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What You Need To Know About The Apartment Boom

An apartment oversupply in Australia’s east coast capitals has been heralded for years. Graphs, diagrams and articles have charted its progress with big spikes ramping upward showing how many thousands are on the drawing board for a 2017 and 2018 completion. There are many opinions about the implications for both the apartments coming on stream and the effects it will have on the broader market.

Melbourne’s CBD is the focus of much of the attention. About 5,200 new apartments will be finished by mid 2017 and 14,300 by mid 2018 in central Melbourne alone. In other key parts of metropolitan Melbourne there will be another 35,000 new apartments by mid 2018.

Looking nationally, by mid 2018 Australia will have added 230,000 new apartments. And it’s a worry because oversupply usually causes a drop in values.

How have values been tracking to date?

In the last 5 years apartment values in Melbourne’s CBD have averaged 5% growth. Over the same period in Sydney where demand is greater, the growth was 40%.

A problem appears though when you compare the volume of apartments due to settle over the next 2 years with the average number of annual sales over the past 5 years because there’s a big discrepancy. For example in Melbourne there were 28,506 apartment sales last year. But in the next 12 months 29,541 total new units are due to settle and 80,503 in the next 24 months. That’s 33,000 extra apartments above previous sales figures.

You have to ask can this level of stock be absorbed? And who by?

An apartment glut was predicted a few years ago for Sydney but strong immigration and strong demand helped absorb the supply on completion. The Sydney market showed it had more resilience than the forecasters predicted. Many new high-rise development sites were scattered across the metropolitan area, making them supposedly easier to absorb. The most recent data shows dwelling completions still tracking behind population growth and apartment rents and values have continued to rise there.

New buyer trends are emerging.

In Sydney and Melbourne, new buyer trends are emerging, like young couples and first homebuyers purchasing apartments as investments to negatively gear as a strategy for entering the expensive market.

As some mainland Chinese had their wings clipped by China’s new restrictions on money flowing out of the country, Hong Kong investors have stepped into the gap, keen to keep ahead of China’s regulators.

So how concerned should we be about the looming flood of apartments, especially in inner city Melbourne? Will defaulting buyers add to a slump in the market?

Who is most likely to default?

The main risk for developers is lower than expected values at settlement time and the off-the-plan buyer defaults that follow. In this scenario apartment values would fall further, and rents would drop as investor-owners compete harder for tenants and income.

Chinese investors keen on Australian apartments have been underwriting the recent boom. Australia is a safe offshore haven for money and is regarded as a more stable housing market than China. But Chinese authorities have cracked down on outgoing capital. It has taken a while to have an effect but its showing more clearly now. China has clamped down on financial services that were helping investors move money out of the country and enforcing a $50,000 limit for individuals taking money out of China. Some investors who initially bought off the plan with a deposit may now find themselves under stricter scrutiny and may default on the settlement.

Adding to investor woes, Australian lending conditions have changed. Loan ratios are more restricted. An off the plan buyer in 2015 may have counted on a loan of 90% or higher. Now they may find they have access to much less. And defaults will result.

Leading apartment developer Harry Triguboff confirmed in August that for the first time Chinese buyers have started to default in Sydney, but unexpectedly a lot of the slack was being taken up by Australian investors, plus other investors of ‘Asian origin’ – which means primarily Hong Kong. He claims his apartments have found buyers and are now selling for the same or greater price than the defaulting mainland Chinese had paid for them off-plan.

In a scenario of oversupply and falling values, other people likely to default are Australian investors who simply want to bail out and suffer a lost deposit.

Investors are looking for better opportunities.

Some market analysts see the approaching oversupply of apartments presenting too many potential problems and suggest investors look elsewhere for opportunities either in other parts of Melbourne, or with different dwelling types.

Townhouses are emerging as a safer proposition for investors. Apartments in the city rarely include what Australians value most in a dwelling – some green outdoor living space. Townhouse and villa units can provide this. Townhouses are also the preferred choice for down-sizing baby boomers who like to keep some of the atmosphere of their former family home. A townhouse can allow down-sizers to stay in the same neighbourhood. They cost far less than a traditional family home but offer a similar amenity, and young families like them because even a small garden space is a great boon for young children.

Other benefits that make townhouses popular are a street frontage, an individual title, a private garage and a path through a garden to the front door. These sound like small features but they are actually important differences that make a townhouse more of a truly private family home.

Recognising this preference, some developers are re-designing their apartment sites to meet a townhouse format.

But how the inner Melbourne market will play out for those who have already committed to a high-rise apartment will depend on individual investor’s resources, and the investors’ tenacity. Also, the location of the apartments, the quality, and how well the building itself is managed. Plus other factors in the market environment that may not have emerged yet.

But with 2018 approaching we will soon see how it shapes up.

If you would like more information about the development of apartments, units or townhouses, SAW Constructions are glad to share our valuable experience. Call us today on (03) 9550 0700.