Given the twin spectres of rising interest rates and higher living costs, Spiros Deftereos of Hostplus holds no illusion that times will continue to be challenging for residential developers.
Deftereos is more than an interested bystander in Australia’s current housing affordability debate. As Head of Property at Hostplus, he oversees several large-scale residential projects currently under way across a number of states.
In total, these projects will house thousands of Australians over the next two decades or more.
“Interest rates show no signs of abating,” Deftereos told [i3] Insights. “The messaging from the RBA has been very hawkish, and they will continue to increase rates until they have inflation under control within their target band.
“Market consensus seems to have shifted now from the rate stabilising in the low fours – which is where we are now – to mid-to-high 4 per cent.
When you combine rising mortgage repayments with the rising cost of living you see very challenging market conditions, particularly for first-time buyers who are trying to enter the market
“When you combine rising mortgage repayments with the rising cost of living you see very challenging market conditions, particularly for first-time buyers who are trying to enter the market.”
But conversely, Deftereos says, there are good market tailwinds. Australia is about to see a wave of migration, and historic data shows that new migrants typically look to buy their first home within two to three years of settling in Australia.
“That may be challenged in the current environment, but many of them may come with the financial capacity to purchase a home.”
Deftereos does not see house prices declining materially any time soon because there is a shortage of new supply and there are rising construction costs, caused partly by labour shortages.
This will, in turn, keep up pressure on rentals, he says. Supply of housing will remain a major issue, as will rising rents.
Build to Sell
Hostplus investment in build-to-sell (BTS) residential began over a decade ago. One of its major investments is a joint venture with the private Australian developer, Hamton Property Group, and the Moonee Valley Racing Club to redevelop surplus land at Melbourne’s Moonee Valley racetrack.
“There has been a lot of progress at Moonee Valley Park,” Deftereos told [i3] Insights. “Despite challenging market conditions, it is performing well. We recently generated some $100 million in presales for the latest release, Trackside House.”
Described as “a residential grandstand”, Trackside House offers dwellings at up to $5 million apiece, with uninterrupted city views. Prior stages have performed well, with all 70 townhouses and 69 midrise apartments sold out and Stonepine House achieving strong pre-sales.
Deftereos says the larger higher-price-point product appeals mainly to downsizers, who wants to live in close proximity to where they live now. These people have been attracted to the project’s vision: to deliver a high-quality neighbourhood within a park. Moonee Valley Park showcases 20 hectares of green open space and parklands.
There has been no fall-over in settlements because the buyers have mostly been owner-occupiers, who are less reliant on leverage.
This year, the South Australian Jockey Club (SAJC) has selected Hostplus and its partner, Villawood Properties, to redevelop Morphettville Racecourse in Adelaide. Like Moonee Valley Park, this mixed-use redevelopment will be a multi-stage, multi-year project.
“This is an exciting opportunity,” says Deftereos. “We are working with the SAJC to redevelop 7.5 hectares of rezoned land to deliver high-quality housing and apartments. There will be both retail and community spaces.
“The first stage of the project is to deliver approximately 230 townhouses, and we are forecasting to launch of our project next year (2024).” The total project has an estimated end-value of $350 million.
“For us, this investment ticks all the boxes,” he says. “It is an infill, well-located site which enables us to deliver a product that can be differentiated from the existing market. The area has favourable demographics for more medium- and high-density living.”
While the intention is to launch the project next year, Deftereos adds a qualification: “Clearly, if there is a material deterioration in market conditions between now and the end of the year, we can reassess that,” he says.
The residential market is somewhat nuanced because, while there are macro headwinds and tailwinds, each sub-market and indeed each project will have its own attributes to be able to tap into latent demand
“But I think the residential market is somewhat nuanced because, while there are macro headwinds and tailwinds, each sub-market and indeed each project will have its own attributes to be able to tap into latent demand.”
He adds: “As it currently stands, notwithstanding challenging market conditions, we think this product will very much appeal to a certain buyer cohort.
“Intentionally, in some of our recent acquisitions for this mandate, we have tried to target long-duration, multistage projects that enable us to look through cycles.
“This (Morphettville) is not a single-stage project, where you try to time the market, and, of course, if you don’t time it well – and there are not enough presales – then you could find forecast equity returns somewhat challenged.”
Other smaller Hostplus projects include Helensvale, a prized 20-hectare subdivision for more than 600 residential allotments on the Gold Coast. There, the partner is also Villawood Properties.
“We are really not surprised that our Helensvale project has done exceptionally well,” says Deftereos. “The residential component is sold out and what is left are buildings for ancillary use. We will divest those.”
Deftereos is coy when asked how well the project has done, except to say: “It is a very good outcome”. He adds: “It has exceeded our expectations.”
Together with Roxy Pacific, a Singapore-based property group, Hostplus has also bought into a former industrial site with beach frontage in North Fremantle, outside Perth.
“The rezoning process is continuing,” Deftereos says. “We are currently focussed on stakeholders and community engagement, so it has gone through the preliminary milestones of the planning process.
“We think it will be a great project ultimately. It is in close proximity to public transport, and to Fremantle city centre.
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Build to Rent
Despite the excitement surrounding build-to-rent (BTR), Hostplus has not ventured into the sector in Australia.
“Our pitch has been that, within our projects, there is a portion of product that would be affordable for a first homebuyer. But in terms of a rental product, or BTR, that is not something we have invested in here,” he says.
“Generally, our view on BTR is that most product that is being delivered in Australia today is product that is not really tailored for millennials or middle-income earners.
“BTR in Australia is a modern product that comes with high-end amenities. Most of it is predicated on generating a rental premium, and we feel that there isn’t a first-mover advantage in getting into that product, particularly when we have the ability to invest in equivalent assets (multifamily) in the US, which is a far more established and mature market.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.