The proposed apartment standards will add $62,500 to the construction cost of each apartment. The attached document below illustrates our calculations for each of the standards.
The cost of each standard is calculated by multiplying the construction rate with the increased area of each item. None of the standards are for free. They all come at a cost. The yield of each site will also decrease by 20% to 40% as a result, with the impact on potential development sites, profound.
Supply will reduce and if potential developments are to be unlocked, then the land component of each apartment will increase by $20,000 to $40,000. There are two indisputable requirements for property development: one, the land component of the development must be worth more than the existing building; and two, the development must make a profit otherwise the banks won't fund it.
If a site is vacant, the land value will simply be reduced – bad for the land owners, yes, but for developers, this will have no impact. However, in Melbourne where the majority of developable sites require the demolition of a pre-existing building, (think every high street within a 5km radius of the CBD), then it is a completely different and far less positive story for the developer.
The proposed apartment standards call for enormous building separation, the extent of which makes many sites undevelopable. This means that whatever type of building currently exists on the site, it will remain – no matter how under-utilised it is.
The overall result? Less supply.
Think of it this way, if every site yields on average, a third less apartments, then there will obviously be a third less apartments on the market and therefore a far lesser supply in established areas. The by-product of this? The population will be pushed further and further out until it reaches the urban growth boundary where prices will increase due to the extra demand.
Of course, developers won't develop only to lose money. They will instead hold their land until such a time as demand becomes so high that the public is forced to pay the additional apartment price, at which point making the development profitable again. We saw this happen in Sydney, where many developers put their projects on hold for some years until the prices reached $15,000 a square metre and then were developed in a frenzy.
This means that as the apartment industry supply slows, prices will rise. Only once the public are willing to pay that extra $100,000 per apartment, will development take off again. It’s a scary truth, but a truth nonetheless.
The government is fully aware that their apartment standards come at a significant cost, but whether they decide to communicate this to the public is an entirely different matter – what do you think they will do?
Above are images taken from Craig Yelland's/Plus Architecture's response to the Better Apartments Draft Standards as of 15th August, 2016.
This piece was written by Craig Yelland, Director of Plus Architecture – a firm with vast experience in the multi-residential sector, Craig Yelland is an advocate of apartment living and innovative design.
Lead image: Andrew Curtis Photography