Feasibility first:
Navigating Australia’s development cycle
Development feasibility is no longer cyclical; it is structural, selective and location‑led. Our Spotlight report identifies where economics are working, where feasibility is emerging, and how constrained supply is reinforcing the value of existing assets.
Development feasibility across Australian real assets has shifted from cyclical to structural, diverging sharply by sector, city and asset positioning, as cost pressures, labour constraints and sustained infrastructure pipelines reshape the economics of new supply.
Our latest Australian Real Asset | Spotlight report, developed with Oxford Economics Australia, applies a consistent feasibility framework across major sectors and markets, identifying where development economics are working today, where they are approaching viability, and where structural constraints will persist.
Hear from our CIO
Investment thesis
Development has bifurcated
Development has not disappeared from Australian real assets – it has bifurcated. There are sectors and cities where development economics are working today, and others where they remain structurally challenged, with the gap between them widening.
Elevated construction costs, constrained labour capacity and a sustained pipeline of public and private work have materially narrowed the path from demand to delivered supply. Outcomes are increasingly shaped by feasibility, timing and asset positioning – shifting where risk‑adjusted returns are earned.
Key findings
Office
Deferred but approaching a window in Sydney and Brisbane
Premium CBD office remains below feasibility today, but Sydney and Brisbane are on improving trajectories, while Melbourne is structurally constrained until the 2030s.
Retail
Incumbent centres are structurally protected
Regional centres are at or near feasibility. The more important constraint on new supply is site scarcity, not cost. Existing dominant assets benefit from both.
PBSA
Development economics are working
The only sector consistently at or above feasibility thresholds across Sydney, Melbourne and Brisbane, with site control now the binding constraint.
BTR
Income play, not a development margin strategy
Rents are below feasibility thresholds across all three cities. Construction costs are forecast to rise faster than rental income.
Industrial
Land scarcity is the binding constraint
Feasibility is increasingly determined by land values and site competition, particularly in supply-constrained markets.
Execution
Execution discipline is now a return driver
Elevated costs, labour shortages and delivery risk mean outcomes are determined as much by execution as by underlying economics.
Market drivers
Three structural drivers reshaping development feasibility
Australia’s construction sector is operating under sustained pressure from three forces acting simultaneously. A crowded infrastructure pipeline, structural labour shortages and elevated cost growth are constraining capacity and narrowing development feasibility. These forces are structural, explaining why feasibility has narrowed – and why it is unlikely to reset quickly.
01
Government-funded infrastructure is crowding out private development capacity. A sustained pipeline across transport, energy and major projects continues to absorb labour, materials and contractor capacity, limiting availability for commercial development as feasibility begins to improve.
02
Construction workforce shortages are structural and will be slow to resolve. Declines in trade commencements, limited migration contribution and weak productivity mean the sector is operating below required capacity, increasing the importance of execution as a determinant of outcomes.
03
Construction costs have reset to a higher baseline. While price growth has moderated from peak levels, forward expectations remain above pre‑COVID norms, driven by sustained demand, labour constraints and productivity limitations rather than temporary cyclical pressures.
Feasibility outlook
Where development economics are working – and where they are not
Feasibility across sectors and cities is constrained by higher replacement costs and income that is only partially catching up. Even where rents are improving, incentives and occupancy costs dilute net effective income, slowing the conversion of rental growth into viable development outcomes and establishing a clear hierarchy across markets.
01
Replacement costs have moved materially higher and remain slow to unwind, while effective income is only partially catching up. This disconnect continues to constrain feasibility, even in sectors where headline rental growth has strengthened.
02
Feasibility is uneven across sectors and cities, with development viable in some pockets and structurally challenged in others. PBSA stands apart, with all three cities at or above feasibility, while office shows the greatest variation in both current position and trajectory.
03
The starting point matters. It determines the scale of rent growth, cost relief or yield compression required to achieve feasibility, and drives materially different timelines for when development can move from feasibility to execution.
Sector insights
- Office
- Industrial
- Retail
- PBSA
- BTR
Deferred, not eliminated – diverging by city
CBD office development remains below feasibility across all three cities today, but trajectories diverge materially. Sydney is approaching a development window, Brisbane is improving but faces execution headwinds, and Melbourne remains structurally challenged with limited new premium supply likely until the early‑to‑mid 2030s.
Office snapshot
01
The gap between when feasibility appears in the numbers and when supply responds creates a first‑mover advantage. Pipelines need to be positioned ahead of that window, particularly in Sydney, where improving demand and constrained supply support future development.
02
Structurally challenged feasibility strengthens the case for repositioning and deep retrofit. In Melbourne, returns are more likely to be driven by repurposing, sustainability‑led upgrades and active asset management than by new development.
03
Improving demand does not remove execution risk. Development outcomes increasingly depend on staged delivery, early demand capture and disciplined procurement to convert improving feasibility into realised outcomes, particularly in higher‑cost environments.
Land is the story, not the shed
Industrial development economics remain comparatively resilient, supported by shorter delivery timelines, simpler building form and more liquid capital markets. Feasibility is increasingly determined by land values and site competition, with land scarcity emerging as the defining constraint across major markets.
Industrial snapshot
01
Land is the primary feasibility lever. Residual land values and competition for well‑located sites increasingly determine development viability, particularly in Sydney where land represents a large share of the total cost stack.
02
Short delivery cycles reduce exposure to demand and pricing shifts. Industrial projects spend more time near feasibility thresholds and are less likely to be caught by major changes before completion, supporting more resilient outcomes across the cycle.
