Developers’ goldmine Down Under
Joseph Wong 

Since 2013, property tycoons and listed companies have undertaken projects worth over A$7.3 bil (RM24 bil) in gross development value in Australia’s second largest city

Part 1
Melbourne, the world’s most liveable city, has attracted hordes of Malaysian developers. Since 2013, property tycoons and listed companies have undertaken projects worth over A$7.3 bil (RM24 bil) in gross development value (GDV) in Australia’s second largest city.

And it’s not only Melbourne that is drawing Malaysians. Sydney, the country’s largest city, and others such as Perth and Adelaide are also luring Malaysian property players, albeit on a smaller scale. This makes Australia the top oversea destination for Malaysian developers.

The three biggest Malaysian players in Melbourne – SP Setia Bhd, UEM Sunrise Bhd and OSK Property Holdings Bhd – have a combined A$5.5 bil (RM18 bil) worth of projects.

SP Setia’s Fulton Lane, Parque Melbourne, Maison Carnegie and Sapphire by the Gardens projects have a combined GDV of nearly A$1.4 bil, with two more parcels of land worth an estimated GDV of A$457 mil yet to be launched.
Hot on the heels of SP Setia’s recent announcement of a partnership with Shangri-La Hotels & Resorts and the launch of Sapphire by the Gardens, the developer also won the bid for its sixth parcel of Melbourne land – 111 A’ Beckett St site – for A$161 mil, on which a A$419 mil development will be built

“The winning bid received reaffirms Setia’s long-term commitment and confidence in the Australian real estate market. We remain positive on the property market in Australia and will continue to look out for more acquisition opportunities,” says SP Setia president and CEO Khor Chap Jen.

He reveals that the take-up rate of Sapphire by the Gardens’ residential tower exceeded 70% during the weekend launch on June 17 and 18. A check with SP Setia shows that 80% of the units have since been taken up.

The company’s other parcel of land will be developed into the A$38 mil Marque Residences.

OSK Property’s inaugural venture called Melbourne Square is a partnership with the Employees Provident Fund (EPF) and is worth A$2.8 bil. UEM Sunrise’s Aurora Melbourne Central, The Conservatory and Mayfair have an estimated GDV of A$1.3 bil.

OSK Group deputy group MD Ong Ju Xing says the company is excited to partner with the EPF for the Melbourne project, which will revitalise Southbank through the planned community infrastructure, making Melbourne Square the heart of a vibrant community.

He says Melbourne Square represents OSK Property’s vision as one of Malaysia’s leading developers in paving the way for a mixed-use community development.

Similarly, UEM Sunrise managing director and CEO Anwar Syahrin Abdul Ajib says the company is intensifying its focus in Melbourne, actively bidding for new land.
The three big developers are among 10 tracked by FocusM with a total of 21 projects in Melbourne, which either have been completed, are ongoing or launching soon in the city alone.

Besides its respective projects, each developer which has gained a foothold in Melbourne is looking for a bigger slice of the pie as it vies for more land for future projects.

So what makes Melbourne so alluring to Malaysian developers?
The lower cost of doing business in the city and rising demand for residential properties are the two key attractions for Malaysian developers.

Melbourne’s significant Residential Property Price Index grew 13.4% from last year to March this year.

For Fulton Lane, the units saw about a 25% increase from the launch price in 2012. Based on recent transactions, the price has appreciated 7% to 10% since the project was completed in 2015.

“Melbourne, which is in Victoria, is a true multicultural city with 36.7% of residents born outside Australia. The population growth remains strong in Melbourne with an additional 112,140 persons as of June 30 last year.
“This is equivalent to 2.5% growth, outstripping the relatively high 10-year average of 2.1% per annum. Economic growth for Victoria was healthy with 3.5% recorded for 2015-16, with unemployment in Melbourne at 5.9% in May 2017,” says Knight Frank Malaysia international residential project marketing senior manager Dominic Heaton-Watson.

Victoria’s economic growth was healthy at 3.5% in 2015-16, says Heaton-Watson

Melbourne, with an estimated 4.6 million residents in 2015-16, is said to be Australia’s fastest growing capital city with a population growth of 2.4% in 2015-16 ahead of Brisbane (1.8%) and Sydney (1.7%), says Central Equity Asia Pte Ltd senior property consultant Michael Koschar.

The Australian Bureau of Statistics forecasts that Melbourne could overtake Sydney as Australia’s biggest city, with its population projected to be between 6.1 million and 6.8 million by as early as 2030s, with Greater Melbourne’s expected to hit eight million by 2051, he says.

Heaton-Watson says the connection between Malaysia and Melbourne continues to be strong. “In 2016, 13,100 Malaysia-born students enrolled to study in Melbourne, from school age to university level. This was more than double the number of Malaysian students who enrolled in Sydney education facilities,” he says.

This also explains why many Malaysian parents are buying property in Melbourne ahead of their children studying there, according to Knight Frank Asia Pacific head of research Nicholas Holt.

However, this figure could be lower than what is perceived.
UEM Sunrise’s Anwar Syahrin says the market perception is that most buyers of UEM Sunrise’s Melbourne properties are Malaysians, but this is not the case.
Only 14% of the units sold in Aurora Melbourne Central were bought by Malaysians and 13% in Conservatory, he reveals.

In SP Setia’s case, Malaysians took up 30% of its first project in Melbourne, Fulton Lane, says Khor.

However, Anwar Syahrin and Khor say besides Malaysians, most buyers are Australians with the rest from Singapore, China, Hong Kong and other countries.

