August 2024 Newsletter

The Australian Residential Real Estate Market – Is Melbourne an opportunity to good to pass up?

An interesting thing happened in August. For the first time ever in Australia’s recent history, Adelaide’s median dwelling price was higher than Melbourne’s. In fact, according to CoreLogic’s House Price Index, Melbourne has now slipped down to be the third most affordable capital city housing market in the country, cheaper than Sydney, Brisbane, Canberra, Adelaide and Perth. (CoreLogic, September 2024)

Over the 12 months to July 2024, Perth, Adelaide and Brisbane experienced extremely strong growth in dwelling values, as affordability advantages supported by solid population growth and low dwelling supply drove prices upwards. Even Sydney, the most expensive market in the country had growth of greater than 5%.

(CoreLogic, September 2024)

(CoreLogic, September 2024)

All capital city markets have experienced rapid increases in input costs for residential development since the pandemic, with construction cost escalation of between 25-50%. This has definitely impacted supply as feasibilities have come under increased pressure. In addition, Melbourne continues to suffer from Victoria’s poor tax settings which are deterring foreign and local investment in the housing market. Stamp duty and other taxes and charges on property are higher in Victoria than any other state, which has driven buyers, and in particular investors to other capital cities. 

Melbourne’s population is currently largely in line with Sydney at approximately 5.2 million and is forecast to become the country’s largest capital city by 2034 with growth forecast at 2.0% p.a. over that period. A major contributor to population growth is Net Overseas Migration (NOM) and while NOM for Melbourne is reducing from its high of 160,000 in 2023, it is still forecast to contribute approximately 85,000 people p.a. to Victoria for the next 3 years (Charter Keck Cramer State of the Market, September 2024).  Supporting this inflow is Melbourne’s job market, which is a similar size to Sydney’s, is twice that of Brisbane’s, nearly 2 ½ times the size of Perth’s and is 4 times that of Adelaide’s (ABS, Labour Force Data, July 2024).

At the same time dwelling supply is at historical lows with forecast apartment completions over the next 3 years approximately 40% below the 10-year average for Melbourne. This includes a significant contribution from the booming Build To Rent (BTR) sector which is more active in Melbourne than any other capital city.

This dislocation between supply and demand means that Melbourne’s current residential vacancy rate at 1.5% is nearly 40% below the 10-year average of 2.4%.

Apart from the unfavourable tax settings and low consumer and business confidence, all other fundamentals that drive and support housing values are strong. NOM will see Melbourne soon be the country’s largest city, supported by consistent and strong population growth, and likely the largest job market. Current rates of dwelling supply are not meeting demand and are unlikely to do so for some time.

Brisbane, Adelaide and Perth have seen the benefits of affordability driving significant value growth but now Melbourne has that advantage. With the other market fundamentals, it simply does not make sense for Melbourne dwelling values to be as subdued as they are.

Is it time to go long on the Melbourne residential market?

Company Updates

Investment and Performance

Deal Settled: 1

Funds under management: $289.7 Million

Weighted Average LVR (Current): 63.38%

Forecast Average Investor Rate: 11.37% p.a.

Investment Updates

The latest investment updates are set out below with most projects progressing steadily.

In Victoria, Oakleigh construction is progressing in line with expectations, with increased sales expected following the display suite’s completion. SPG’s Tatura project shows strong sales and ongoing settlements, while bulk earthworks continue at Morwell. Ballarat North is expecting PSP amendment by Q4 2024. Mount Cottrell land banking continues while the Oakbank PSP is under consideration, and Leakes Road has been sold with a September 2026 settlement. 
 
In Queensland, Toowoomba is nearing settlement and repayment, Deception Bay is forecast to be repaid early in lateSeptember, and Burpengary has settled with construction to commence shortly. Bracken Ridge is progressing well, and Morayfield’s titles are expected to be issued in September with settlements to commence shortly after. Newport in NSW has achieved a significant sale awaiting execution and earthworks are continuing. 
 
In South Australia, Sellicks Beach has achieved additional sales, Gawler East is advancing with strong presales, and Munno Para is finalising planning with a late 2024 sales campaign. Overall, project progress remains strong with robust sales and strategic developments.

Bedrock Mortgage Fund Update

August 2024 saw Ark Bedrock deliver another strong return of 0.95% (11.25% annualised).   
 
Funds under management (FUM) rose by $2.7 million, ending August at $43.7 million, with an additional $3.0 million received for unit issuance in September. The year-to-date (and inception-to-date) Bedrock return is 11.35% annualised. At the end of August, the portfolio comprised 20 unique loans to 13 borrowers across 9 different geographies in 6 states/territories, spanning 3 different development sectors and 3 different loan types. Land and civil construction loans continue to make up the bulk of the portfolio at 91.7% of the total, with the remainder invested in commercial and industrial built-form loans. 

There were two notable changes to the portfolio in August, with $4m invested in a civil construction loan for a residential land subdivision in Burpengary East, Brisbane and a reduction of $1.25m in a residential land banking loan in Ballarat, regional Victoria.  The average loan-to-value ratio (LVR) increased slightly to 63.9%.

Available to: Wholesale investors 
Min invest: $50,000
Distributions: Paid Monthly
Redemptions: Quarterly after minimum initial term of 6 months
DRP: Distribution Reinvestment IS available
Unit Issues: First day of each calendar month
Updates: Annual distribution statements and quarterly updates of the Fund’s performance
Investments: At least 85% in registered 1st mortgage securities with up to 15% potentially invested in registered 2^nd mortgages
LVR: Average 65% across the 1st Mortgage investments
Fees: 0.75% Fund Manager fee
Direct Costs: Up to 0.25% direct costs