is the only way up
Image: Canva.
  • Taller buildings require more advanced engineering to ensure safety and stability.
  • Increasing height also increase the time it takes to deliver a project.
  • This can mean a development is more susceptible to risks.

Written by Niall McSweeney, president, cost & project management, Asia Pacific and Tim Peisley, senior trainer at Altus Group.

Housing affordability has reached a fever pitch. Interest rates are at an 11-year high, house prices are on the up-and-up and national rents have risen by 27.4% since March 2020. At the same time, Australia’s net overseas migration is expected to surpass 400,000 this financial year.

The development industry is as worried as mortgage holders and renters. Concerns about housing affordability and supply have hit record highs, according to the latest ANZ/Property Council Survey, and 48% of respondents expect construction materials to rise by at least 5% over the next year.

As the cost of materials continues to climb, alongside debt finance and skills, many developers are revisiting their feasibilities and finding their projects no longer stack up.

A price of $3,200 a square metre before the pandemic has now passed the $4,000 per square metre mark for high density quality product in Sydney. This is the new normal, and those waiting for costs to drop will be disappointed.

Important interventions

The factors that influence housing affordability are complex and challenging to solve. But from our work on countless feasibility studies for affordable housing developments, we’ve found one solution that stands above all: government intervention. Affordable housing developments simply don’t stack up without some sort of government incentive, whether that’s a grant, height bonus, gift of land, or tax exemption.

Governments around the country are stepping in with a suite of welcome incentives. While the Australian Government’s $10 billion Housing Australia Future Fund still languishes in the Senate, its Home Guarantee Scheme, administered by the National Housing Finance and Investment Corporation (NHFIC), is helping some home buyers get the key to the door sooner, with a deposit of as little as 5%.

At the state level, the NSW Government has announced new measures in which housing developments with a capital investment value of more than $75 million, which allocate a minimum of 15% of the total gross floor area to affordable housing, will gain access to the State Significant Development planning approval pathway, as well as floor space ratio and height bonuses. This complements the NSW Government’s existing Housing Acceleration Fund and provides grants for critical infrastructure projects, like upgrades to roads, water, sewerage and power.

The Queensland Government has slashed land tax for build-to-rent developments that include affordable housing.

The South Australian Government’s HomeSeeker SA program aims to help 1,000 low-income households break into the market with a suite of strategies from land tax concessions to shared equity schemes.

Creating greater density

The NSW Productivity Commission’s paper, Building more homes where people want to live, finds regulation and planning restrict the development of new housing, especially apartments and town houses, in existing suburbs. Fewer than 20% of new dwellings are being built within 10 kilometres of the CBD, despite those being the areas where most Sydneysiders want to live.

The solution, the NSW Productivity Commission suggests, is to deliver greater density. Between June 2017 and March 2022, around 1,500 new apartment buildings were completed in Greater Sydney, the Commission says. On average, these buildings were seven storeys tall and contained 70 units.

If governments had permitted slightly higher densities, of up to an average of 10 storeys and 100 units per building, the Commission estimates that an additional 45,000 dwellings could be supplied without extra land. This represents around a typical year’s worth of new housing construction in New South Wales, the Commission says.

Can’t you build higher?

The knee-jerk reaction may be to build higher. Rather than build 20 apartments, let’s allow 40. Double the density on the same block and halve the price of each unit, right? But as the height of a building goes up in height, the percentage of useable and saleable space drops.

All developers have a ‘walk away price’. One way to identify that is to calculate the residual land value. In this formula, all projected costs of the development, excluding land, are added to the required developer’s margin. This combined figure is subtracted from projected revenue to provide an estimated value of the undeveloped land, referred to as the residual land value. By working in reverse, the developer determines the maximum amount that could be paid for a parcel of land and still achieves the required profit. Tripling the density does not mean the value of the site triples – but it does mean the costs will increase.

Taller towers require additional structural elements to support their height and withstand wind loads. A larger portion of the space must be dedicated to structural components like columns, beams and support systems. Taller buildings require more advanced engineering, logistics and construction techniques to ensure stability and safety. Services – elevators, mechanical systems, electrical infrastructure, plumbing and the like – can also restrict the usable space within the building. Then there are the extra considerations of maintenance and strata of larger properties.

Doubling the height of a building also takes longer to deliver, increasing the debt funding and time cost of money. The longer a project takes from dirt to disposal, the more susceptible it is to risks.

Whether you deliver 20 or 40 units on the site, the percentage return will be the same. Yes, the dollar return on the more ambitious project will be higher. But the internal rate of return will be the same – and a smaller development will achieve that return with less risk.

Therefore, going up is not always the answer.

Thinking inside the box

What is the solution? The development industry is always being told to “think outside the box”. But the solution is to think inside the box – or, rather, to adjust the shape and size of the box to shift the dynamics of delivery.

Here’s why dwelling size is the key differentiator. Take the budget breakdown on the average apartment project:

  • 25% on preliminaries and profit margin,
  • 25% on building structure,
  • 25% on services, and
  • 25% on finishes.

Developers set a profit margin before they step into the ring. Tinkering around the edges with cheaper tapware or tiles may shave off just a percentage here or there, but this is unlikely to have much more than a marginal impact on the costs of each unit.

Building structure and services are, to a large degree, fixed – that is unless we change the size of each unit.

The bottom line? Prices are an output, not an input. In other words, prices reflect supply and demand dynamics, economic conditions, production costs, competition and other external factors. They are not a driving force but a function of the criteria we provide. If we don’t like the price, we must change the parameters. The most obvious way is to shrink the size of the block and the dwelling on it.

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