The Development Digest | 19.8.23 | JLL Development Site Services

We are pleased to provide you with our weekly JLL Development Site Services Market Update - The Development Digest.

Please contact me on 0402 085 702 / jesse.radisich@jll.com if you would like to receive our more detailed weekly updates via email each Friday morning.

This update will cover:

• Observations of the week
• Wingate Research – August 2023
• JLL Asia Pacific Debt Monitor – 11 August 2023
• Headlines of the Week

Observations of the Week

In a welcome sigh of relief during the week, the nation’s premiers and chief ministers gathered for a national cabinet meeting, and the national direction is that there will not be a rent freeze/rent cap, as was previously feared. There is however ongoing discussions around limiting a rent increase to once per year, which in practice will not be a significant change for the vast majority of landlords. There have also been a range of proposed changes and increases in funding and targets within the National Housing Accord. How these initiatives are actually delivered and funded in reality is another issue altogether.

On the development site transaction front, our team has this week transacted ~$90m of sites over a two day period,

in a positive sign that despite some of the uncertainty and challenges within the market, active developers and capital sources (based both locally and off-shore) have a high level of conviction in the Melbourne market. Based on the broader dynamics and projected population growth across Australia (detailed further below), coupled with changing housing composition, it is not difficult to understand the reasoning behind the confidence.

Wingate Research – August 2023

According to the latest research from Wingate, Australia’s population continues to rebound after experiencing one of the largest declines in growth by a developed country during the pandemic according to the Australian Bureau of Statistics.  It is a remarkable 42 percent above its pre-pandemic level (see table below).  While, growth in the 12 months to 31 December 2022 is the strongest since 31 December 2008 (459,500 people).

The East Coast states captured around 80 percent of total growth with:

• New South Wales leading the way with growth of 138,000 people, followed by Victoria (137,700p) and Queensland (116,600p);
• Victoria netted 27.7 percent of total growth (down from 34.9 percent pre-pandemic);
• Western Australia captured 12.6 percent of total growth (up from 9.5 percent pre-pandemic); and
• The Australian Capital Territory’s population growth is 97.6 percent above its pre-pandemic level (albeit off a small base).

Australia should grow by no less than 430,000 people in 2024 before normalising at around 350,000 people in 2025. Over the longer term, the key age cohorts driving population growth over the next decade are the baby bonus generation, the millennials and baby boomers, offering insight into future housing requirements.

According to the research, population is growing, but it is also changing and the number people aged 65 years or older will increase. Single person households will almost double to 40.5 percent by 2046. 

There is no doubt that this changing housing dynamic will further add to the pressure on Australia’s housing market, with a great number of dwellings required to house not only the growing population, but also the increasing number of single person households.

JLL Asia Pacific Debt Monitor – 11 August 2023

Last week, global bond yield moves continued to remain mixed with some yields moving up whilst other rates pulled back. However, salient moves were seen on the US treasury front especially led by longer maturity government bonds – the US 10 and 30 year treasury yields climbed by 12bps and 6bps respectively last week.

The main event of the week was the US inflation print which offered some assurance to the markets and the fed. The July report came out at 3.2% yoy in line with the market consensus and again confirms the disinflation trend continues at a decent pace still. However, the market seems to be hung up on the looming inflation risk. First of all, on the very next day after the CPI report, the US PPI (producer price index) got released, growing 0.8% yoy in July, the pace faster than originally anticipated. The recent surge in WTI, the US oil price benchmark also caught traders’ attention – climbed more than $10 in July alone but the index still faces an upward pressure. Some FOMC members like Daly expressed a concern this uptick may rekindle the price pressure and that could be captured into the next inflation report.

The owner equivalent rent (OER), the key component in the US CPI is also adding to concerns as the pace of the growth has softened but still at a sluggish pace. If this measure is not easing enough, service inflation may bounce back strongly in upcoming months as favourable base impact is likely to start to reverse due to relative lower bases for coming months.

