Parramatta Crane Survey Analysis And Commentary On The

Analysis and commentary on the Parramatta development marketDeloitte Real Estate GroupWestern Sydney contactsGarry MillhousePartner Deloitte Privatep: 61 2 9840 7340m: 61 417 417 581e: gmillhouse@deloitte.com.auDavid SartorioPartner Deloitte Privatep: 61 2 9840 7970m: 61 481 007 188e: dsartorio@deloitte.com.auSandra FelliPartner Deloitte Privatep: 61 2 9840 6640m: 61 417 274 387e: sfelli@deloitte.com.auMelissa DriverManager Deloitte Privatep: 61 2 9840 7321m: 61 404 885 381e: mdriver@deloitte.com.auGavin EnfieldDirector Taxp: 61 2 9840 7359m: 61 418 117 299e: genfield@deloitte.com.auAnnalisa AmiradakisPartner Assurance & Advisoryp: 61 2 9840 7845m: 61 429 959 838e: aamiradakis@deloitte.com.auTheo PsychogiosPartner Financial Advisoryp: 61 2 9840 7333m: 61 410 457 172e: tpsychogios@deloitte.com.auDavid MansfieldPartner Financial Advisoryp: 61 2 9840 6630m: 61 402 871 370e: dmansfield@deloitte.com.auDeloittePrivateA private business-focussedpractice, powered by thedepth of a globalBig Four firm.TaxOffers clients a broad rangeof fully integrated tax servicesincluding business tax,indirect tax, international tax,and transfer pricing.Assurance &AdvisoryDeloitte’s global network ofspecialists provide a range ofaudit and advisory services toassist you in managing your riskand improving your businessperformance.Financial AdvisoryProvides a broad rangeof services around Real Estateadvisory, M&A, restructuring,economics and capitaloptimisation.9

Parramatta Crane Survey10

Analysis and commentary on the Parramatta development marketSummaryby sector11

Parramatta Crane SurveyResidentialThe volume of apartments underconstruction in the Parramatta CBDis slowingThe Parramatta CBD has seen rapid growthin the number of residential apartmenttowers, however development activity istempering.Currently there are 2,707 apartmentsacross seven projects under constructionin the Parramatta CBD due for completionbetween 2018 and 2019. In contrast,the current DA approved total is 1,110apartments across four projects,representing 59% less than the volumeof apartments under construction.These statistics indicate that the trend infuture planned apartments currentlyunder construction is slowing fromprevious years.Parramatta CBD has a short termpotential supply of apartments of twoto three years. The medium/long termpotential supply is significantly larger –in excess of nine yearsOur research recorded an apartmentabsorption rate varying from 360 to850 new apartment sales per annum(absorption rate) between 2012 and2016 with an average over this period ofapproximately 500 per annum.12Based on the total current DA approvalsof 1,110 apartments and by adopting thefive year average absorption rate, wecalculated an estimated two to three years‘potential’ supply of apartments in the DAapproved stage.Our research indicates a further 4,865apartments across 12 projects areproposed but not committed andrepresent potential supply from the year2020 onwards. These include projectsat concept design to DA lodgementphase. We note this total excludes 1,200apartments that were proposed for theParramatta Riverbank site now earmarkedfor the new museum.The pool of 4,865 potential apartmentsrepresents more than nine years ‘potential’supply of apartments that are notcommitted at this stage. It is these projectswhich are likely to have influenced thepopular view that there is a waveof apartments about to flood thelocal market.It is our view that many of theseprojects will not eventuate in the shortterm. We see these projects beingdelivered to the market later andin a controlled manner as they won’tbe built speculatively.Residential apartments by status1,738Complete2,707Under construction1,110DA approved4,865ProposedResidential apartments by completionyear and status6,0004,0002,000020162017 20182019CompleteUnder constructionDA approvedProposed2020 2020

