The number of new development projects aimed at investors is slowing down, which could lead to more rental market pressures according to new research.  

Knight Frank’s Australian Residential Developer Survey 2023 found there was a growing focus on building owner-occupied stock, with 56% of those surveyed saying owner-occupiers were the main buyers for their last project, compared to just 11% that were focused on investors.

Moving forward, 58% of developers indicated they would target owner-occupiers for their next project, with only 8% targeting investors solely. 34% said they would take a balanced approach.

Knight Frank Partner, Head of Residential Research Michelle Ciesielski, said the shift in focus will lead to a reduced number of properties in the rental pool, exacerbating issues with already low rental vacancy rates and leading to higher rents.

“There will continue to be significant pressure for the rental market with fewer new dwellings being designed for investor buyers to add to the rental pool, coupled with other issues for investors such as recent higher investor mortgage lending rates,” Ms Ciesielski said.
 

The survey also found that the construction pipeline for apartments in particular would fall over the coming two years in Sydney, Melbourne and Brisbane. The main concern of developers according to the survey was around the availability of suitable development land, with 79% of developers saying land was “limited” or “very limited”.

Nine in ten developers said the impact of planning regulations was a barrier to the delivery of future housing supply, with half the respondents now believing a site with development approval is ideal for their next purchase Knight Frank Partner and Head of Residential, Erin van Tuil said that more developers are opting for a balanced buyer pool or homes designed purely for an owner-occupier.

“Many owner-occupiers are looking to move from a standalone house to a townhouse or terrace home to downsize or rightsize,” Ms van Tuil said.

“COVID put the spotlight on how we are living as being stuck at home during lockdown gave people the time to reflect on their lifestyles, with these downsizing or rightsizing buyers now looking for more generously sized townhouses or apartments, but with impressive amenities to provide convenience and luxury.”

Ms van Tuil said the current low rental vacancy rates are directly impacting the rental market, leading to high rental growth.

Despite the challenges, migration is expected to pick up pace over the next two years, resulting in greater demand for rental stock With fewer new dwellings being designed for investor buyers to add to the rental pool, the incentive for developers to build more investor stock is limited.

The survey also found that 52% of developers said the cost of living crisis is having a significant impact on overall buyer sentiment, which will lead to a greater undersupply, pushing up rents even further.
 

Planning delays are expected to be a significant challenge this year, with 15% of developers naming this as the number one issue expected to have an impact on residential development in 2023.

“Developers have responded to rapidly rising rents and elevated demand with significantly above-average levels of construction, which means more choice and flexibility for occupiers and a more balanced market.”