Price falls will kill off ‘dog boxes’
The property downturn may finally spell the end of the "dog box".
As local and overseas investors flee en masse, property developers are struggling to get funding from banks, with a growing number of apartment buildings being delayed or abandoned altogether.
Non-bank lenders are increasingly stepping in to fill the gap - and the focus is turning away from the 20-storey high-rises and tiny one-bedroom apartments favoured by investors to larger units in smaller-scale developments targeted at owner-occupiers.
"There is a tailwind in terms of the demographics, especially the baby boomers who have more capital, as they make that transition to apartments for lifestyle reasons," said David Chin, founder of investment advisory firm Basis Point.
"The larger two- and three-bedroom apartments still have a market. In Europe and (places like) Paris, it is quite common for apartments to be very large, three bedrooms, almost like homes. It sets the higher density living in three- four-, five-storey buildings, not high rises. It works and I think that will be more common in Australia."
Mr Chin hosted a Deloitte seminar this week titled "Preparing for Pain and Gain in Western Sydney", which discussed the coming "fast and furious times" amid the property downturn, slowing Chinese capital flows and US-China tensions.
Speaking on a panel discussing the role of non-bank lenders - both Australian "old money" and new "Chinese money" - Dorado Property co-founder Peter Packer highlighted the role of the sector in cushioning the falls in Brisbane.
"We were reading headlines about how that was going to crash and burn," he said.
A number of major banks had funded construction projects without being covered by sales, which "meant you had expiring bank debt at completion of projects".
"But us and a number of private lenders jumped into that market and refinanced that debt, usually with 18- to 24-month terms, putting requirements on the developers to slowly sell down their stock," Mr Packer said.
"What it meant was that market never had the crash that (people) were talking about. That's where non-bank lenders can help."
Dorado Property is currently funding a number of projects in Perth and Brisbane. Mr Packer said successful developers were turning to "smaller projects, more boutique, higher-density areas, good locations".
"They've generally moved away from investor focus (which meant) internal bedrooms, small floor plans," he said.
"You're getting more light, bright, airy apartments, they're getting larger. Well designed, good apartments that owner-occupiers want to live in, but smaller-scale projects where you don't have to go out and get a huge number of presales. That's typically what needs to happen in a down market."
REA Group chief economist Nerida Conisbee said the flood of investors and offshore buyers had "led to a lot of projects starting that would have otherwise not been able to start".
"In many cases, particularly in Melbourne, developers selling to Asia were able to get projects up and running from that buyer group which from there have been sold more broadly into the market," she said.
Concerns about apartment quality, amenity and overdevelopment have led to a number of states implementing minimum size requirements in the past few years to clamp down on so-called "dog boxes".
Ms Conisbee said the changing environment meant developers were now having to set their sights on the three owner-occupier groups - first homebuyers, downsizers and upsizers.
"Downsizers are a key market, what they're looking for is often quite bespoke apartments. They want greater choice in the layout, bigger apartments, they're a bit more fussy about the type of fit-out," she said.
First homebuyers, while more price driven, are also more discerning. "The better developers at the moment are looking at more communal areas, more places to hang out," she said.
"They're trying to create places that people want to live in as opposed to small apartments that don't offer the best sense of community."
David Mao, executive director with real estate investment firm White & Partners, told the Deloitte conference he still saw plenty of opportunities in the falling market.
"We see value everywhere - western Sydney, the north, the south," he said. "We're maintaining our discipline as long as we find the right asset at the right price."
White & Partners sees the market as "not so much a down market but more of a moderating market". "The run-up particularly in the last five years has been quite tremendous because of the low interest rate environment," Mr Mao said.
"You saw asset prices reach historical highs. What we're seeing currently is not so much that it's down but it's moderating such that the long-term average is reached."
Paul Zahara, executive director of Austar Fund Management, was optimistic about the outlook for the market.
"I think we're in a fortunate position where if you look at previous downturns there's been grave imbalances between the supply and demand situation," he said.
"We've got generally a balance between supply and demand at the moment. Even though we've got affordability issues, the supply and demand situation isn't bent out of shape. That's a dramatic contrast to previous downturns, 1991, 1974."
A property cycle can come off a peak in one of two ways. "It's like a balloon, you can either pop the balloon or you can let the air out," Mr Zahara said.
"This time we've done a pretty good job of letting the air out of the balloon, we haven't seen the major pop. For me 1991 was a major, major crisis. We've done a very good job this time of managing that decrease in the property market.
"The banks pulled back, the government's gotten involved, developers have realised what's going on."