14% of inner Melbourne apartments are sitting vacant and unoccupied, while the supply pipeline is at record level according to BIS Shrapnel’s latest Inner Melbourne Apartments Market Brief
Now that’s a recipe for disaster in the new and off the plan Melbourne apartment market if I’ve ever seen one.
According to the report new apartment supply in Melbourne’s inner suburbs has been at a record high in the last four years and is expected to reach higher levels in the next three years.
On average, about 6,000 apartments have been released to the Melbourne market in each of the past four years and more than 24,000 apartments, or nearly 8,000 per annum, are on track to be completed over the next three years.
That will more than triple the long-term average of 2,563 per annum in the 16 years to 2012, the brief says.
Driven by overseas investors
The market has been mainly driven by overseas investors, offsetting the weakening in domestic investors.
BIS Schrapnel predicts that most of the city’s new apartment supply will be absorbed by overseas investors, as domestic investors are put off by flat rent and price growth in the sector.
Just to make things clear…it’s the inner city (CBD) market which is particularly exposed to these concerns and this is also the area targeted by overseas investors.
Of the current apartment stock in the inner Melbourne area, private rental apartments account for 58%, compared to 25% across greater Melbourne.
Owner-occupied dwellings represent 28% of the inner Melbourne CBD apartment stock, while unoccupied dwellings , which BIS Shrapnel describes as apartments “held as second homes or kept empty as speculative investments”, comprise 14% of the apartments.
Not surprisingly the vast majority of rental demand comes from tenants aged between 20 and 29 years old and students account for 21 per cent of the inner-city apartment population, with overseas students making up 85 per cent of this figure.
The brief reports that the inner Melbourne apartment vacancy remains “relatively high” at 3.5 per cent and that median rents have shown “almost no change” over the last four years and median apartment prices are set to trend downwards in 2015/16.
With lenders tightening credit to buyers of apartments – particularly investors and offshore purchasers – concern is growing about settlement risk.
There are many buyers who have paid a 10% deposit for an off-the-plan apartment hoping it’s value would rise by the time of completion and that they wouldn’t have to pay any more – but that’s not turing out to be the case.
Often the value on completion is less than the contract price and now many banks will only lend a buyer 80% of the new -lower- valuation meaning the buyer won’t be able to find the extra funds to settle.
Some will just have to walk away and lose their deposit. Others may get sued by the developer for their losses as they on sell the apartments at a lower price.
If that happens on a large scale, it could pull apartment values down sharply.
This comes as no surprise as we’ve warned our clients for the last few years to steer well clear of new and off the plan apartments.
In my view investors in these types of properties could end up waiting over a decade for any significant capital or rental growth.
More apartments on the drawing board.
If you were a visitor to Melbourne 20 years ago and returned today you wouldn’t recognise it.
In 1993, there were only 157 high-density apartments (in buildings rising above four storeys) being built.
By 1998 that number increased to 1,620 – that’s a tenfold increase.
BIS Shrapnel figures show that last year the number for new apartment commencements had grown by the more than the same factor again, to 19,777.
And while the number of new apartment starts will slow, the pipeline is still strong.
The City of Melbourne estimates that as of November, it had 20,000 apartments under construction, another 19,000 approved and a further 30,000 dwellings awaiting approval.
Does this mean you should avoid Melbourne apartments?
NO- not necessarily.
As I said, I’d avoid the new and off the plan apartment market, but there are some great established apartments available which will make excellent long term investments – especially those with potential to add value through renovations.
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