Analysis and commentary on the Parramatta development marketSettlement risk remains a live issue fordevelopers and their project financiersParramatta CBD is currently experiencinga concentrated amount of apartmentdevelopment. If property prices retractslightly, or less mortgage finance is madeavailable, for example as banks restrictinvestor loans, the presale purchaser maybe required to contribute further equity.The settlement risks could potentially resultin purchasers not being able to completeand the completed stock being relisted forsale thereby adding to the existing supplypool in the Parramatta market.This is most likely to occur when theapartment was sold at the ‘peak of thecycle’ where the purchaser has assumedongoing capital growth and stretchedtheir own financial position. Our researchindicates approximately 650 apartmentswere purchased off-plan during the peakof the cycle in 2016 which are the presalesexposed to the highest settlement risk.Anecdotally we have not heard of anymajor settlement issues in the local marketto date and prudent developers are likelyto be proactively monitoring this risk.The ‘catalysts’ that influence theapartment development supplyApartment DA approval statisticsare commonly quoted by marketcommentators and used as a barometerto gauge future apartment supply. Whilstthere is a correlation between apartmentapproval statistics and future apartmentsupply, the ‘catalysts’ that motivateproperty developers to progress theirprojects from a concept design or DAapproval through to construction needto be examined. An understanding of theseinfluencing factors will provide a moreinsightful appreciation of the likelihoodof future apartment supply being deliveredto the market.Based on our in-house experienceand research, the key factors currentlyinfluencing the delivery of new apartmentsto the market (supply) include: Property market conditionsThis is the most obvious and influentialfactor. Property developers generallydeliver stock to meet a market demand.Depending on the phase of theproperty cycle, the available supplyof new apartments will swing fromundersupply (at the beginnings of anupcycle) to a potential oversupply (at thecommencement of a downturn followinga peak in the cycle).Residential Unit Salesin Parramatta CBD14001200100080060040020002012 20132014 2015 20162017Total number of salesNumber of new and off plan salesProperty markets are dynamic relativeto the process developers need to gothrough to deliver the stock to meet thedemand. This lag in delivery of the supplycan be miss-timed resulting inan oversupplied market temporarily.An example of a developer reactingto market demand is Walker Corporationon Site 8 in Parramatta Square. In early2016, Walker Corporation was in thedesign phase of developing the secondtallest residential apartment towerin Australia with 72 levels containing615 apartments and 147 hotel rooms.Turn the clock forward 18 months andWalker Corporation is now pursuing acommercial office scheme on the samesite. That is 615 proposed apartmentsno longer proceeding into the ParramattaCBD market.13

Parramatta Crane Survey Availability of development financeWith the ‘Big 4’ banks controlling amajority of the finance for developmentprojects, their pre-funding requirementsand appetite for lending in this sector hasa major influence on the availabilityof finance for developers to progresstheir projects.There would be a very small percentageof property developers able to self-fundtheir projects and able to avoid suchfunding conditions. In recent times withlocal bank’s restrictions on developmentlending a gap in development fundingis being filled by second tier andinternational financier sources. Lending restrictions on propertyinvestors from the local banksThe Australian Prudential RegulationAuthority (APRA) has been concernedabout bank’s lending books beingoverweight in property lending. Inrecent years APRA has forced banksto take measures to reduce exposure inthis sector.The banks have reacted with loweringLoan to Value ratios on propertyinvestment and changing the calculationof serviceability with a restriction oncertain types of lending products suchas Interest-Only loans. The market hasreacted to this and property developersweigh-up the risks of committingto a project.14 Foreign Investment Review Board(FIRB) restrictions and additionalchargesFIRB restrictions and recently imposedadditional taxes, which includean increase in the stamp duty surchargeto 8% and an increase in land taxsurcharge to 2%, has dampenedinterest from foreign buyers who werean influential factor in the pre-saleapartment market, particularly in themetropolitan CBD areas. China restrictions on outboundinvestmentChinese regulators have recently placedrestrictions on outbound investmentswith real estate and hotel deals notedon a ‘restricted’ list. These restrictionson property investment are highly likelyto affect demand for new residentialdevelopment sites.Development pre-fundingconditions now typicallyrequire 60% to 70% ofthe apartment project tobe presold before bankfinancing is issued fordevelopment costs.With such high presalerequirements, it can beassumed a newly erectedcrane on a residentialdevelopment site atthe commencement ofconstruction is a flag thatthe financiers conditionshave been met and theproject has at most 40%of the project remainingto sell.

