_What is the outlook for the residential apartment market in Greater Melbourne?

Across the capital cities, Greater Melbourne has recorded the most number of apartments with marketing being put on-hold, pushing back their completion beyond 2022 and aiding the ongoing fear of oversupply. What’s the outlook for the other key development drivers for Melbourne?

Overview

• Although the volume of high-density development site sales was down, there were still a number of recent significant sales achieving premium prices for well-located sites.
• Development funding remains challenging given the slowdown in the Greater Melbourne apartment market over the past year. Conversely, stricter lending for purchasers have impacted the number of pre-sales achieved.
• A little over 12,900 apartments that were once marketed have been placed on-hold with the likelihood they will no longer be completed by the end of 2022.
• As investors have retreated, developers are building apartments with more bedrooms to accommodate the owner occupier and downsizing market.
• Compared to previous years, there are significant major infrastructure projects in the pipeline for Greater Melbourne—most expected online by 2031. 

Development Site Values

A little under half the volume of sales of sites with potential for high-density residential development in Greater Melbourne transacted in 2018 ($890 million) when compared to the volume recorded the year earlier. High-density site sales made up approximately 54% of total development site sales over the year ending December 2018. 

The average sales rate for sites earmarked for high-density development in Greater Melbourne, excluding CBD sites, was an indicative $120,400/per apartment at the end of 2018, falling 9.1% over the year.

The inner suburbs of Greater Melbourne saw the range of $50,000 to $225,000/per apartment remain in place throughout 2018, although the indicative rate fell 8.8% to stand at $139,400/per apartment. A similar trend was experienced in the middle suburbs over 2018 with the indicative rate repositioning to $90,000/per apartment (down 12%) to range from $70,000 to $193,300/per apartment.

With little new apartment supply entering the outer suburbs of Melbourne, site values have remained steady for the past two years with an indicative of $40,000/per apartment; ranging from $25,000 to $50,000/per apartment. 

Apartment Pipeline

Almost 13,100 new apartments were completed throughout the Greater Melbourne region in 2018, 34% less than came online in 2017. This allowed the six-month average trend vacancy to remain steady at 2.2% in December 2018.

New stock was most evident in the inner suburbs of Melbourne with an additional 10,150 apartments over this time. The number of apartments in the inner suburbs is projected to grow by another 26,700 apartments with those currently under construction; and 4,950 more being marketed with the potential to be delivered by the end of 2022. In the middle and outer suburbs, 2,950 high-density apartments were completed in 2018 with 7,650 under construction, and another 5,250 being marketed, due within the next four years. 

Potentially 20,300 development approved apartments could be added to the supply pipeline by 2022 across Greater Melbourne, although project launch, marketing and presales must start soon. The current pipeline for Greater Melbourne has also considered almost 12,900 apartments which launched to marketing stage in recent years, but are now on-hold, or taken out of the pipeline altogether, after being converted to office or student accommodation assets.