High-rise developments are proving bad business for builders, with lenders reluctant to lend and buyers not wanting to buy.

Such are the findings of the latest industry analysis from Riskwise Property Research, which says high-profile cases such as the cracking of Mascot and Opal towers in NSW and the cladding crisis have resulted in a staggering drop in demand. And it's not just potential buyers who have been turned off.

"Lenders are proceeding much more cautiously too," says Riskwise CEO Doron Peleg. "This includes non-bank lenders whose business model is to provide alternative solutions from the ADIs, and generally have a less conservative assessment of risk.

"Add to that the issue of oversupply in many Danger Zone areas and there is very real risk for developers."

Unit development is set to make up 7.6 percent of Australia-wide stock over the next 24 months. A total of 9.5 percent of current stock in Sydney and 8.1 percent in Melbourne consists of high-rise units, yet only eight percent and twelve percent was sold in the three months to June 2019 in Sydney and Melbourne respectively.

In total, the the value of sales of development sites suitable for high-density projects in Greater Sydney halved in the 2019 financial year, while average site values across the two capitals fell dramatically, according to Knight Frank's Australian Residential Development Review.

"If you combine the recent quality issues with financial losses from investment in high-rise units, this could amount to a permanent structural change in demand," says Peleg.

"In some cases developers, instead of assessing the true needs of the market, have developed large numbers of units and have needed to find ways to shift stock by using instrastate or overseas markets with high commissions that are often factored into the property price. A prime example of this type of poor risk management is the oversupply in the Brisbane unit market, as detailed in our case study of 2018, which resulted in lower valuations, rising defaults on settlements, heavy discounting and incredible incentives such as new cars.

"Add to that the high level of unit oversupply and it’s possible to see how structural changes could occur in a sense that the overall demand for off-the-plan dwellings shifts from units to house-and-land packages. Medium-density dwellings, such as townhouses, particularly in popular areas also enjoy higher demand."

The news comes at a critical point for the building industry, with no end in sight for the downturn in new home development. A 28.3 percent drop is forecast in the 2020/21 period from the 2015/16 peak, in no small part due to the lack of apartment and unit buildings in the pipeline.

"Without demand from investors, and other buyers, you don't have pre-sales or sales and the entire development is at risk," warns Peleg.

"Obviously, an event of default is never planned by the developer. However, developers need to carefully assess the risk that they are taking the risk, and they need to be in a strong financial position to deal with the potential consequences and not be forced to do a fire sale."

Image: Maurício Mascaro, Pexels.com