According to RiskWise Property Research’s latest analysis of the construction industry which has been hit hard over recent months following the high-profile cases of the Mascot and Opal towers in NSW, lenders are reluctant to lend and buyers don’t want to buy when it comes to high-rise developments.

RiskWise CEO Doron Peleg says with cracks in both the Sydney towers, fears more will become apparent in other buildings and the need to replace combustible cladding in thousands of buildings throughout Australia, demand for units had dropped dramatically.

“Lenders are proceeding much more cautiously too, and this includes non-bank lenders whose business model is to provide alternative solutions from the ADIs, and generally have a less conservative assessment of risk,” says Peleg.

“We have a situation now where lenders aren’t eager to lend and buyers don’t want to buy but we still have developers who are considering developing high rise.”

Units in the pipeline for the next 24 months Australia-wide equate to 7.6 percent of current stock. In Sydney there are 58,094 units in the pipeline or (9.5 percent) of current stock and in Melbourne there are 59,634 units in the pipeline or (8.1 percent) of current stock.

However, in the last three months to June 2019, only 8 percent of stock sold in Sydney and in Melbourne, 12 percent.

Sydney’s Mascot and Opal towers are not the only ones that have been hit with negative media coverage. In July, reports swept in of cracking noises in Melbourne’s soon-to-be tallest building, Australia 108, while a cladding fire took hold of another Melbourne building, the 43-storey Neo200, in February. In July, a development in Sydney’s Zetland was also forced to shut its doors on residents for eight months after reports of water damage and faulty fire prevention.

According to Knight Frank's Australian Residential Development Review, in Greater Sydney the value of sales of development sites suitable for high-density projects halved in the 2019 financial year, while average site values in both Sydney and Melbourne fell dramatically.

“If you combine the recent quality issues with financial losses from investment in high-rise units, this could amount to a permanent structural change in demand,” he says.

“In some cases, developers, instead of assessing the true needs of the market, have developed large numbers of units and have needed to find ways to shift stock by using instrastate or overseas markets with high commissions that are often factored into the property price. A prime example of this type of poor risk management is the oversupply in the Brisbane unit market, as detailed in our case study of 2018, which resulted in lower valuations, rising defaults on settlements, heavy discounting and incredible incentives such as new cars.

“We already have significantly reduced levels of demand due to restrictions on foreign investors, credit restrictions, banks refusing to loan to self-managed super funds and local investors looking elsewhere.”

“Add to that the high level of unit oversupply and it’s possible to see how structural changes could occur in a sense that the overall demand for off-the-plan dwellings shifts from units to house-and-land packages.”

Image: Courtesy of Elenberg Fraser and Disegno Australia