IF THERE'S A GLUT, PELLICANO IS NOT FEELING IT
Written on the 2 September 2016 by Nick Nichols
MELBOURNE'S Pellicano Group may be taking a massive bite at Brisbane's inner-city apartment market, but it remains unfazed by growing talk of a property glut.
The company, which next year celebrates 50 years in business, expanded into Queensland in 2004 and is currently developing the $600 million South City Square in Woolloongabba as a joint venture with Perri Projects.
It's an area that has already reaped rich returns for the family-owned company in recent years.
While South City Square is the largest mixed-use development it has undertaken in Queensland, Pellicano Group has been buoyed by a big run of sales from the release of the first three stages of the project.
Sales from the three towers have hit $190 million, with contracts on 370 apartments of the 398 lunched.
Work has started on two of the towers with the third scheduled to begin construction in a couple of months.
When completed, South City Square will comprise six residential towers and a five-star hotel with ground floor retail to include a cinema, dining precinct, supermarket and medical centre.
However, the 21,000sqm lifestyle and leisure development, on the corner of Logan Road and Deshon Street, is likely to take seven years to complete which pushes the project's timeline well beyond the current property cycle.
Pellicano Queensland's development manager Michael Kent concedes there has been a slowdown in Brisbane's inner-city apartment market, but he sees longevity in the South City Square development due to its scale and positioning within the city council's priority development area.
Kent also believes that as the market tightens, there will be a flight to quality.
"Projects with good fundamentals are always in demand and that's whether you are an owner or a tenant. Certainly we think the market has slowed down but were not concerned because we believe in our product."
Pellicano Group is a diversified property company with investments and developments in a range of assets.
Early last year, the company shed more than $33 million from its industrial portfolio in south-east Queensland to plough the proceeds into its construction activities.
It also sold the Paradise Resort in Surfers Paradise to Sydney's Ralan Group for $75 million, pocketing a gross profit of about $28 million along with its joint venture partner in the deal.
In Victoria, the company is focusing heavily on industrial parks, while Brisbane remains an attractive apartment market for the group.
It first ventured into high rise development in 2009 with the Balencea residential tower in Melbourne. It was a joint-venture project with Brisbane-based developer Sunland Group (ASX:SDG).
The company has residential projects under way on the Sunshine Coast and has just completed an industrial development in Ipswich.
"We're very positive about Brisbane and certainly in Queensland we're seeing growth in retail," says Kent.
"That's reinforced by the fact we are starting two new developments on the Sunshine Coast worth $20 million.
"South City Square is a long-term project, and probably will be completed in 2022. We're certainly ahead of where we expected to be at the moment with the development.
"The key to the project is that it's been designed in stages and we believe it is gaining significant momentum. While the broader residential market may slow, this project will start to bring its own fundamentals in play."
While growth in the Queensland residential market over the past year has helped Pellicano's former joint-venture partner Sunland Group boost margins over FY16, Kent sees some price pressures ahead for the industry through rising construction costs.
"In the last 18 months to two years there has been escalation in construction prices, but by being a builder as well as developer we can control some of the prices, to a point," he says.
"Certainly construction price rises have been an issue for many developers and I don't see that changing in the short term with projects such as Queen's Wharf and construction for the Commonwealth Games on the Gold Coast.
"Those large-scale projects will fill any gaps and we think there will be a shortage of subcontractors in the market."
Author: Nick Nichols