Lastly, USD inflation SWAP forward 5year/5year, one of the leading indicators tracking long term inflation expectation, has started to trend up lately, alluding the market has started to price in risk that elevated price pressure may persist even in the long run. Many are blaming volatile moves of the US 10 year and 30 year treasury on the latest US 30 year treasury auction last week which was plagued by muted demand. In my opinion, the bulk of the recent upticks for long maturity bonds seems to be more directly linked with the aforementioned developments on inflation front. The July inflation report is making another strong case for the pause for the September FOMC but resilient US economy alongside all these shreds of new evidence supporting sticker inflation ahead seem to point out rates will stay high – not higher though - for a longer period not only in the US but also for the rest of the world.

USD inflation SWAP forward 5year/5year

Our weekly Debt Monitor update is provided by Sungmin Park (Director, Asia Pacific Capital Markets Research).

Headlines of the Week

The AFR – No quick fix for housing supply crisis

Key points:

• National cabinet: fast approvals, reject rent caps.
• Incentives to fast-track approvals and increase housing supply will be on the table at today’s national cabinet meeting, but every state, including Victoria, will reject demands by the Greens and the welfare sector to impose rent caps or freezes.
• With supply to be the focus of the meeting held amid the nation’s worst housing crisis in generations, Prime Minister Anthony Albanese is happy for the states to pursue their own individual policies to free up the planning and approvals processes.
• Following a warning last week by Reserve Bank governor Philip Lowe that capping or freezing rents would only worsen the rental crisis, Victorian Premier Daniel Andrews, who had been flirting with the idea, fell into line with his counterparts yesterday and ruled it out.

The AFR – House sells $500K over reserve, confidence up

• The number of auctions and clearances were higher in the week to Saturday, which experts say shows vendors and buyers have gained confidence that interest rate rises are coming to an end.
• The clearance rate, 71.3 per cent, was a touch higher than the 71 per cent initial rate a week earlier – a figure subsequently revised down to 64.5 per cent – as the number of scheduled auctions rose to 1911 from 1746 in the east coast-dominated national market, CoreLogic figures yesterday showed.
• In Melbourne, where the preliminary rate of 69.5 per cent reflected the reported 659 results of the 842 auctions scheduled, low stock levels were making buyers desperate in the well-heeled suburbs. ‘‘People are bidding beyond what they’re comfortable bidding at because there are such low stock levels,’’ said Emma Bloom, a buyer’s agent who works in the city’s prestige areas. ‘‘It’s almost panic buying.’’

The AFR – New home listings now rising faster than demand

• Fresh home listings are now rising faster than buyers can absorb them across the combined capital cities, indicating tougher competition for vendors and more options for buyers in spring, data from CoreLogic shows.
• The dynamic also portends a further slowdown in home value growth in coming months as price pressures ease.
• Over the four weeks to August 13, the number of new listings across the combined capital cities jumped 11.8 per cent above the five-year average, and were up 1.5 per cent compared to a year ago.

The Age – CBA tips rate cuts as spending lags

• Consumer spending across Victoria and NSW is tumbling under the weight of super-sized mortgage repayments and the nation’s biggest lender predicts the Reserve Bank will need to slash interest rates a full percentage point to stabilise the economy.
• CBA chief economist Stephen Halmarick said the index reflected the effect of the 4 percentage point lift in official interest rates imposed by the RBA since May last year.
• He said he expected the Reserve, which took the cash rate to an 11-year high of 4.1 per cent in June, would cut rates by a full percentage point next year. He predicted two more cuts in the first half of 2025.

The AFR – Despite WeWork gloom, flexible working ‘set to stay’

• WeWork’s future is in doubt. And Zoom Video Communications, the pandemic poster child of remote work, just told its employees to get back to the office. The headlines suggest flexible work is on the ropes – but it’s actually thriving.
• The owner of co-working giant Regus – think WeWork, but with better cash flow and no leadership drama – just posted its best six-month sales period, thanks to a growing list of customers that includes Zoom. LiquidSpace, a digital marketplace where clients like T-Mobile and the US federal government find and book on-demand office space, has seen transactions soar this year.

We hope you have enjoyed another edition of The Development Digest. Please contact our team if there is anything we can assist you with.  

Jesse