What’s happening in the inner Brisbane apartment market

The Brisbane inner city apartment market is getting a lot of attention of late. 

The conversation has been mixed, with some supporting the surge in recent building & buying, whilst others are expressing concern.

So let’s do a Q&A to better understand what’s going on…

In a nutshell what is happening in downtown Brisbane?

Recent changes to BCC town planning have now made it very easy to oversupply Brisbane’s inner city apartment market.

And for mine, that is exactly what is happening at present.

Yes, there is a demand for more compact housing in Brisbane – in fact, across many areas in Australia – but the volume of current supply & in particular the nature & price of the current supply, is way over the top.

If this continues, it could end in tears.

That sounds pretty gloomy.  Are there already signs that things are going pear shaped?

Yes. But before I go into detail, let me say at the outset that most apartments are originally sold to investors, many of whom (most, really of late) are not local buyers; they live interstate or overseas.

Investors are looking for a return – either capital growth or rental returns; neither of which are doing that well, of late.

Also, keep in mind that the new surge in supply has not yet entered the market, but rents are already softening; the vacancy rate is increasing & some resales in recently completed inner city apartment buildings are already selling for losses.

So let’s break this down. Can we talk about rents?

One bedroom apartment rents across inner Brisbane have actually fallen over the last 12 months, down $10 per week to average $360 per week.Diversity Housing

This is the first time in about five years that this has happened.

Two-bedroom stock has seen a very small increase, up $5 per week over the last 12 months. Renters are starting to share accommodation, so two-bedroom/two-bathroom apartments are increasingly popular.  The average two-bedroom inner Brisbane apartment rents out for $495 per week.

There has been no change in three-bedroom inner Brisbane apartment rents, which are steady at $690 per week.

And what about the vacancy rate?

Sadly, the amount of vacant apartment stock available to rent is already very high. Hence, rents are stalling & actually falling for one-bedroom stock, which is a double whammy, as a lot of the new, emerging supply is one-bed stock.

Our friends at SQM Research supply very good and up-to-date statistics, on vacancies across Australia. These figures are as at June 2014.

Dwelling to rent

So, the vacancy rate is already over 4% & the amount of vacant stock for rent has increased three-fold over the last two years, and we haven’t even started to see the new volume of supply coming through yet.

But hasn’t the Brisbane market been under-supplied over the last 5 years & we are just playing catch-up?

That’s true. The chart below shows the past under-build & the current level of starts.

Our analysis shows an underlying demand for about 9,000 new dwellings across Brisbane at present.

Brisbane New Dwelling Starts 1

But importantly, the nature of the current supply – a lot of it being downtown apartments & most of that in mid-to-high rise apartments – isn’t catering for the demand.

When we break down the demand by market segment, we see a great demand for new product catering for downsizers & retirees in Brisbane.

High-rise apartments, especially in large & I dare say, somewhat soul-less complexes, have very little appeal to many aged over 60 years.

Our second chart suggests the demand for downtown apartments will fall rather than rise in coming years, as it is the young rental market that occupies a significant percentage of the inner city apartment accommodation.

Brisbane City Underlying Demand 2

You mentioned poor resale performance earlier; can we discuss that a bit more?

Sure, but I cannot name names, so to speak, as certain developers are very sensitive about this topic & often legal threats are made if anyone, regardless of the overwhelming evidence, makes some frank & honest observations. So I will keep my answer here general in nature.

The key point here is that a lot of the new apartment sales being made across inner Brisbane are to overseas buyers or local Asian residents, who are buying on behalf of those living overseas.

The settlement records clearly show this trend. I am not xenophobic, but selling this way has potential risks.

Overseas investors, especially the Chinese, have blinkers on – they aren’t interested in buying anything other than inner city apartments, despite better – in my opinion – passive investment opportunities elsewhere.

So the current surge in buying interest feeds on itself, with faster reported ‘sales’, which further excites buyers, especially those some distance from the market…..and the surge escalates.

So, are you talking about a bubble?

Yes, it is starting to feel very unsustainable, particularly when you have overseas developers paying very high prices – frankly, overpaying – for development sites, many now without a DA.

The only way forward in many cases is to escalate the price of apartments and/or reduce their size. Both trends have, again for mine, already reached a tipping point, which is based around rental returns.

And resale results?

Thanks for reminding me.

The official government records show that two out of three resales in recently completed inner Brisbane apartment projects have resold for a loss.

The losses – in gross terms – have been minor, averaging 5%, but still they are losses. This reflects the rental market, with rents often dropping after the first tenancy period.

Again for mine, the rents being advised for new apartment projects across inner Brisbane are too high. Investors need to really question the depth of the rental market before buying.

Anything else that you would like to add?

Just three points:-

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 Firstly, there is a risk that the overseas buyers might not settle, especially if there is a change in their financial circumstances or investment performance – perceived or otherwise, here.

This would be very problematic. It might be a small risk, but it is there.

Secondly, investors need to have three clearly identifiable buyer groups that could logically buy their property off them in the future; and preferably, an owner-resident.

This, for the life of me, I cannot see for many of the new apartments currently being sold across downtown Brisbane.

Finally, with the amount of stock coming, coupled with the demographic & real estate trends emerging, apartment investors will need to maximise their rent.



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Michael Matusik

About

Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


'What’s happening in the inner Brisbane apartment market' have 3 comments

  1. August 31, 2014 @ 5:03 pm Craig

    Thats typical, we were all led to beleive to invest in brissy only last year by matusik, now were getting told theres an oversupply.

    Reply

    • August 31, 2014 @ 7:21 pm Chid

      You are right Craig. There were quite a few projects out there in inner brisbane backed by matusik as being great investment. Now he is telling otherwise. Amazing!

      Reply

    • August 31, 2014 @ 8:34 pm Michael Yardney

      Craig
      I think the take home message is that only a handful of properties in any market are “investment grade”

      Reply


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