Developer Refunds Buyers, Claims 10% More Per Apartment

Survey costs that are forcing developers to shelve projects or ask buyers to pay more are cutting into the supply of much-needed new apartments as increased immigration and high home prices push buyers back to denser housing types.
Last month, Perth developer Richard Pappas started construction on a 34-unit apartment project in Subiaco, four months behind schedule and only after the boss of Celsius Property Group returned buyers and asked them for an additional 10 per cent on top of what they had agreed to pay.

Mr. Pappas sold 19 units last year – meeting his original sales target – in the Elysian Subiaco development, but the bid estimates he received in February made it clear that his price was not enough. The bank will not allow the project to begin.

“The sales we did in October 2021 were at a price point that, with new construction rates, we couldn’t continue,” he said.

Celsius had to enact a “viability clause” in its purchase agreement, a first for the developer, which started business in 2004.

“We refunded our buyers and had an honest conversation with them. The majority of buyers understood… They didn’t want us to wait for things to calm down. They wanted to get ahead.”

He was lucky that the project at 385 Rokeby Road was in the leafy western suburb of Subiaco, where rising land prices made costs higher. In July, developer Sirona canceled a planned 38-storey apartment tower in South Perth – where price increases have not been as dramatic – due to rising costs of materials and labour.

However, not all of Celsius’s buyers are ahead of schedule. Only 10 buyers agreed to pay 10% more – nine got their deposits back – but that and two more sales in February, along with four further sales priced at least 12% more than the original, allowed things to get going.
A similar situation is happening across the country, making low supply the biggest problem in the apartment market.

JLL Commercial Real Estate’s Q2 2022 apartment market overview shows that inner-city apartment supply averaged 21,000 units nationwide from 2016 to 2021, but is expected to fall below 10,000 units next year – and welcoming guests is a certainty.

“2023 looks like the bottom but … I don’t want to call 2023 definitely the bottom,” said Leigh Warner, JLL senior director, research.
“We would be lucky to get an average of 22-26 closer to 12,000-15,000 per year.”
Needs are not the problem. Partly due to relative affordability compared to housing, demand for apartments remains strong from owner-occupiers, especially discounters – which many buy in Elysian Subiaco. Investor demand is more uncertain due to rising interest rates, but the strong rental market and continued uncertainty in other asset classes may partly offset this.
The JLL report, which found that the number of apartments approved annually nationwide is less than half of its 2015 peak, said the combination of rapidly rising construction and financing costs has put enormous pressure on project feasibility and caused many projects to be delayed or abandoned.
Build-to-rent developers are more comfortable because they do not have to bear rising costs during the pre-sale phase, but even they are not immune to project cost pressures, the report said.
“The net result is that apartment supply will likely continue to be thin for at least several more years,” Mr. Warner said.

“We need to build more apartments. It’s as simple as that. We’ve got very low rental vacancy rates nationwide. There’s no relief from that. We need to build.”
In Perth, Mr Pappas said his decision to go back to the buyer was a “last resort” but was still preferable to letting a project be delayed until enough time had passed to trigger a cool-down clause.
“You better fulfill the terms [khả năng tồn tại] and determine whether there is a path forward rather than trapping the buyer in a non-actionable contract. The only mechanism for canceling the contract is the expiration date, which may be many years away. ,” he said.
“It appears that a number of apartment projects in Perth and across the east coast will not be economically viable in the current market due to construction prices with some projects having canceled the contracts of existing buyers and put projects on hold.”