Be wary of changes
Like all international purchases, Malaysian buyers should be wary of property-related laws and regulations which could be subject to change, thus affecting their investments.

“There have been some recent legislative changes to stamp duty for both local and off-shore investors, and this will have some impact on the market in the short term,” says Setia (Melbourne) Development Company Pty Ltd CEO Choong Kai Wai.

We don’t see Australia as a risk, says Choong

He is referring to this year’s introduction of a new tax of 1% levied on vacant residential property targeted at properties in Melbourne’s inner and middle suburbs.
“While owners will be encouraged to make vacant properties eligible for purchase or rent, this is likely to increase some cost for investors,” says JLL Property Services (M) Sdn Bhd managing director YY Lau.

Recent legislative changes likely to increase some cost for investors, says Lau

The Victorian government also increased stamp duty for foreigners for two consecutive years since July 1, 2015, she says.

The additional duty surcharge of 3% was imposed on certain transactions involving residential property acquired directly or indirectly by foreign buyers, which was raised to 7% in July last year.

“At the same time, the Victorian government will abolish stamp duty for first home buyers purchasing property valued below A$600,000, thereby helping to sustain interest in real estate. These measures will help local buyers but reduce demand by foreign investors,” says Lau.

“In the medium to long term, the strong underlying fundamentals, which have supported our market historically, will continue in the future,” says Choong.
Melbourne, he says, is a highly CBD-focused city, created by a circular transport network, while cultural, entertainment, education, sporting, health, professional services and employment opportunities are all located within or the adjoining CBD.

As such, he says: “We don’t see Australia as a risk.”

The slowdown is inevitable with the government’s cooling measures, especially on foreign purchasers, but the market will go through a correction stage, says Lau.

However, local demand is expected to remain solid due to supply constraints, hence the market sentiment will be back on track after the correction stage, she adds.

“It usually takes one or two years for the market to correct but the decline will not be permanent.”

There is also another factor to consider. In the United Kingdom, a house buyer can buy and sell the property before its completion, says Lau. “However, in the case of Australian property, a buyer cannot sell until the project is completed and even then, he has to sell it to a permanent resident or citizen,” she says.

She says the restriction on resale before property completion is to protect home affordability and prevent unnecessary price speculation for Australians.

Non-resident foreign persons are generally prohibited from purchasing established dwellings in Australia, says Knight Frank Australia head of residential research Michelle Ciesielski.
“However, temporary residents can apply to purchase one established dwelling to use as their residence while they live in Australia, on the condition the property is sold when it ceases to be their principle place of residence. Strict penalties can be enforced if these rules are not followed,” she says.

JLL’s Lau points out that financing is not provided by major Australian banks to foreign buyers and that Malaysian banks are financing Australian projects.

Stricter criteria
Since late 2014, by way of cooling the market as encouraged by the Australian Prudential Regulatory Authority, lenders, like in Malaysia, have tightened funding with stricter criteria for domestic and foreign investors.

“Developers seeking domestic finance must also sell a certain number of apartments before the funding is approved. This has controlled the number of apartments being built, although those with foreign funding are not bound to this threshold,” says Knight Frank Malaysia’s Heaton-Watson.

Three key drivers indicating the likelihood of future capital growth are increasing sales turnover of established apartments, rising rentals and low vacancy rates within the city.

“All are still relatively positive although the number of apartments being built over the next three years is greater than those delivered over the past three years. Some pockets of the city will temporarily see more apartment supply outweighing demand,” says Heaton-Watson.

Investors can lower their risk exposure by carrying out extensive research on the projects’ location, branding, specification, amenities, services, surrounding retail and entertainment, as well as transport connectivity, he says.

“Better still, talk to a trusted professional adviser to take you through the whole purchase process from start to finish and beyond.”
Apartments fuelling demand
On the other hand, demand for residential apartment units in Melbourne outstrips supply, making it attractive for Malaysian companies with proven record in developing high-rise projects in Malaysia.

“There appears to be a fair ratio of landed housing to apartments. The market has shifted with a strong demand from downsizers, empty nesters and single professionals. Yes, there is a shortage of apartments in the inner city and increased demand for inner city apartments. The supply cannot meet the demand due to scarcity of land” says JLL’s Lau.

Choong concurs from his own experience. “Apartments are in high demand from the younger generation working near Melbourne CBD who want to be close to all the amenities our city has to offer,” he says.

“Housing preferences continue to change with apartment living becoming increasingly accepted.”

He says Melbourne is less constraint than Sydney in terms of supply and cost.

“Melbourne is still very affordable. You can buy a large 80 sq m two-bedroom apartment at an average price of A$800,000, the same for a one-bedroom apartment in Sydney. Hence, many Sydney investors are attracted to Melbourne,” he explains.

According to the NAB Residential Property Survey for Q1 2017, 45% of foreign buyers in Victoria were most likely to purchase apartments, followed by houses on land (30%) and a block of land without a dwelling (25%), says Knight Frank’s Ciesielski.

“For the Australian average, 53% of foreign buyers bought apartments, 30% houses on land and 17% a block of land without a dwelling.”

Each state government supports higher-density development around key infrastructure hubs and along transport corridors by relaxing the height and number of apartments allocated to these higher-density developments, she says.

“Most of these areas are zoned in preparation, but in many cases, these sites are sold at a premium. Incorporating mixed use with retail, office and hotel can also be encouraged.”

(Part 2 will appear tomorrow)

This article first appeared in Focus Malaysia Issue 240.