Back in November, we wrote a blog noting that the hype surrounding apartment oversupply was largely inflated and the market was missing the real issue – settlement risk.
At the time, we noted that the residential development market has a level of self-governance, that is, pre-sales and debt development funding are required in order to produce supply and thus when the numbers ‘don’t stack up’ the supply is either postponed or eliminated.
In today’s Australian Financial Review, there were two very interesting articles relevant to this topic. One on page 6 noted that apartment commencement had dipped to their lowest level in 18 months. This was the second consecutive fall in commencements and is what we believe is the start of an ongoing fall in commencements. This is due to the self-governance aspect which is many ways is Darwinian Theory – only the strongest survive.
In another article, this point was categorically backed up by a quote from prominent architect Callum Fraser of Elenberg Fraser. Callum was quoted as saying “Architects are bleeding to death. The golden goose is dead and everybody is dying in the ditch. It is almost impossible for developers to find debt funding for large projects unless they have an avenue into offshore funds. A lot of developers who bought land at the peak of the market are now finding the projects don’t work commercially. These projects will simply not proceed”.
We could not agree more with Callum’s comments – this is what we have been saying for a long time. The reality, architects are the pointy edge of the wedge as they are the first to see the reduction in work, or supply, as the cycle softens. As such, we expect the headlines around oversupply to abate. Our focus is, and has always been, on settlement risk. There are many examples of what we would consider are apartments sold over the “market price” and these will become increasingly hard to support with valuations and bank finance come settlement time. The future headlines will be focused on this aspect.