"In the CBD the investment required for a major project outweighed the costs associated with other locations."
What is the best location for a residential development?
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Last week I highlighted how it is impossible to overlook the key influence of location in the project DNA of any development.
Here in a recent conversation with one of my associates, Shane Dargue, from Colliers International in Melbourne, we will explore this topic in greater detail. From the outset I think it is clear that taking a site to market is a complex subject. topics like planning and infrastructure are never out of sight.
Thinking of a location as a blank canvas immediately opens the way for creative thinking so that one day the final development will deliver the very best result, and this is, I think, the core challenge this subject will explore. Recently in both NSW and Victoria the major land delivery agencies have been facing evolving roles as a result of shifting market pressures and dynamics, and I think this further underlines how complex a market this is.
Where are the demand hotspots?
Starting our conversation, I firstly wanted to know from Shane his take on the current demand for residential development sites and then moving onto what he believes are the key marketing challenges for new medium and high-density sites.
“This a big topic, but there are some common factors across most markets. But firstly we need to step back a few years, just to get a common starting point.
“Until 2010 across almost all markets there was what I would without reservation describe as an environment of fever pitch activity, and in particular in Melbourne. Then over the past few years 2011-12 there has been a shift in demand for sites. We have come of the highs of 2010 but clearly sites are still being sold, still in demand.
“The dynamics have moved to where the development risk has taken on a different complexion, and as might be expected it is access to finance that has come into much sharper focus."
To better help overview market conditions Shane suggests that it is helpful to look at markets across three main sectors, all of which will be familiar.
“I think that it is both helpful and necessary to look at the market for new sites as they fit into three distinctive zones. While they will have common factors in any major metropolitan market, for ease of discussion let’s call the three main markets A, B and C.”
Within this definition suggested by Shane the zones cover: ‘A’ the core CBD, ‘B’ the inner ring of well-established suburbs and our final group ‘C’, which covers the outer ring of suburbs where the majority of broadacre and greenfield sites are located. All three markets have locations suitable for medium-density development but are very different with varied fortunes.
“The CBD in any market always has the highest site costs, and beyond that the entire cost structure implies a major investment in terms of finance, time and marketing, its often seen as the most speculative.
“Then we have the inner ring of suburbs ‘B’ which is the more diverse and flexible of the three markets and in the case of Melbourne, because of Melbourne’s grid layout, it’s a rich source of sites.
“Finally we have the outer ring locations ‘C’, which includes greenfield sites, some locations are self-contained medium-density sites, which are usually in the more established areas while other are a part of a master-planned community estate. This is a market dominated by individual homes and is very cost driven, price and supply sensitive but still there are valuable medium-density sites.
"Demand for the outer ring this market has softened the most over the past 24 months and in particular over the past 12 months, partly as direct result of many more new homes coming into play as supply across Melbourne has increased."