Sales of residential development sites in Sydney plummeted in the 2019 financial year, dampened by funding difficulties, weakened demand, and construction issues, according to Knight Frank's latest Australian Residential Development Review.

There was a 38% slump in residential development site sales over the year to $5.1bn, led by the declines in Greater Sydney. The region, where most sites are for high-rise developments, recorded a 50% fall in sales to $1.97bn.

Sales volume fell in all other mainland states except in South Australia, driving the national figures to decline by 38%.

The downturn could be attributed to the lack of interest amongst major banks to lend developers and the growing national crisis on flammable cladding spurred by the events at Olympic Park's Opal Tower.

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Furthermore, the residential development sector faced fierce competition against alternate asset classes, including office, hotels, aged care, and student accommodation for most of the year, said Knight Frank head of residential research Michelle Ciesielski.

Ciesielski feared that the fewer construction starts would not be able to support the population growth in major Australian cities.

"The strict lending criteria for buyers has now been loosened, but access to traditional finance is still difficult for many local and offshore developers, which has resulted in many projects put on hold," she told The Australian Financial Review.

While Sydney appeared to have lost the interest of foreign investors, Melbourne and Brisbane witnessed renewed demand from offshore buyers. Overseas developers and buyers made up 42% of total sales volume in Melbourne and 18% in Brisbane.

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Brisbane has become the go-to place for many well-capitalised private groups looking for larger-scale development opportunities, said Knight Frank's Queensland head of investment sales Christian Sandstrom.

"In particular, offshore buyers from the main Asian markets of Singapore, Malaysia and China/Hong Kong have re-emerged seeking premium opportunities mainly aimed at the higher quality investor and owner-occupier product," he told AFR.