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Opportunity in the West – Positive fundamentals emerging in the residential sector

  • In recent years, between 3-5% of the Merricks Capital Partners Fund has been invested in Western Australia.
  • Between 2017-2019 Merricks Capital financed more than $400m of residential development in the Perth market.
  • At the time we felt many of the planned developments would not come to market due to the weak commodity cycle and the few projects to proceed would be delivered into a shortage of residential supply.
  • In recent years our exposure has shrunk as we felt easy credit and rapidly rising construction costs in the Perth market made it less appealing for a lender.
  • Our team has in recent months been actively engaging with Perth based borrowers as we again believe the forward outlook for new supply is very appealing and the risk of rapidly rising construction costs is dissipating, and the market will again be short for new supply.

Our experience in Western Australia (WA) has shown that the boom-bust cycles of resources and mining can be weathered when lending into residential, land and agriculture investment opportunities at appropriate debt levels (~60% LVR). As one of the most isolated states in the world during the COVID pandemic there has been an added factor that created extreme cost pressures. With boarders open and significant positive migration expected into WA we expect both increased demand for accommodation and some relief to cost pressure as the labour market normalises.

Post the pandemic supply/demand dislocations attractive to lenders are emerging in the state. This is particularly evident in the residential market, driven by:

  1. Historical low rental vacancy (0.7%). [1]
  2. Perth housing values holding strong in the residential sector (up 2.7% YoY to January 2023).
  3. Expectations housing values will continue to grow 2-5% over the next 12 months. [2]
  4. Housing supply shortage within the capital city.
  5. Highest construction costs in Australia and a tight labour market stalling residential development project pipelines.

Residential building activity was down 6.8% [3] in the September quarter and the number of monthly dwelling approvals in Western Australia has fallen in recent months to below pre-COVID-19 levels.

We expect new residential stock coming to market in Perth within the next 12-18 months to command a higher price, while underlying land value is relatively cheap compared to other states creating favourable conditions for developers. Our observations are mid to high rise apartments, student accommodation and build-to-rent residential subsectors are set to benefit from this environment. Our experience and funding are suited to mid to high rise apartments with non-core residential market investments being reviewed where risk return profiles provide an appropriate incentive.

Merricks Capital is currently reviewing two new opportunities in Perth – a hotel construction project and a large residential project targeting the local owner/occupier buyer market.

[1] Real Estate Institute of Western Australia (REIWA). “”Perth Vacancy Rate at Lowest Level in 40 Years.” Real Estate Institute of Western Australia” 18 Jan. 2023. https://reiwa.com.au/news/perth-vacancy-rate-at-lowest-level-in-40-years/

[2] The Property Tribune. “What Is Going To Happen To Perth House Prices In 2023?” 9 Jan. 2023. https://thepropertytribune.com.au/market-insights/what-is-going-happen-to-perth-house-prices-in-2023/?amp

[3] Australian Bureau of Statistics (ABS). “Building Activity, Australia – September 2022” 18 Jan. 2023 https://www.abs.gov.au/statistics/industry/building-and-construction/building-activity-australia/

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