Brisbane's rash of new developments could have trouble getting financing

I had to laugh the other day; the Australian Financial Review wrote a very upbeat piece on the high rate of settlement in one of Brisbane’s more recently completed riverfront apartment complexes.

The article reported a 40-odd per cent settlement rate, which isn’t something that is usually bragged about, especially in the financial press. It does, however, reflect the risks associated with developing large-scale new apartment projects these days.

Another apartment project coming up for settlement later this year is Hamilton Harbour. More than 90% (440 out of 470 in the first two towers) of the apartments are reported to be sold off the plan. While newly released apartments across inner Brisbane are now being sold at prices 20% above (based on a gross rate per square metre) the contract purchase prices achieved within Hamilton Harbour’s first two towers, this project, too, could face some risk at settlement. This time the risk lies with bank valuers.

When assessing the worth of an apartment in a project like Hamilton Harbour, valuers need to appreciate the importance of the overall project on the price of the apartment itself, as well as where the project is actually located. Also – and this is very important – they must pick comparable sales as evidence. Recent resale prices in the Urban Renewal Precinct in the likes of Freshwater, Newstead Terraces and even Ellington have more relevance than looking further afield. The apartment prices in Brisbane’s middle ring offer little in the way of comparable sales. ValEx, my friends, just doesn’t cut it.

While there are about 2,500 new apartments currently for sale across inner Brisbane and another 4,000 planned for release over the next 12 to 18 months, many of these planned apartments are unlikely to proceed in the time frames proposed. Getting enough unconditional sales in order to raise development finance will be the largest stumbling block.

Keep in mind that one in every five new residents to Brisbane (5,000 each year) now moves into the city’s inner suburbs. This is a significant turnaround, given that in the 1990s inner Brisbane was actually losing permanent residents. Also, the vacancy rate across inner Brisbane is already very tight at 1.5%. Apartment rents are increasing as a result.

Hamilton Harbour’s settlement rate should be on the development industry’s “must watch list”. Hamilton Harbour is a litmus test for the Brisbane apartment market – a beachhead, if you will.

We wish both the developers of Hamilton Harbour – Devine and Leighton – all the best. And to the more novice apartment suppliers out there, you had best do your homework and maybe have it checked by another before proceeding. Developing new apartments is getting harder by the day.

PS Last week the Queensland government made three announcements regarding the eligibility requirements for the $10,000 Queensland building boost. These include the extension of building construction deadlines for multi-unit projects from July 31, 2013 to January 31, 2015, making National Rental Affordability Scheme products eligible and excluding foreign investors from the boost.  All good things, if you ask me.

Apartment developers, in particular, however, need to be very careful about how they promote and especially embellish the $10,000 government offer. Some are already doubling, and even tripling the boost. Others are paying the stamp duties for buyers during the boost’s period. Meanwhile, some are offering free furniture packages and guaranteeing rent for an extended period. These are fine incentives – although one does wonder why it took a relatively small government grant to trigger them – but it remains uncertain if bank valuers will discount these from the purchase price upon settlement. Also, in projects with substantial presales, those who have already bought off the plan might feel more than a bit peeved that they aren’t getting the same discounts.

A bird in the hand is worth two in the bush.

Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 500 new residential developments come to fruition and writes the weekly  Matusik's Missive.