to be banked, so we haven’t gone backwards; we haven’t gone back to reducing prices, which was prevalent in that period prior to stimulus.”

Sales activity

Cedar Woods’ acquisition of an 86-hectare, 1,200-lot site at Eglinton and 120-lot estate near Rockingham for a combined $54 million made 2021 a significant year in terms of capital outlay.

“That represents about two years of supply for our Perth operation,” Mr Rosser said.

In the three years leading up to 2021, Cedar Woods bought about 800 lots across three acquisitions.

“As a basic rule we’re looking to be acquiring on average at the rate that we’re selling,” Mr Rosser said.

“If we’re selling 500 lots in any year, then we should be acquiring 500 lots to be maintaining our pipeline.”

He said Cedar Woods was drawn to the Eglinton site, which had subdivision approval for 275 lots before the purchase, for its potential long-term returns.

“Until now, we didn’t have a presence in the north-western corridor,” Mr Rosser said.

“Being a 10-year project, through the life of this acquisition there will be a fair amount of supply that will be removed from that corridor, which in our assessment is going to result in lesser competition and stronger project returns.”

Cedar Woods sold about 565 lots in 2020-21 and 560 in 2019-20.

Mr Rosser noted that, while the 2021 financial year figure was higher, the numbers were trending downwards during that period.

ASX-listed national developer Stockland sold about 650 lots for $250 million in 2021, compared with about 1,400 lot sales in 2020.

Stockland general manager residential WA Col Dutton described 2020 as a “volume year”.

“The purpose of the stimulus worked and certainly brought a lot of sales forward; 2021 had some of the tail effect of the stimulus but really, most of the year was more normal selling,” Mr Dutton told Business News.

Lots sold in December averaged 398sqm and sold for $605/sqm, compared with lots on the market in the December quarter at 380sqm and priced at $679/sqm.

Urbis director David Cresp said this showed that land prices were likely to increase into 2022.

“These are strong signs the price growth we started to see in late 2021 will be further consolidated in 2022, which is understandable given the very significant cost increases in 2021 and the prospect of continuing cost escalation in 2022,” Mr Cresp stated in UDIA’s latest urban development index.

COVID-19 impacts

Mr Dutton said labour shortages and supply chain snarls brought about during COVID-19 were resulting in delays to the preparation of land for future housing.

“The market is still in catch-up in regard to providing finished land for future houses,” he said.

“[COVID-19] certainly has put pressure on the civil construction part of our pipeline.”

Mr Rosser said there were few areas in the business that had not been affected by the pandemic.

“The tentacles of COVID reach everywhere and having sold high volumes of stock over the stimulus period, the high cost of delivery and availability of trade and material is the biggest challenge at present,” he said.

“There is enormous pressure on our civil contractors and builder partners … and snowballing effects are commonplace.

“Build programs are so finely tuned that any disruption in supply of materials and labour or final approvals results in delays.”

Mr Rosser said the rapidly increasing nature of construction costs during the pandemic made it difficult for builders and civil contractors to price new work.

“There is more risk than normal being priced in civil jobs over trying to land on where prices of labour and materials are going to go,” he said.

“That is also manifesting in feasibility for acquisition opportunities; trying to forecast where costs are going to go for civil stages if you bring forward land [is] pretty challenging.

“The WA market is proving to be very resilient at the moment, despite all of that.”

Economic conditions

Frasers Property Australia general manager residential WA Tod O'Dwyer said economic conditions in WA should contribute to stable demand for new land this year.

“Our unemployment is still at record lows [and] a lot of market commentators are now starting to talk about population growth for Western Australia,” he said.

“You add a low interest rate environment, and suddenly they’re the three key planks in creating really stable conditions for us moving forward.”

Frasers sold 257 lots in 2021, contributing to $64.1 million in gross revenue.

This compared with 277 sales and $73 million in revenue in 2020, and 86 sales worth $22.4 million in 2019.

Mr O'Dwyer said the company’s most recent development East Green, an 82-lot site north-east of Perth, aligned perfectly with the government’s COVID-19 stimulus.

“We launched it in July 2020, at the height of the stimulus package,” he said.

“It was like I’d been kissed on the cheek; it was just perfect timing.”

Frasers Property is part way through developing its marina village at Port Coogee near Fremantle, which is expected to produce 950 dwellings within the next five to seven years.

Mr Satterley had a gloomier outlook on population and interest rate projections, voicing his concerns around housing affordability.

“I am very concerned about WA housing affordability [and] if the prices keep going up, at 1.5 per cent a month, it is going to become very unaffordable for first homebuyers very quickly,” he said.    

“The problems our industry faces [are] low population rates [and] rising interest rates, so you can get a housing loan roughly at 2 per cent by Christmas 2023 it will be about 4 per cent.

“We think the interest rates will go up 150 basis points between now and Christmas 2023.”