Concern over rising foreign investment

Offshore developers will be building half of all apartment projects in Melbourne's central city area by the end of next financial year as the residential sector absorbs an unprecedented wave of foreign investment.

International developers, which have been staging a major push into the local market since the GFC, will double their market share of projects by 2014-15 after more than doubling it in the past two years, analysts Charter Keck Cramer say.

It's expected to be the peak of a "structural shift" that began in 2008, when foreign private, listed and government-backed entities were historically responsible for building just 10 per cent of residential stock in the CBD, Southbank, Docklands and St Kilda Road precincts.

"It represents an 'internationalisation' of Melbourne's apartment market, and there are all sorts of ramifications for the type of stock that is being built, who buys the apartments, and what it means for the liveability of the city," said CKC director Robert Papaleo.

Offshore developers have been attracted by Australia's robust economic performance, comparative affordability of development sites, and the country's status as a safe place for foreign investment.

The influx of capital has pushed most local developers out of the central city market as they find themselves outbid or hamstrung by tighter funding restrictions that have been in place since the GFC.

Hamton joint managing director Paul Hameister said many offshore developers were sourcing debt finance in their country of origin, which enabled them to sell up to 80 per cent of their apartment stock outside the country.

There was some concern that overseas developers were applying the development logic and "framework of their home markets" to Melbourne's CBD, which had different demand dynamics, he said.

"In Melbourne, people historically don't want to live in the city," Mr Hameister said. "It defies logic to me. That's why as a developer we are wary of the CBD."

But Mr Papaleo said the competition was now "chasing local developers down the road".

Analysts and planners are worried about the effect such a large wave of residential development will have on Melbourne's property market and the inner city's liveability.

"We also need to think about what is the purpose of the stock being built: is it to house our growing domestic population or is it a financial product that's being built to satisfy the needs of offshore investors? That's a pretty big question," Mr Papaleo said.

Pace Development Group founder Shane Wilkinson estimates about 50 per cent of Melbourne's apartments are being sold offshore.

"At some point in time that investor product we've all been selling for so long, is going to come to an end. It's going to turn back to more owner-occupier stock," he said.

That could have a dramatic effect on demand, he said.