Ghost towers are springing up across Sydney – here’s what that means for you as an investor

Ghost towers are springing up across Sydney.

Now just to make things clear…they’re not haunted, just packed with empty apartments as developers continue to release new high-rise homes into a saturated unit market.

26,000 new apartments will hit the Sydney property market this year, adding to the 28,000 apartments built in 2018. Sydney+suburbs

In other words, by the end of this year around 54,000 new apartments will have flooded the Sydney market over a 2 year period,

This has obviously led to an oversupply of apartments for sale and for rent.

This has occurred at a time when the first home buyer incentives have worked with one in four people in the Sydney property market buying their first home but it hasn’t been enough to soak up the extra supply of apartments, with “ghost towers” on the rise in Sydney.

Now this has happened before overseas in Singapore, Vancouver and China, but recently the Sydney suburb of Carlingford, about 22 km northwest from the CBD has hit the limelight where there are a large number of high rise apartment blocks that were approved during the property boom.

However, from all reports they’re just not selling or leasing and these ghost towers are prevalent in suburbs where there have been multiple developments of high rise towers

Overall Sydney’s vacancy rate sits at around 3.4% – the highest since records began in 2005  and this could end up as high as 4 per cent by the end of the year.

But in suburbs like Carlingford, where there has been overdevelopment – the vacancy rate is almost double that at 6.3%

In the Hills District in north western Sydney are sitting at 5.8% with some locations even being as high as 7%.

Vacancy rates in Sydney’s CBD are 5.4%

A tenant’s market

Currently tenants are spoiled for choice and have an upper hand in rent negotiations after years of being at the mercy of landlords, who just two years ago could easily hike prices because only 1.7 per cent of Sydney rentals were available.

This means Sydney landlords need to keep their rents the same when a lease expires and many are having to drop their rentals to attract tenants when their property becomes vacant.

I’m pleased to say our Sydney vacancy rates at Metropole Property Management are about half those of the general market and are currently sitting well under 2%.

While this is in part due to proactive property management, a large factor is the type of properties we’ve bought on behalf of our clients – established apartments in small blocks close to amenity are still in strong demand – they’re holding their values well and leasing quicker. More on that in a moment.

Too many of the wrong type of apartments for sale

When it comes to apartments for sale there are almost 14,000 apartments available – double the number for sale in 2017 (7,000 in 2017).

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The market is being artificially propped up by developers manufacturing scarcity by holding on to stock and not releasing their unsold apartments into a saturated market.

At the same time some investors, particularly foreign investors, are not putting their properties on the market keeping them “brand new” waiting for better times, or just as a store of value

Governments have attempted to address this situation.

In December 2017, the Federal Government introduced a foreign owners vacancy tax, where owners were charged a fee if their property was unoccupied or rented out for less than six months in a year. But this is hard to police and only applies to properties bought after 9th May 2017.

But we’re not building the right stock

Buoyed by hordes of foreign investors and a new generation of local investors who didn’t really understand what made a good investment, developers built  high rise apartments aimed at these investors in suburbs traditionally dominated by single-level houses, such as the Hills District, Penrith and upper north shore. Future Sydney Scenarios

The new unit buildings in the Hills District, many released just before the opening of the Sydney Metro Northwest rail link, were clearly out of synch with local tastes as the region traditionally drew families seeking space.

There just isn’t the same underlying demand for apartments in many of these suburbs as there is in the inner suburbs of Sydney

This has led to high vacancy rates – currently 5.6 per cent in the Hills district and close to eight per cent of rentals in the Rouse Hill-Kellyville postcode are untenanted.

And of course investors will lose out as they are unlikely to see an increase in value of their properties for at least a decade. And those who wish to, or need to sell, will find it hard to find a buyer with so much stock for sale.

Now there is nothing new about this…

Off the plan apartments make terrible investments!

Analysis by BIS Oxford Economics reports that of the apartments sold off the plan during the past eight years:

  • Two out of three Melbourne apartments have made no price gains or have lost money upon resale. And this is despite a record immigration and a significant property boom.
  • In Brisbane about half these apartments bought off the plan are selling at a loss, or at no profit.
  • In Sydney it is about one in four apartments bought since 2015 are selling at a loss, or at no profit.

In other words, more investors in off the plan high rise apartments have lost money than have made money.

And of course, there are all those investors sitting on the apartments which are continuing to fall in value, but they haven’t crystallised their loss yet.

According to the BIS research, resales of apartments within a three to five kilometre of central Sydney, Melbourne and Brisbane have realised consistently lower prices than established apartment resales.

In other words the older style apartments – what we used to call flats when I was young – you know… solidly built, well laid out apartments in small 2 to 3 storey walk up complexes outperform the new glitzy apartments that were built with investors in mind.

These are investment grade properties, because they:

  • Appeal to a wide range of affluent owner occupiers
  • Are in the right location. By this I don’t just mean the right suburb –one with multiple drivers of capital growth – but they’re a short walking distance to lifestyle amenities such as cafes,   Sydney suburbsshops, restaurants and parks. And they’re close to public transport – a factor that will become more important in the future as our population grows, our roads become more congested and people will want to reduce commuting time.
  • Have street appeal as well as a favourable aspect or good views.
  • Offer security – by being located in the right suburbs as well as having security features such as gates, intercoms and alarms.
  • Offer secure off street car parking.
  • Have the potential to add value through renovations.
  • Have a high land to asset ratio – this is different to a large amount of land. I’d rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia.

The bottom line is buying the right ‘investment grade’ property is all about following a proven blueprint that successful investors follow.

This increases your chance of better financial returns and reduce your risks of getting caught out as our property markets move into the next, less buoyant stage of the property cycle.

How do you know which step to take next?

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased. 

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Ghost towers are springing up across Sydney – here’s what that means for you as an investor' have 2 comments

    Avatar

    July 11, 2019 Paul

    If councils&state gove are allowing thousands of appartments to be built , but now cant sell them or rent them, why do the developers continue to build them?
    Has the government told these developers a immigration plan “We dont know about”

    Reply

      Michael Yardney

      July 11, 2019 Michael Yardney

      Paul – this is the normal cycle of major property development. When these towers were planned 4-5 years ago it seemed a good idea at the time

      Reply


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