Planning reform, a tax shakeup and incentives for developers are needed to revive apartment development and ease Victoria’s rental crisis, according to property experts at Pitcher Partners.
Severe shortages of apartments in Victoria are heaping pressure on affordability, with rental values rising 17.7 per cent year on year to reach $526 per week, according to SQM Research.
At the end of July, SQM recorded a vacancy rate of just 1.3 per cent across the Melbourne metropolitan area.
Pitcher Partners Melbourne Partner and tax expert Craig Whatman said Victoria’s tax system was putting the brakes on new apartments, with developers becoming increasingly hesitant to outlay the capital needed to develop major projects.
Analysis from Charter Keck Cramer shows the number of apartments being marketed and under construction is set to fall sharply over the next two years, from 12,100 this year to just 4,200 in 2025.
“It’s a very complicated tax system that we’re living with in Victoria,” Mr Whatman said.
“We’re not encouraging foreign investment and we’re not encouraging developers from a tax policy perspective to actually build these apartment towers.”
Mr Whatman urged the Victorian government to reintroduce off the plan stamp duty concessions for investors, while a revamp of the state’s foreign buyer’s surcharge would provide a positive signal to overseas investors.
“We need to create a more stable ongoing land tax system, which leads to the whole question of having an annual property tax versus a transactional tax in stamp duty,” Mr Whatman said.
“In Victoria, we are moving towards having an annual property tax that works on an ongoing basis for commercial and industrial properties, but not residential property.
“We’re going to end up having a two-tiered system, which in my view is just going to make the property tax regime even more complicated than it currently is.
“Successive governments have imposed an ever increasing tax burden on property developers, which has disincentivised investment in the sector. The carrot approach would be more effective. We need to incentivise local and international capital to flow into the property development sector so that we can continue to build the dwellings that are needed now and will be needed in the future.
“Providing investors with the capacity to think long term, without fear of additional taxes, is a critical step in encouraging more development in the apartment sector.”.”
Planning complexity is also holding developers back, Mr Whatman said.
Analysis from consulting group Urbis shows that developers willing to invest in major apartment projects were facing an average time frame of 4.9 years between lodging a development application and completing construction.
“There are too many layers of entity upon entity that deal with planning decisions,” Mr Whatman said.
“And it’s complicated across jurisdictions. Simplification from both a tax point of view and a planning point of view would be a really good start.”
Pitcher Partners Melbourne Client Director and property expert Benni Aroni said the cost of construction was another factor forcing developers to rethink major apartment projects.
Data released by the Australian Bureau of Statistics in July showed an average apartment in Melbourne costs $490,602 to build, nearly $44,000 more than a typical new house built in the outer suburbs.
But while apartments are costing more to build, and rents are rising swiftly, Mr Aroni said values were not increasing at a rate that would be enticing to investors.
CoreLogic data shows the median unit price in Melbourne has been stagnant at best for the last 12 months, dipping by 0.7 per cent to sit at $603,642.
“Everyone focuses on the supply side, and I accept that’s the biggest issue, but there is also a demand issue which is seldom talked about,” Mr Aroni said.
“Buyers have lost a lot of confidence for a bunch of reasons. In Sydney, there have been many issues with apartment defects, while there have also been issues with flammable cladding.
“And in Victoria, the price appreciation for apartments has not been anywhere near what it should be, bearing in mind that rents have gone through the roof and there is limited supply.
“All of those things have led to people having a very long, deep think about whether they want to buy an apartment.”