Analysis and commentary on the Parramatta development marketOfficeParramatta CBD is experiencingunprecedented levels of new officedevelopmentNever in the history of commercial officedevelopment activity in Parramatta CBDhas there been a situation, as there iscurrently, whereby 92,000 sqm of officefloor area is under construction acrosstwo buildings. Anecdotally, we understandthat City of Parramatta Council (theCouncil) have received more applicationsfor commercial office development in theParramatta CBD in the month of July 2017than in the last eight years.A-Grade office space in Parramattais fullIn the latest office market report fromthe Property Council of Australia, for thefirst six months of 2017, there was a zerovacancy rate for A-Grade office space inParramatta. Further, the total vacancy ratefor office space in Parramatta CBD was ata low of 4.3%. This compares to the 5.9%vacancy rate in the Sydney CBD.Coupled with the fact that rental ratesremain at a discount to the Sydney CBD, thelack of supply and renewed Governmentand private sector focus on the creation ofjobs in Western Sydney has been a catalystfor commercial office development.Construction of the Parramatta Squaredevelopment is well underwayCommercial development in ParramattaCBD has been triggered by the majorproject at Parramatta Square, which hasbeen successfully initiated by the Council,in conjunction with Walker Corporation andCharter Hall. The Parramatta Square sitewill introduce a new asset class of A-Gradesuburban office buildings considered tobe a premium in comparison to the mostrecent office developments that haveoccurred in Parramatta. Already the newWSU building developed by Charter Hallhas seen broad acclaim in the educationsector for the innovation and quality in itsdesign and fitout.Commercial floor space (m2)by completion year and status200,000150,000100,00050,00002018Under construction2020 2020DA approvedProposed3 Parramatta Square will provide a 16storey building to be developed byWalker Corporation to provide 43,000sqm and has been fully pre-leased witha 12 year commitment by NAB. NAB willbe consolidating their workers from theRhodes and North Sydney office locationsinto Parramatta in 2020. NAB will havethe benefit of prime positioning in theParramatta Square with a direct tunnel linkfrom the public domain frontingthe building leading into ParramattaRailway station.15

Parramatta Crane SurveyNSW Government has made a majorcommitment by a large tenancy4 Parramatta Square is being developedby Walker Corporation and provides some67,000 sqm office space that has been fullypre-leased to NSW government agenciesincluding Department of Planning andEnvironment, the Office of Environmentand Heritage and the EnvironmentProtection Authority. It represents thelargest NSW government agency pre-leasedeal in Western Sydney, and is projectedto complete by 2019. 6 Parramatta Squareis not yet pre-committed and is anticipatedto be occupied by private sector tenants.There are design proposals to connect 6Parramatta Square and Parramatta Squareto create a campus size commercial officebuilding offering.105 Phillip Street, Parramatta is beingdeveloped by Dexus and is mid-waythrough construction. It will provide25,000 sqm of office space over 13 storiesand is fully pre-leased to Departmentof Education. Completion is expected inMarch 2018. It has reportedly been presoldfor 229 million to Charter Hall Group’sPrime Office Fund and Direct Office Fundin May 2017, reflecting a benchmark saleyield for a Parramatta CBD office buildingat approximately 5.3% net.16As flagged in a recent Council meeting,8 Parramatta Square appears likely to havea commercial office scheme replace theAspire residential tower that was originallyproposed (subject to pre-commitmentssecured by Walker Corporation). Thisrepurposing of the land is a sign that themomentum is shifting away from residentialtowards commercial office as a competingland use. The most recent other commercialoffice developments proposed includeWestfield Tower, GPT’s project at 32 SmithSt, and Dexus’ project at 140 George St.140 George St. project will result in a singlebuilding of 33 floors encompassing 48,338sqm with completion anticipated in 2021.