03
Competing land uses will intensify scarcity. Data centre expansion and residential encroachment are reducing available industrial land, reinforcing scarcity value, supporting rents for existing assets and tightening development margins over time.
Supply-constrained and structurally protected
Regional shopping centres are broadly at or near feasibility, but the defining feature is the structural scarcity of suitable new supply sites. Strong operating fundamentals and limited development pathways reinforce the competitive position of incumbent assets across major markets.
Retail snapshot
01
The binding constraint on new supply is site availability, not development economics. Suitable, well‑located and deliverable sites are scarce and tightly held, giving incumbent assets a structural advantage even as feasibility improves.
02
Returns are driven by ownership of established centres in strong catchments. Population growth, tight vacancy and limited competing supply support income resilience and pricing power for dominant assets.
03
Redevelopment and mixed‑use intensification are more executable than greenfield development. Leveraging existing infrastructure and landholdings allows investors to unlock value without underwriting full development risk.
The clearest development opportunity
Purpose-built student accommodation (PBSA) is the feasibility outlier, with all three markets at or above the viable range today. Strong demand, constrained supply and supportive income settings mean the binding constraint has shifted from capital to site availability in core university precincts.
PBSA snapshot
01
PBSA offers the clearest development opportunity, supported by above‑threshold feasibility and sustained undersupply. Investors with access to well‑located, campus‑adjacent sites are structurally advantaged as development opportunities concentrate around scarce land.
02
Sydney and Melbourne provide the strongest feasibility outcomes, supported by deeper demand and stronger income settings. Brisbane remains viable but with less headroom, requiring more precise execution as feasibility sits closer to threshold.
03
Demand‑side risks remain secondary to supply constraints. While affordability and policy settings may moderate rent growth, the scale of unmet demand and limited pipeline mean the sector remains structurally undersupplied.
A long-duration income play
Built to rent (BTR) is supported by strong structural demand, but development economics remain below institutional thresholds. Rents are below required levels while construction costs are forecast to rise faster, reinforcing stabilised assets as the primary entry point.
BTR snapshot
01
The investable pathway is stabilised BTR. Well‑located, income‑producing assets can be underwritten on durable cash yield and operating performance, while development activity remains selective and dependent on project‑specific advantages.
02
Feasibility is constrained by a structural cost‑income mismatch. Construction cost growth is forecast to outpace rental income, meaning development viability is unlikely to improve without changes to cost structures, productivity or policy settings.
03
Development only works under specific conditions. Projects require advantages such as discounted or pre‑controlled land, scale efficiencies, or a lower cost of capital to clear feasibility under current market settings.
Message to investors
Introducing the report, CEO Ross Du Vernet notes that development has not disappeared from Australian real assets; it has bifurcated.
"There are sectors and cities where the economics are working today, and there are sectors and cities where they are not, and the gap between them is widening. The question for investors is not whether development returns as a theme. It is whether you are positioned in the right places before it does."
Contributors
Jonathan Hedger
Chief Investment Officer
James Melville
Senior Research Manager
Mia Kasalo
Research Analyst
Profile Details
Jonathan Hedger
Chief Investment Officer
Jonathan Hedger
Chief Investment Officer
Jonathan Hedger is Chief Investment Officer (CIO) at Dexus with responsibility for strategy, corporate transactions, research and investment management of the Dexus balance sheet portfolio.
He has more than 15 years of experience in the real estate and investment banking industries across strategy, mergers and acquisition, investment management, equity and debt financing, as well as research. Prior to Dexus, he held roles with Deutsche Bank AG and Jones Lang LaSalle.
Jonathan holds a Bachelor of Commerce (1st Class, Hons) from the University of Auckland.
Profile Details
James Melville
Senior Research Manager
James Melville
Senior Research Manager
Profile Details
Mia Kasalo
Research Analyst
Mia Kasalo
Research Analyst
Key contacts
Natalie Tan
Head of Institutional Capital
Mayen Takakura
Senior Manager, Institutional Capital
John Taylor
Head of Private Capital
Brian Kwon
General Manager, Distribution - Asia
Profile Details
Natalie Tan
Head of Institutional Capital
Natalie Tan
Head of Institutional Capital
Natalie joined Dexus in July 2021 as the Head of Institutional Capital. Natalie is responsible for the creation and execution of the institutional capital strategy for Dexus’ Funds Management business across real estate and infrastructure. This includes the management of global institutional capital relationships, equity raising and marketing of new products to grow the Dexus platform. Natalie works with both Australian and international institutional investors to best invest their capital in the Australian real asset market.
Prior to her current role, Natalie was the Head of Investor Relations for Lendlease Investment Management where she was responsible for maintaining relationships with existing institutional investors and leading the investor relations team. Prior to this, Natalie worked within Lendlease’s Investment and Capital Markets team where she held responsibility for the structuring, analysis and marketing of any new wholesale investment products developed by Lendlease Funds Management.
Natalie has over 15 years’ experience in the property industry. Prior to joining Lendlease, Natalie had five years’ experience across financial accounting and analysis roles within Pricewaterhouse Coopers and Babcock & Brown. Natalie holds a Bachelor of Commerce from the University of New South Wales, is a member of the Institute of Chartered Accountants Australia and New Zealand, and holds a Master of Applied Finance from the Securities Institute of Australia.
Profile Details
Mayen Takakura
Senior Manager, Institutional Capital
Mayen Takakura
Senior Manager, Institutional Capital
Profile Details
John Taylor
Head of Private Capital
John Taylor
Head of Private Capital
Profile Details
Brian Kwon
General Manager, Distribution - Asia
Brian Kwon
General Manager, Distribution - Asia
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