The great Australian land grab

For Asian developers, Australia has become a proxy for growth to offset a downturn in their home markets -- and they are hugely inflating prices in Australia as they compete for land.

The foreign developers are routinely paying at least 25 per cent more than Australian developers are prepared to pay for sites in sought-after areas across Sydney and Melbourne.

As a result, local developers are effectively being priced out of the market.

“I am finding it difficult to get good sites,” says a Sydney developer, who requests anonymity.

“We are presented with a real conundrum, because we have to keep a land bank for future projects -- and Asian, particularly Chinese, developers are prepared to pay top dollar for sites without understanding the complexities of the development business in Australia.”

He cites as an example a site in the inner-west Sydney suburb of Leichhardt.

“We looked at it but we could not justify paying more than $30 million because there are rezoning and contamination issues, and these will be expensive to remedy,” he says.

The site was sold to the Chinese developer, Greenland, for around $47 million in March this year.

Indeed, there are many examples of over-the-top prices being paid for sites.

One developer speaks of a site in the north-western Sydney suburb of Epping. “I believe it is worth no more than $100 million, but, given the competition among Asian developers, I won't be surprised if the final price exceeds $150 million,” he says.

“We are looking at small sites for up to 50 units in the suburbs, which (so far) have not attracted Asian developers.”

In Melbourne, the situation is similar. “With the influx of Asian developers, the market for development sites here is very hot -- prices have risen 25-40 per cent in the last two years,” says Ashley Williams, managing director of Evolve Development.

But Williams says offshore developers are interested only in selected areas of Melbourne -- mainly in the central business district and CBD fringes.

“We are not buying in this market -- it is at the top of the cycle,” says Williams, adding, ruefully, that Melbourne may well be witnessing a step change in pricing in the residential market, caused by heightened interest from Asian developers.

Jarrod Sanfilippo, managing director of Melbourne's Burbank Property Group, says: “Definitely, we have walked away from tendering for some development sites where we know foreign buyers are interested.”

And there's no shortage of interest. Patrick Callaghan, director of capital markets with DTZ Melbourne, adds: “We see new offshore developers looking for sites every one or two days.”

Callaghan recently sold the Duke of Kent hotel in Latrobe Street, central Melbourne, for $14 million -- to second-tier listed Singapore developer, Figtree Holdings.

At $28,000 per square metre, Callaghan says the sale set a record price in the Melbourne CBD for a development site without a planning permit.

Michael Holm, executive chairman of Balmain Group, one of the largest managers of distressed property loans in Australia, says there are usually two or three Asian buyers bidding for the one site. Balmain has sold around 30 sites in past 18 months.

Holm recently hosted a lunch for 30 or so regular clients (old-time Greek and Italian developers) in Victoria, and says none of them are buying sites at the moment.

“Some are selling part of their land bank. They simply think of a number, double it and put on a development profit,” he says.

Mr Sanfilippo concurs. “Some local developers are selling their land for nearly as much profit as they could expect were they to develop the sites themselves.

“They may not make 100 per cent, perhaps 75 to 80 per cent of the development profit -- but there's no risk,” he says.

Lately, but for different reasons, some of Australia's largest property groups, including the privately-owned Grocon, and the listed logistics specialist, Goodman Group, have been cashing in on the boom in development sites.

Grocon sold the former Carlton & United Breweries site in Carlton, Melbourne, to a Chinese company for $60 million.

And Goodman sold an industrial park in Erskinville in South Sydney, a large potential residential site, for $350 million to Hong Kong's Golden Horse Holdings -- reportedly the highest price yet paid for a residential site in Australia.

Mr Williams believes that those entering the market at the current point in the price cycle will have to build the higher land cost into the price of the end product.

Others will push for a higher plot ratio. “On sites where an Australian developer might think the maximum number of apartments is 400, an Asian developer could go for 600 units in a 50 or 60-storey block,” Mr Williams says.

Asian developers are both experienced and smart. “If they are willing to pay the price, they know the risks and know how to make it work,” Mr Sanfilippo says.

The cost of funding is an important factor, and Asian developers usually bring in their own financing for Australian projects.

Considering the low interest rates available in Asia, their cost of funds would certainly be lower than those for Australian developers borrowing from Australian banks.

While it cannot be confirmed, it has been said that some large Chinese developers are paying an all-up cost of just 1 per cent for their project finance in Australia.

Mr Sanfillipo says marketing costs normally add a further 5.5-9 per cent to the development budget. But he believes Asian developers, who largely sell back to their client base in Asia, do not have these same costs.

Sources claim that some Asian developers sell as much as 80 or 90 per cent of their projects to overseas investors, despite the usual cap being at 50-60 per cent.

As at the end of September, developers from China, Singapore and Hong Kong had a total of 32,390 apartments either in planning stage or under construction in Australia, according to the Sydney research firm Deepend Services. It is a number that is constantly climbing.