Analysis and commentary on the Parramatta development marketHotels, cultural andsporting facilitiesHotel operators moving to fillpotential market openingA gap in the market for short stayaccommodation has been recognisedby various operators/developers. Meritonhas just completed a new servicedapartment tower (Meriton Suites) on thebanks of the Parramatta River witha total of 254 suites over 30 storeys.The V by Crown project has incorporated72 suites, under their Skye suites brandwhich opened in February 2017. QTwill be managing 260 hotel suites in theCoronation Property Co. developmentat 8 Phillip Street, and is due for completionin 2020. A Four Point Sheraton 4.5 starhotel is planned in the Parramatta CBDon George Street with 271 rooms and alsoexpected to complete in 2020.A total of 857 rooms will be available by2020 and it is in response to the demandsthat will be created by the new museumand cultural precinct, new Western Sydneystadium and improved accessibilitybetween Parramatta and Sydney OlympicPark via the light rail with Eat Street beinglocated within walking distance of all thesehotels/serviced apartments.Revamped leisure precinct enhancesamenity and will boost visitor numbersIn July 2017, NSW Premier Gladys Berejiklianannounced the Government is investing 140 million to buy the future site of theMAAS on the banks of the ParramattaRiver. Interestingly for the purposes of TheReport, the site was previously earmarkedfor approximately 1,200 apartments. 100m from the proceeds of the sale willbe applied to fund a major upgrade to theRiverside theatre and the remainder usedto implement the Council’s cultural plan.The PLR will be stopping in close proximityto both these cultural facilities.The PLR will continue in a northerlydirection to the new Western SydneyStadium with a capacity for 30,000 peopleincluding five levels of corporate andfunction spaces, big screens, advancedtechnology along with improved pedestrianand public plazas areas and landscapingaround the stadium, before headingon to Westmead.857roomsby2020Prominent Food & Beverage operatorscome to Parramatta CBDThe biggest rooftop bar in Sydney CBDhas been proposed for Parramatta. The600-person space will sit atop CoronationProperty Co.’s 55-storey 8 Philip Streettower, a development that will also behome to restaurants Rockpool and Saké,by Neil Perry.Neil Perry has joined Jamie Oliver as thesecond celebrity chef that has shown theirconfidence in the Parramatta CBD market.Neil Perry has dipped his toe into themarket and opened Burger Project withinthe recently completed V by Crown, whichis poised to also open a new bar on one ofthe higher levels.These new hotel, cultural and sportingofferings, linked by a smart transportsystem will present Parramatta CBDas a more sophisticated and wellrounded city.17

Parramatta Crane SurveyTransport infrastructure developmentis poised to further enhance theconnectivity of the Parramatta CBDParramatta Light RailThe proposed route of the PLR project has recently beenannounced and will commence construction in 2018. It isanticipated to be completed by 2023. It will span from Westmeadto Carlingford and will encourage new development along its 16earmarked rail stops. A total of seven stops will be located withinthe Parramatta CBD and fringes (four in the core CBD area).The preferred route for Stage 2 has been confirmed as connectingParramatta CBD to Sydney Olympic Park, with the route passingthrough 10 - 12 stops with a planned journey time of just over halfan hour. A key question for the route is whether it goes throughCamellia or Rydalmere. Potentially taking it via Camellia will havea big impact on the former industrial land alongside the river. Thebusiness case will confirm the final route and that is expectedto be completed in 2018.This new infrastructure installation will complement the alreadyexisting heavy rail and major bus interchange offering inParramatta CBD. The PLR will strategically link the WSU campusesacross the region, Parramatta Square, the Church street café, newcultural precinct and the new Western Sydney Stadium which willbe a dramatic improvement to connectivity in the Parramatta CBD.Source: Parramatta Light Rail Stage 2 Fact Sheet18Sydney Metro WestAlthough still only at the planning stage, the Sydney Metro West(Metro) is expected to be the largest urban rail project in Australianhistory. The Metro is to be delivered as an underground metrorailway line and provide direct connection between the CBDsof Parramatta and Sydney. The planned Metro would doublerail capacity from Parramatta to the Sydney CBD and supportthe Greater Sydney Commission’s vision for better connectionsbetween these two major centres with a potential journey timefrom the Sydney CBD to Parramatta of 15 minutes.Four key precincts to be serviced have initially been identified asParramatta, where the number of jobs is expected to doubleover the next 20 years to 100,000, Sydney Olympic Park, where34,000 jobs and more than 23,000 residents will be located by2030, The Bays Precinct, Sydney’s new innovation hub where95 hectares of land is being regenerated, and Sydney CBD. Theincreased connectivity will be a benefit to the Parramatta CBD inmany respects.Source: https://www.sydneymetro.info/west

Parramatta to Olympic Park travelling further East parallel to the river before crossing over at Wentworth Point. Combined with the existing heavy rail and bus interchange, as well as the proposed future Sydney Metro West link, the enhanced transport network will play a key role in connecting workers to jobs in the Parramatta CBD.